**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 

**(Mark One)**

 
| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | **For the quarterly period ended November 30, 2005**                                                                                                                                                                                                                                                                                             |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                            |
| **Or**     |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                            |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                               |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                            |
| ** ** | ** ** | **For the transition period from                             to                          ** |

 

**Commission filenumber: 000-25249**

** **

**INTRAWARE, INC.**

**(Exact name of registrant as specified in its charter)**

 
| **Delaware**                                                        | ** ** | **68-0389976**                               |
|---------------------------------------------------------------------|------------|----------------------------------------------|
| **(State or other jurisdiction of  incorporation or organization)** | ** ** | **(I.R.S. Employer  Identification Number)** |
| ** **                                                          | ** ** | ** **                                   |
| **25 Orinda Way  Orinda, CA**                                       | ** ** | **94563**                                    |
| **(Address of principal executive offices)**                        | ** ** | **(Zip Code)**                               |

 

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

** **

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

 

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o   No ý

 

As of December 31, 2005 there were 6,082,488 shares of the registrant’scommon stock outstanding.

 

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS**

 

**INTRAWARE, INC.**

**CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per share amounts)**

**(unaudited)**

 
| ** **                                                                                                                                                               | ** ** | **November 30, 2005** | ** ** | **February 28, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                                               | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| **ASSETS**                                                                                                                                                               |       |                       |       |                       |       |
| Current assets:                                                                                                                                                          |       |                       |       |                       |       |
| Cash and cash equivalents                                                                                                                                                |       | $                          | 13,426     |                       | $          | 9,463 |   |
| Accounts receivable, net                                                                                                                                                 |       | 1,412                      |       | 1,765                      |       |
| Costs of deferred revenue                                                                                                                                                |       | 404                        |       | 404                        |       |
| Other current assets                                                                                                                                                     |       | 362                        |       | 321                        |       |
| Total current assets                                                                                                                                                     |       | 15,604                     |       | 11,953                     |       |
| Cost of deferred revenue, less current portion                                                                                                                           |       | 88                         |       | 70                         |       |
| Property and equipment, net                                                                                                                                              |       | 723                        |       | 863                        |       |
| Other assets                                                                                                                                                             |       | 116                        |       | 80                         |       |
| Total assets                                                                                                                                                             |       | $                          | 16,531     |                       | $          | 12,966 |   |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK & STOCKHOLDERS’ EQUITY**                                                                            |       |                       |       |                       |       |
| Current liabilities:                                                                                                                                                     |       |                       |       |                       |       |
| Notes payable                                                                                                                                                            |       | $                          | 383        |                       | $          | 823 |   |
| Accounts payable                                                                                                                                                         |       | 551                        |       | 464                        |       |
| Accrued expenses                                                                                                                                                         |       | 1,068                      |       | 967                        |       |
| Deferred revenue                                                                                                                                                         |       | 2,071                      |       | 2,450                      |       |
| Related party deferred revenue                                                                                                                                           |       | —                     |       | 2                          |       |
| Total current liabilities                                                                                                                                                |       | 4,073                      |       | 4,706                      |       |
| Deferred revenue, less current portion                                                                                                                                   |       | 217                        |       | 164                        |       |
| Notes payable, less current portion                                                                                                                                      |       | 185                        |       | 342                        |       |
| Total liabilities                                                                                                                                                        |       | 4,475                      |       | 5,212                      |       |
| Contingencies (Note 4)                                                                                                                                                   |       |                       |       |                       |       |
| Redeemable convertible preferred stock; $0.0001 par value; 10,000  shares authorized:                                                                                    |       |                       |       |                       |       |
| Series A; 552 at November 30 and February 28,  2005 (aggregate liquidation preference of $1,000 at November 30 and February 28,  2005)          |       | 897                        |       | 897                        |       |
| Series B; 1 at November 30, 2005  (aggregate liquidation preference of $6,630 at November 30, 2005)                                                       |       | 5,701                      |       | —                     |       |
| Total redeemable convertible preferred  stock                                                                                                                            |       | 6,598                      |       | 897                        |       |
| Stockholders’ equity:                                                                                                                                               |       |                       |       |                       |       |
| Common stock; $0.0001 par value; 250,000  shares authorized; 6,082 and 6,045 shares issued and outstanding at November 30  and February 28, 2005, respectively |       | 1                          |       | 1                          |       |
| Additional paid-in-capital                                                                                                                                               |       | 163,289                    |       | 163,173                    |       |
| Accumulated deficit                                                                                                                                                      |       | (157,832                   | )          | (156,317                   | )          |
| Total stockholders’ equity                                                                                                                                          |       | 5,458                      |       | 6,857                      |       |
| Total liabilities, redeemable convertible  preferred stock and stockholders’ equity                                                                                 |       | $                          | 16,531     |                       | $          | 12,966 |   |

 

See notes to unaudited interim consolidated financial statements.

 

2

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**INTRAWARE, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share amounts)**

**(unaudited)**

 
| ** **                                    | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **November 30, 2005**     | ** ** | **November 30, 2004**    | ** ** | **November 30, 2005** | ** ** | **November 30, 2004** | ** ** |
|                                          |       |                           |       |                          |       |   |   |   |   |
| Revenues:                                     |       |                           |       |                          |       |   |   |   |   |
| Online services and technology                |       | $                              | 2,320      |                          | $          | 2,032 |   | $ | 7,124 |   | $ | 5,627 |   |
| Alliance and reimbursement                    |       | 203                            |       | 493                           |       | 1,308 |   | 1,759 |   |
| Related party online services and  technology |       | —                         |       | 4                             |       | 4 |   | 542 |   |
| Software product sales                        |       | —                         |       | —                        |       | — |   | 42 |   |
| Total revenues                                |       | 2,523                          |       | 2,529                         |       | 8,436 |   | 7,970 |   |
| Cost of revenues:                             |       |                           |       |                          |       |   |   |   |   |
| Online services and technology                |       | 1,038                          |       | 820                           |       | 3,215 |   | 2,086 |   |
| Alliance and reimbursement                    |       | 259                            |       | 331                           |       | 1,077 |   | 1,143 |   |
| Software product sales                        |       | —                         |       | —                        |       | — |   | 37 |   |
| Total cost of revenues                        |       | 1,297                          |       | 1,151                         |       | 4,292 |   | 3,266 |   |
| Gross profit                                  |       | 1,226                          |       | 1,378                         |       | 4,144 |   | 4,704 |   |
| Operating expenses:                           |       |                           |       |                          |       |   |   |   |   |
| Sales and marketing                           |       | 712                            |       | 756                           |       | 1,989 |   | 2,330 |   |
| Product development                           |       | 303                            |       | 383                           |       | 888 |   | 1,195 |   |
| General and administrative                    |       | 1,040                          |       | 1,107                         |       | 2,886 |   | 2,798 |   |
| Restructuring                                 |       | 41                             |       | (75                           | )          | 41 |   | (75 | ) |
| Total operating expenses                      |       | 2,096                          |       | 2,171                         |       | 5,804 |   | 6,248 |   |
| Loss from operations                          |       | (870                           | )          | (793                          | )          | (1,660 | ) | (1,544 | ) |
| Interest expense                              |       | (12                            | )          | (24                           | )          | (47 | ) | (79 | ) |
| Interest and other income and expenses, net   |       | 78                             |       | 50                            |       | 192 |   | 92 |   |
| Net loss                                      |       | $                              | (804       | )                             | $          | (767 | ) | $ | (1,515 | ) | $ | (1,531 | ) |
| Basic and diluted net loss per share          |       | $                              | (0.13      | )                             | $          | (0.13 | ) | $ | (0.25 | ) | $ | (0.26 | ) |
| Weighted average shares - basic and diluted   |       | 6,076                          |       | 6,036                         |       | 6,062 |   | 6,003 |   |

 

See notes to unaudited interim consolidated financial statements.

 

3

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**INTRAWARE, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                   | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                   | ** ** | **November 30, 2005**    | ** ** | **November 30, 2004** | ** ** |
| Cash flows from operating activities:                                        |       |                          |       |   |   |
| Net loss                                                                     |       | $                             | (1,515     | ) | $ | (1,531 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                          |       |   |   |
| Depreciation and amortization                                                |       | 455                           |       | 441 |   |
| Provision for doubtful accounts                                              |       | 4                             |       | 13 |   |
| Gain on sale of fixed assets                                                 |       | —                        |       | (2 | ) |
| Amortization of discount on note payable                                     |       | 3                             |       | 17 |   |
| Changes in assets and liabilities:                                           |       |                          |       |   |   |
| Accounts receivable                                                          |       | 350                           |       | (20 | ) |
| Costs of deferred revenue                                                    |       | (17                           | )          | (150 | ) |
| Other assets                                                                 |       | (78                           | )          | (245 | ) |
| Accounts payable                                                             |       | 94                            |       | 113 |   |
| Accrued expenses                                                             |       | 53                            |       | (102 | ) |
| Deferred revenue                                                             |       | (328                          | )          | 180 |   |
| Related party deferred revenue                                               |       | —                        |       | (642 | ) |
| Net cash used in operating activities                                        |       | (979                          | )          | (1,928 | ) |
| Cash flows from investing activities:                                        |       |                          |       |   |   |
| Purchases of property and equipment                                          |       | (323                          | )          | (354 | ) |
| Proceeds from sale of fixed assets                                           |       | —                        |       | 2 |   |
| Net cash used in investing activities                                        |       | (323                          | )          | (352 | ) |
| Cash flows from financing activities:                                        |       |                          |       |   |   |
| Principal payments on note payable                                           |       | (776                          | )          | (789 | ) |
| Proceeds from notes payable                                                  |       | 176                           |       | 308 |   |
| Proceeds from issuance of stock and  warrants                                |       | 5,865                         |       | 1,102 |   |
| Net cash provided by financing activities                                    |       | 5,265                         |       | 621 |   |
| Net increase/(decrease) in cash and cash  equivalents                        |       | 3,963                         |       | (1,659 | ) |
| Cash and cash equivalents at beginning of  the period                        |       | 9,463                         |       | 11,804 |   |
| Cash and cash equivalents at end of the  period                              |       | $                             | 13,426     |   | $ | 10,145 |   |
|                                                                         |       |                          |       |   |   |
| Supplemental disclosure of cash flow  information:                           |       |                          |       |   |   |
| Cash paid for interest                                                       |       | $                             | 50         |   | $ | 63 |   |
| Supplemental non-cash activity:                                              |       |                          |       |   |   |
| Purchases of property and equipment in  accounts payable                     |       | $                             | 85         |   | $ | 96 |   |

 

See notes to unaudited interim consolidated financial statements.

 

4

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**INTRAWARE, INC.**

 

**NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1.BASIS OF PRESENTATION**

 

**INTRAWARE**

 

The accompanying unauditedinterim consolidated financial statements have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”).  Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to these rules andregulations.  However, management believes that the disclosures areadequate to ensure the information presented is not misleading.  Thebalance sheet at February 28, 2005, has been derived from the auditedfinancial statements, but does not include all disclosures required bygenerally accepted accounting principles.  These unaudited interimconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements and notes thereto included in ourannual report on Form 10-K for the fiscal year ended February 28,2005, filed with the SEC on April 22, 2005.

 

In the opinion ofmanagement, all adjustments, consisting only of normal recurring items,considered necessary for a fair statement have been included in theaccompanying unaudited interim consolidated financial statements.  Theresults of operations for the interim periods presented are not necessarilyindicative of the operating results to be expected for any subsequent interim periodor for the fiscal year ending February 28, 2006.

 

Wehave incurred losses and negative cash flow from operations during each fiscalyear since inception. For the three and nine months ended November 30,2005, our net loss was approximately $(0.8) million and $(1.5) million,respectively, which is consistent with the corresponding periods in the prioryear.  For the nine months ended November 30,2005, we incurred negative cash flows from operating activities ofapproximately $(1.0) million, as compared to approximately $(1.9) million forthe corresponding period in the prior year. Our cash balances may decline further, although we believe that theeffects of our capital financing activities, strategic actions implemented toimprove revenue, and cost controls will be adequate to generate sufficient cashresources to fund our future operations.  If we fail to generatesufficient revenues or adequately control spending, we may be unable to achievekey business objectives and our operating results may be harmed.

 

Certain prior year amountshave been reclassified to conform to the current period presentation. Thereclassifications did not change previously reported net loss, stockholders’equity or cash flow.

 

**NOTE 2.SIGNIFICANT ACCOUNTING POLICIES**

 

**Revenuerecognition**

 

Online services andtechnology revenue results primarily from four types of arrangements. First, it results from sales of our SubscribeNet digital delivery service tosoftware vendors and other companies that distribute software as part of theirbusiness.  Second, it results from professional services that we provideto customize our SubscribeNet service for customers, to convert data forcustomers, and to integrate our proprietary software.  Third, it resultsfrom our resale of third-party services or software licenses complementary toour SubscribeNet service. Fourth, it results from the sale of our proprietarysoftware licenses and related maintenance to companies using those productsinternally or using those products to provide web-based services to theircustomers. As a result of the sale of our Asset Management software business inMay 2002, we are not currently deriving revenue from licenses, maintenanceor integration services for our proprietary software; however, we may recognizesuch revenues in the future if opportunities arise to sell licenses for ourproprietary software underlying our SubscribeNet service and relatedmaintenance. We sell our SubscribeNet service, and will sell proprietarysoftware licenses if opportunities present themselves, primarily through ourdirect sales force and authorized resellers.

 

5

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Alliance and reimbursementrevenue primarily relates to our recently terminated alliance agreement withSoftware Spectrum for sales and marketing services. This revenue consists of apercentage of the gross profit derived from Software Spectrum’s sales of thethird-party software and maintenance for which we provided sales and marketingservices, and, prior to August 1, 2005, reimbursement for the costs ofmaintaining a sales team dedicated to providing sales and marketing services toSoftware Spectrum for that third-party software and maintenance. This revenue wasrecognized as we provided the services to Software Spectrum.  On August 1,2005, we signed an updated agreement with Software Spectrum.  Under the updatedagreement, Software Spectrum paid us a higher percentage of the gross profitderived from its sales of Sun software licenses and maintenance.  However, Software Spectrum stoppedreimbursing us for our direct costs in maintaining a team dedicated to sales ofSun software licenses and maintenance.  We terminated our allianceagreement with Software Spectrum effective January 3, 2006, in connectionwith the sale of our third-party software and maintenance resale business toFusionStorm.   That sale was completed on January 3,2006.

 

We defer online services andtechnology revenues related to our SubscribeNet digital delivery service andgenerally recognize them ratably over the term of the service arrangement. SomeSubscribeNet service implementations for new customers involve customizationessential to the functionality of the service.  In those cases, we deferrevenue recognition until the service go-live date is reached and recognize therevenue on a ratable basis over the remaining contract term.  The go-livedate is the later of the date on which the essential functionality is deliveredor the point at which no additional customization is required.  OurSubscribeNet contracts with customers typically give the customer a period oftime (generally five days) to evaluate a SubscribeNet implementation after wehave completed it, and provide that the customer is deemed to have accepted theimplementation if it has not affirmatively rejected it within thatperiod.  We typically rely on such non-rejections by customers to indicatetheir acceptance of implementations.  Any subsequent indications by ourcustomers that their implementations have not been properly completed couldhave a material adverse impact on our financial condition or results ofoperations.

 

We also sell additionalprofessional services related to SubscribeNet agreements.  Generally,these services do not provide stand-alone value to a customer, and accordingly,we defer recognition of that revenue until the go-live date for theprofessional services, similar to the manner in which we treat SubscribeNetservice revenues as discussed above.  Such professional services revenuesare recognized ratably over the longer of the remaining estimated customer lifeor the remaining contract term, commencing with the completion of theprofessional services. Estimated customer life requires that we periodicallyestimate the projected life of our existing customers, based on historicalinformation, such as customer renewal rates.  A 10% increase in ourestimated customer life during the three and nine months ended November 30,2005, would have caused a net increase in our net loss of $6,000 and $8,000,respectively.

 

Online services andtechnology revenues related to our resale of third-party services or softwarelicenses complementary to our SubscribeNet service are generally recognized asthe service or license is provided.  If the service or license resoldinvolves customization essential to the functionality of the underlyingSubscribeNet service, the fees charged for the customization are recognized asrevenue in the same manner in which we treat the professional servicesdiscussed above. Revenues related to these resold services or licenses arerecognized as revenue based on the fee charged to the customer as we bear thecredit risk for resold services or licenses, have the latitude to establishpricing at our discretion, and are primarily responsible for acceptability ofthe services or licenses delivered.  In addition, costs paid to thethird-party providers are recorded as cost of revenues and recognized in thesame manner as the related revenue.

 

We recognize revenue whenall of the following conditions are met:

 

•                  There is persuasive evidence of anarrangement;

 

•                  We have provided the service to the customer,made the software available for customer download through our website, orshipped the software to the customer;

 

•                  We believe that collection of these fees isreasonably assured; and

 

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

 

6

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**Costs ofdeferred revenue**

 

We capitalize direct costsof revenues related to significant SubscribeNet service implementations andestablished professional services contracts associated with our SubscribeNetservices. Direct costs include compensation and payroll-related fringe benefitsdirectly related to the time spent on significant implementation andprofessional services activities. These costs are recognized over the longer ofthe remaining estimated customer life or the remaining contract term (see “RevenueRecognition” above). Costs associated with professional services involvingsignificant new functionality for the SubscribeNet service that are partiallyor fully funded by customers but do not qualify as funded research anddevelopment activities are expensed as cost of revenues as incurred until aworking model is delivered to the customer. Once a working model has beendelivered, all additional direct costs are capitalized in the same mannerdiscussed above. Any change in our revenue recognition estimates could resultin corresponding changes to our recognition of costs of deferred revenues. At November 30,2005, we had approximately $0.5 million in capitalized costs relating todeferred revenues. We expense customer acquisition costs, including salescommissions, as incurred.

 

**Stock-basedcompensation**

 

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

 

The following tableillustrates the effect on net loss and net loss per share if we had applied thefair value recognition provisions of SFAS No. 123, to stock-based employeecompensation (in thousands, except per share data).

 
| ** **                                                                                                       | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                       | ** ** | **November 30, 2005**     | ** ** | **November 30, 2004**    | ** ** | **November 30, 2005** | ** ** | **November 30, 2004** | ** ** |
| Net loss                                                                                                         |       | $                              | (804       | )                             | $          | (767 | ) | $ | (1,515 | ) | $ | (1,531 | ) |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards |       | (629                           | )          | (836                          | )          | (1,825 | ) | (2,427 | ) |
| Pro forma                                                                                                        |       | $                              | (1,433     | )                             | $          | (1,603 | ) | $ | (3,340 | ) | $ | (3,958 | ) |
| Net loss per share — basic and diluted                                                                      |       |                           |       |                          |       |   |   |   |   |
| As reported                                                                                                      |       | $                              | (0.13      | )                             | $          | (0.13 | ) | $ | (0.25 | ) | $ | (0.26 | ) |
| Pro forma                                                                                                        |       | $                              | (0.24      | )                             | $          | (0.27 | ) | $ | (0.55 | ) | $ | (0.66 | ) |

 

We calculated the fair valueof each option grant on the date of grant, using the Black-Scholes optionpricing model as prescribed by SFAS No. 123 using the followingassumptions:

 
| ** **                | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|---------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **November 30, 2005**     | ** ** | **November 30, 2004**    | ** ** | **November 30, 2005** | ** ** | **November 30, 2004** | ** ** |
| Risk-free interest rates  |       | 3.96 - 4.40                    | %          | 2.83-3.53                     | %          | 3.69 - 4.40 | % | 2.00-3.53 | % |
| Expected lives (in years) |       | 2-4                            |       | 2-4                           |       | 2-4 |   | 2-4 |   |
| Dividend yield            |       | 0                              | %          | 0                             | %          | 0 | % | 0 | % |
| Expected volatility       |       | 70 - 80                        | %          | 110                           | %          | 70 - 80 | % | 110 | % |

 

We calculated the fair valueof the stock issued under the employee stock purchase plan using theBlack-Scholes option pricing model as prescribed by SFAS No. 123 using thefollowing assumptions:

 

7

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| ** **                 | ** ** | **For the three and six months ended** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **November 30, 2005**             | ** ** | **November 30, 2004** | ** ** |
| Risk-free interest rates   |       | 4.08                                   | %          | 1.12 - 1.99 | % |
| Expected lives (in months) |       | 6                                      |       | 6 |   |
| Dividend yield             |       | 0                                      | %          | 0 | % |
| Expected volatility        |       | 61                                     | %          | 64 - 79 | % |

 

**Net lossper share**

 

Basic net loss per commonshare is computed by dividing the net loss for the period by the weightedaverage number of common shares outstanding during the period excluding sharessubject to repurchase. The terms of our redeemable convertible preferred stockinclude the right to participate in dividends declared to common stockholders.Our redeemable convertible preferred stock does not have a contractualobligation to share in the losses in any given period. As a result, thisparticipating security will not be allocated any losses in the periods of netlosses, but will be allocated in the periods of net income using the two-classmethod. The two-class method is an earnings allocation formula that determinesearnings per share for each class of common stock and participating securitiesaccording to dividends declared or accumulated and participation rights inundistributed earnings. Under the two-class method, net income is reduced bythe amount of dividends declared in the current period for each class of stockand by the contractual amounts of dividends that must be paid for the currentperiod. The remaining earnings are then allocated to common stock andparticipating securities to the extent that each security may share in earningsas if all of the earnings for the period had been distributed. The totalearnings allocated to each security are determined by adding together theamounts allocated for dividends and the amounts allocated for a participationfeature. The total earnings allocated to each security are then divided by thenumber of outstanding shares of the security to which the earnings areallocated to determine the earnings per share.

 

Diluted net loss per share iscomputed by dividing the net loss for the period by the weighted average numberof common and potential common shares outstanding during the period if theeffect is dilutive. Potential common shares are composed of common stocksubject to repurchase rights and incremental shares of common stock issuableupon the exercise of stock options and warrants and upon the conversion ofpreferred stock. The dilutive effect of outstanding stock options and warrantsis computed using the treasury stock method.

 

The following table setsforth the computation of basic and diluted net loss per share as well assecurities not included in the diluted net loss per share calculation becauseto do so would be antidilutive (in thousands, except per share amounts):

 
| ** **                                                                      | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                      | ** ** | **November 30, 2005**     | ** ** | **November 30, 2004**    | ** ** | **November 30, 2005** | ** ** | **November 30, 2004** | ** ** |
|                                                                            |       |                           |       |                          |       |   |   |   |   |
| Numerator:                                                                      |       |                           |       |                          |       |   |   |   |   |
| Net loss                                                                        |       | $                              | (804       | )                             | $          | (767 | ) | $ | (1,515 | ) | $ | (1,531 | ) |
|                                                                            |       |                           |       |                          |       |   |   |   |   |
| Denominator:                                                                    |       |                           |       |                          |       |   |   |   |   |
| Weighted average shares                                                         |       | 6,076                          |       | 6,036                         |       | 6,062 |   | 6,003 |   |
|                                                                            |       |                           |       |                          |       |   |   |   |   |
| Basic and diluted net loss per share                                            |       | $                              | (0.13      | )                             | $          | (0.13 | ) | $ | (0.25 | ) | $ | (0.26 | ) |
|                                                                            |       |                           |       |                          |       |   |   |   |   |
| Antidilutive securities not included in the  computation of net loss per share: |       |                           |       |                          |       |   |   |   |   |
| Redeemable convertible preferred stock                                          |       | 1,055                          |       | 55                            |       | 1,055 |   | 55 |   |
| Warrants to purchase common stock                                               |       | 159                            |       | 187                           |       | 159 |   | 187 |   |
| Employee stock options                                                          |       | 1,200                          |       | 1,120                         |       | 1,200 |   | 1,120 |   |
|                                                                            |       | 2,414                          |       | 1,362                         |       | 2,414 |   | 1,362 |   |

 

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**RecentAccounting Pronouncements**

 

In December 2004, theFASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”).SFAS No. 123R addresses all forms of share-based payment (“SBP”) awards,including shares issued under employee stock purchase plans, stock options,restricted stock and stock appreciation rights. SFAS No. 123R will requireus to expense SBP awards with compensation cost for SBP transactions measuredat fair value. The FASB originally stated a preference for a lattice modelbecause it believed that a lattice model more fully captures the uniquecharacteristics of employee stock options in the estimate of fair value, ascompared to the Black-Scholes model which we currently use for our pro formadisclosure. The FASB decided to remove its explicit preference for a latticemodel and not require a specific valuation methodology. In April 2005, theSEC issued a release which amends the compliance dates for SFAS No. 123R. Accordingly, we will be required to adopt the new accounting provisionsbeginning in the first quarter of our fiscal year ending February 28,2007.

 

On March 29, 2005, theSEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of theSEC regarding the interaction between SFAS No. 123R and certain SEC rules andregulations and provides the SEC’s views regarding the valuation of share-basedpayment arrangements for public companies. In particular, SAB 107 providesguidance related to share-based payment transactions with nonemployees, thetransition from nonpublic to public entity status, valuation methods (includingassumptions such as expected volatility and expected term), the accounting forcertain redeemable financial instrument issues under share-based paymentarrangements, the classification of compensation expense, non-GAAP financialmeasures, first-time adoption of SFAS No. 123R in an interim period,capitalization of compensation costs related to share-based paymentarrangements, the accounting for income tax effects of share-based paymentsarrangements upon adoption of SFAS No. 123R, the modification of employeeshare options prior to adoption of SFAS No. 123R, and disclosures inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations subsequent to adoption of SFAS No. 123R. We expect the adoptionof SFAS No. 123R and SAB 107 will have a material adverse impact on ourresults of operations and loss per share. We are currently in the process ofevaluating the extent of such impact.

 

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154replaces APB Opinion No. 20, “Accounting Changes” and SFAS No. 3, “ReportingAccounting Changes in Interim Financial Statements.”  SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. We do not expect the adoptionof SFAS No. 154 to have a material impact on our consolidated financialstatements.

 

**NOTE 3.CHANGES IN STOCKHOLDERS’ EQUITY**

 

During the nine months endedNovember 30, 2005, our stockholders’ equity changed as follows (inthousands):

 
| ** **                                                    | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                    | ** ** | **Common stock** | ** ** | **paid-in** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                    | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **capital**     | ** ** | **deficit**            | ** ** | **equity**        | ** ** | **loss**   | ** ** |
|                                                          |       |             |       |        |       |            |       |                   |       |              |       |       |       |
| Balance at February 28, 2005                             |       | 6,045            |       | $           | 1          |            | $          | 163,173                |       | $                 | (156,317   | )          | $          | 6,857 |   |   |   |
| Exercise of stock options                                     |       | 11               |       | —      |       | 7               |       | —                 |       | 7                 |       |       |       |
| Issuance of common stock for employee stock  purchase program |       | 26               |       | —      |       | 109             |       | —                 |       | 109               |       |       |       |
| Net loss                                                      |       | —           |       | —      |       | —          |       | (1,515                 | )          | (1,515            | )          | $          | (1,515     | ) |
| Other comprehensive loss                                      |       |             |       |        |       |            |       |                   |       |              |       | —     |       |
| Comprehensive loss                                            |       |             |       |        |       |            |       |                   |       |              |       | $          | (1,515     | ) |
| Balance at November 30, 2005                             |       | 6,082            |       | $           | 1          |            | $          | 163,289                |       | $                 | (157,832   | )          | $          | 5,458 |   |   |   |

 

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**NOTE 4.CONTINGENCIES**

 

**Indemnifications**

 

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

 

•                  *Intellectual PropertyIndemnities to Customers and Resellers.*Our customer and reseller agreements for our SubscribeNet servicetypically contain provisions that indemnify our customers or resellers fordamages and costs resulting from claims alleging that our services infringe theintellectual property rights of a third-party. We have also entered intosoftware license agreements indemnifying the licensees for damages and costsresulting from claims alleging that the software infringes third-partyintellectual property rights. The duration of these indemnities is typicallyunlimited. Our potential payments under these indemnities are in some caseslimited (e.g., to the fees paid to us under the contract or to another amount)and are in other cases unlimited. Where we have given such indemnities forthird-party software licenses that we resold, we have typically receivedsimilar indemnities from the software publishers. We plan to continue to enterinto SubscribeNet service agreements with customers and resellers, licensesoftware, and provide industry-standard indemnities to our service customers,resellers and licensees.

 

•                  *Intellectual PropertyIndemnity to Acquirors of Assets.*In the May 2002 sale of our Asset Management software business toComputer Associates International, Inc., we agreed to indemnify ComputerAssociates for damages and costs incurred by it in connection with claimsalleging that the software and technology we sold to them infringes theintellectual property rights of third parties. This indemnity will remain ineffect until May 2007. Our maximum potential payment under this indemnityis $9.5 million.  In the sale of ourSun software resale business to FusionStorm, which closed in January 2006,we agreed to indemnify FusionStorm for damages and costs incurred by it inconnection with claims alleging that the customer list we sold to theminfringes the confidentiality or trade secret rights of third parties. Thisindemnity will remain in effect until March 2008, or in certaincircumstances potentially until January 2010. Our maximum potentialpayment under this indemnity is $2.5 million.

 

*•**                 **Indemnities to Private Investors.*In our private placements of stock, we havemade representations and warranties to the investors and placement agents, andhave agreed to indemnify them for any damages and costs they incur as a resultof our breach of those representations and warranties. We also have signedregistration rights agreements with private investors under which we indemnifythem for damages they incur as a result of any material misstatements oromissions in our registration statements, and pay penalties in the event wefail to maintain the effectiveness of registration statements. The duration ofour indemnities to our investors under the respective stock and warrantpurchase agreements ranges from one to two years from the respective closingdates, other than the purchase agreements for our June 2000 warrants andour January 2001 Series A Preferred Stock and warrants, which providefor indemnities of unlimited duration. Our indemnities to our investors underthe respective registration rights agreements expire upon termination of ourregistration obligations, which is typically the date the securities may besold under Rule 144(k) under the Securities Act of 1933. Our potentialpayments under these indemnities are unlimited.

 

*•**                 **Indemnities to Directors and Officers.*We indemnify our directors and officers fordamages and costs incurred in the performance of their duties, to the extentpermitted by Delaware law. The duration of, and our potential payments under,these indemnities are unlimited, subject to Delaware law.

 

We have historically received only a very limitednumber of requests for indemnification under these agreements and have not beenrequired to make material payments under them. Accordingly, we have notrecorded a liability related to these indemnification provisions.

 

**LegalProceedings**

 

*In re Intraware, Inc. Initial Public OfferingSecurities Litigation*

 

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

 

Lawsuits containing similar allegations have beenfiled in the Southern District of New York challenging over 300 other initialpublic offerings and secondary offerings conducted in 1999 and 2000.  Allof these lawsuits have been consolidated for pretrial purposes before UnitedStates District Court Judge Shira Scheindlin of the Southern District of NewYork.  On July 15, 2002, an omnibus motion to dismiss was filed inthe coordinated litigation on behalf of the issuer defendants, of whichIntraware and its three named current and former officers and directors are apart, on common pleadings issues.  On or about October 9, 2002, theCourt entered and ordered a Stipulation of Dismissal, which dismissed the threenamed current and former officers and directors from the litigation withoutprejudice.  On February 19, 2003, the Court entered an order denyingin part the issuer-defendants’ omnibus motion to dismiss, including thoseportions of the motion to dismiss relating to Intraware.

 

In June 2004, a stipulation of settlement forthe claims against the issuer-defendants, including us, was submitted to theCourt.  The underwriter-defendants in the *Inre Initial Public Offering Securities Litigation* (collectively, the “underwriter-defendants”),including the underwriters of our initial public offering, are not parties tothe stipulation of settlement.

 

The settlement provides that, in exchange for arelease of claims against the settling issuer-defendants, the insurers of allof the settling issuer-defendants will provide a surety undertaking toguarantee plaintiffs a $1 billion recovery from the non-settlingdefendants, including the underwriter-defendants.  The amount our insurerswould be required to pay to the plaintiffs could range from zero toapproximately $3.5 million, depending on plaintiffs’ recovery from theunderwriter-defendants and from other non-settling parties.  If theplaintiffs recover at least $1 billion from the underwriter-defendants,our insurers would have no liability for settlement payments under the terms ofthe settlement.  If the plaintiffs recover less than $1 billion, webelieve our insurance will likely cover our share of any payments towardssatisfying plaintiffs’ $1 billion recovery deficit.  Managementestimates that its range of loss relative to this matter is zero to$3.5 million.  Presently there is no more likely point estimate ofloss within this range.  As a consequence of the uncertainties describedabove regarding the amount we will ultimately be required to pay, if any, as ofNovember 30, 2005, we have not accrued a liability for this matter.

 

On August 31, 2005, the court grantedpreliminary approval of the settlement.  A fairness hearing for thesettlement is scheduled for April 2006.  There is no guarantee thesettlement will become final as it is subject to a number of conditions,including the final approval of the court.

 

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

 

In July 2004, a complaint was filed in theUnited States District Court for the District of Delaware, Civ. No. 04-822,against ComVest Venture Partners, LP; ComVest Management, LLC; CommonwealthAssociates Management Company, Inc.; Commonwealth Associates, LP; RMCCapital, LLC; Michael S. Falk; Robert Priddy; Travis L. Provow; KeithRosenbloom; and Intraware.  The complaint describes Intraware as a nominaldefendant.  The complaint alleges that, between August 2001 and January 2002,all of the defendants other than Intraware were members of a group, and thereforeshould be treated as a single “person,” for purposes of Sections 13(d)(3) and16(b) of the Securities Exchange Act of 1934 (the “1934 Act”).  Thecomplaint further alleges that ComVest Venture Partners, LP and Mr. Priddy,while they and the other alleged group members collectively owned more man 10%of a class of our equity securities, bought 

 

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andsold our equity securities within a 6-month period and failed to disgorge to usthe profits allegedly realized in those trades, thereby violating Section 16(b) ofthe 1934 Act.  Mr. Falk was a member of our Board of Directors from April 2001to May 2002 and Mr. Provow was a member of our Board of Directorsfrom October 2001 to May 2002.  The complaint demands thatComVest Venture Partners, LP and Mr. Priddy pay over to Intraware theprofits they allegedly realized and retained in violation of Section 16(b) ofthe 1934 Act, together with interest and legal costs.  According to thecomplaint, the amount of those alleged profits is unknown to the plaintiff,however, the information alleged in the complaint suggests that amount may beapproximately $1.3 million.  The complaint does not seek damagesagainst us.  After the complaint was filed, the plaintiff and Intrawaresigned a stipulation acknowledging that Intraware takes no position withrespect to the claims in the action, and providing that Intraware acceptsservice of the complaint, that Intraware is not required to file an answer orother response to the complaint, and that Intraware will otherwise have therights and responsibilities of a party to the action.  In June 2005,the court denied motions filed by the defendants other than Intraware todismiss the plaintiff’s claims. The parties, including Intraware, are currentlyengaged in discovery.  A trial in this case is currently scheduled tobegin in July 2006.

 

We are also subject to legal proceedings, claims andlitigation arising in the ordinary course of business.  We do not expectthat the ultimate costs to resolve these matters will have a material adverseeffect on our consolidated financial position, results of operations, or cashflows.

 

**NOTE5.  NOTES PAYABLE**

 

In August 2003, weissued a note payable to Silicon Valley Bank for proceeds of approximately $2.0million. The note was payable in fixed monthly principal installments plusinterest through September 2005.  In connection with the notepayable, we issued a warrant to purchase 4,173 shares of our common stock at anexercise price of $11.90 per share.  The warrant was immediatelyexercisable and expires in August 2010.  We estimated the allocatedfair value of such warrant at approximately $46,000, using the Black-Scholesvaluation model with the following assumptions: expected volatility of 136%,risk-free interest rate of 4.01%, expected life of seven years and nodividends.  The value of the warrant was recorded as a debt discount andwas amortized as interest expense using the effective interest method over thelife of the note payable. The debt discount related to the warrant wasfully amortized as of November 30, 2005.  As of November 30,2005, the warrant had not been exercised.

 

In August 2003, we alsoentered into an equipment advance agreement with Silicon Valley Bank. Theequipment advance agreement bears annual interest at the greater of the bank’sprime rate plus 1.00% or 5.50%.  The agreement provided for borrowings ofup to $500,000 through August 2004 and was limited to equipmentpurchases.  We borrowed approximately $363,000 under this agreement andthe interest rate at November 30, 2005 was 8%.  Monthly payments ofinterest only were payable through August 1, 2004, after which fixedmonthly principal installments plus interest will be made through August 2006.

 

In September 2004, weentered into a second equipment advance agreement with Silicon ValleyBank.  This equipment advance agreement bears annual interest at thegreater of 5.50% or the bank’s prime rate plus 1.00%. This second equipmentadvance allowed us to borrow up to $500,000 through August 1, 2005,solely to finance equipment purchases. We borrowed approximately $493,000 underthis agreement and the interest rate at November 30, 2005 was 8%.  Monthlypayments of interest only were payable through August 2005, after whichfixed monthly principal installments plus interest will be made through August 2007.

 

In November 2005, weentered into a third equipment advance agreement with Silicon ValleyBank.  This new equipment advance agreement bears annual interest at thegreater of 7.0% or the bank’s prime rate plus 1.00%. This third equipmentadvance allows us to borrow up to $500,000 through November 30, 2006,solely to finance equipment purchases. As of November 30, 2005, we had notborrowed under this agreement and the interest rate at that date was 8%.  Eachadvance is repayable over 24 monthly installments of principal plus interest,beginning the month after the advance is made.

 

All of this debt iscollateralized by a senior security interest in substantially all of ourassets.  We are also required to maintain compliance with certainfinancial covenants, with all of which we were in compliance at November 30,2005.

 

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Scheduled maturities of debtat November 30, 2005, are as follows (in thousands):

 
| Years ending:          |   |   |   |
|------------------------|--------|--------|--------|
| February 28, 2006 |   | $      | 107    |   |
| February 28, 2007 |   | 337    |   |
| February 29, 2008 |   | 124    |   |
|                   |   | $      | 568    |   |

 

**NOTE 6.ALLIANCES**

 

**Provisionof Sales and Marketing Services to Software Spectrum for Resale of Third-PartySoftware**

 

Prior to June 2001, weresold Sun Microsystems, Inc. Internet-related application software(marketed under the brands “Sun/Netscape Alliance” and “iPlanet”) and relatedmaintenance services to end-users in North America under an agreement betweenus and Sun.  In June 2001, we signed an agreement with CorpSoft, Inc.(which merged with Software Spectrum, Inc. in 2002 and will be referred tohereafter as “Software Spectrum”) under which we transferred to SoftwareSpectrum our Sun software resale business, including our agreement with Sun forresale of Sun software and maintenance services.  Software Spectrumassumed primary responsibility for resale of Sun software and relatedmaintenance under its agreement with Sun (which has since been replaced by anagreement between Software Spectrum and Sun’s distributor).  Under the June 2001agreement, we assisted Software Spectrum in its sales and marketing of the Sunsoftware marketed under the brands “Sun ONE” and “Java Enterprise System,” aswell as related maintenance, and also provided our SubscribeNet service toSoftware Spectrum to enable it to deliver that Sun software to its customerselectronically. As part of this arrangement, Software Spectrum paid us apercentage of the gross profit derived from its sales of Sun software licensesand maintenance services, and reimbursed us for our cost in maintaining a teamdedicated to sales of Sun software licenses and maintenance (included in the allianceand reimbursement revenue line item on our consolidated statements ofoperations).  The June 2001 agreement with Software Spectrum was partof our transition out of the business of generally reselling third-partysoftware. At the time we announced this agreement, we also ceased reselling allthird-party software except for a limited number of products that werecomplementary to our SubscribeNet service.

 

In December 2003 and August 2004,we amended our June 2001 agreement with Software Spectrum to add Websensesoftware to the set of products that Software Spectrum and Intraware jointlyresold under that agreement. Under these arrangements, Software Spectrum paidus a percentage of the gross profit derived from our joint sales of Websensesoftware licenses and maintenance services (included in the alliance andreimbursement revenue line item on our consolidated statements of operations).

 

This contract accounted formore than 10% of our total revenues in our 2005 fiscal year and during thethree and nine months ended November 30, 2005.

 

On August 1, 2005, wesigned an updated alliance agreement with Software Spectrum.  Under the updatedagreement, we continued to provide outsourced sales services and ourSubscribeNet digital delivery service to Software Spectrum for Sun Java Systemand Sun ONE software.  Software Spectrum continued to pay us a percentageof the gross profit derived from its sales of Sun software licenses andmaintenance.  However, under the updated agreement Software Spectrum stoppedreimbursing us for our direct costs in maintaining a team dedicated to sales ofSun software licenses and maintenance.  Though the percentage of gross profitthat Software Spectrum paid us increased in the updated agreement, this increasedid not fully offset the elimination of Spectrum’s reimbursement of our directcosts.  Accordingly, we recognized anegative gross profit from our alliance and reimbursement revenues in the threemonths ended November 30, 2005.

 

Effective January 3,2006, we sold our Sun software resale business to FusionStorm and, inconnection with that asset sale, terminated our alliance agreement withSoftware Spectrum. We will no longer recognize any alliance and reimbursementrevenues after January 3, 2006. We have signed a two-year SubscribeNetservice agreement with FusionStorm, which will likely partially offset thedecline in our online services and technology revenues that will result fromthe termination of our alliance agreement with Software Spectrum. However, feesunder that new SubscribeNet service agreement with FusionStorm could besubstantially less than we anticipate if sales of Sun Java Enterprise Systemand Sun ONE software by FusionStorm are lower than expected.  FusionStorm paid us $250,000 in considerationfor our Sun software resale business, and will be required to pay us additionalconsideration of $200,000 if its gross profit from sales of certain SunMicrosystems software exceeds certain pre-established targets during the 12months following completion of the asset sale. 

 

During thefiscal year ended February 28, 2005 and for the period from March 1,2005 to December 31, 2005, Intraware purchased from FusionStorm hardwareproducts and services for approximately $182,000 and $256,000, respectively, intransactions not related to the sale of our Sun software resale business.  The consideration paid and payable byFusionStorm to Intraware for the Sun software resale business was determined asa result of arms-length negotiations between Intraware and FusionStorm.

 

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**NOTE 7.COMMON STOCK**

 

**ReverseStock Split**

 

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

 

**NOTE 8.PREFERRED STOCK**

 

OnNovember 9, 2005 we entered into a Series B Preferred Stock PurchaseAgreement with Digital River, Inc., pursuant to which Digital River agreedto purchase 1,000 shares of our Series B Convertible Preferred Stock foran aggregate purchase price of $6.0 million representing an approximately 14%ownership stake, if converted, as of November 30, 2005.  Concurrently, we entered into an InvestorRights Agreement and a Standstill and Stock Restriction Agreement with DigitalRiver.  The transaction closed on November 10,2005.  Proceeds from the transaction wereapproximately $5.7 million, net of investment banking and legal fees.

 

Eachshare of Series B Convertible Preferred Stock is convertible into 1,000shares of our common stock (subject to adjustment for stock splits and thelike) at any time at the option of Digital River. In addition, each share of Series BConvertible Preferred Stock shall automatically convert into 1,000 shares ofour common stock upon any transfer, except for transfers to an affiliate ofDigital River. The Series B Convertible Preferred Stock is also entitledto a liquidation preference in connection with a liquidation event, includingan acquisition of Intraware, and certain non-cumulative dividend rights. We alsohave certain redemption rights with respect to the Series B ConvertiblePreferred Stock if it has not been entirely converted to common stock by November 9,2007.  The liquidation preference will bean amount per share equal to the greater of the purchase price plus alldeclared and unpaid dividends (if any) on such shares of the Series B ConvertiblePreferred Stock, or the amount per share that would have been payable had itbeen converted to common stock immediately prior to the liquidation event. Theliquidation preference at November 30, 2005 is $6.6 million or, if greater, the market price of the commonstock into which the Series B Convertible Preferred Stock is convertibleimmediately prior to a liquidation event.

 

Pursuantto the Investor Rights Agreement, Digital River may request, at any timebeginning two years after the closing, that we file a registration statement onForm S-3 to register the shares of common stock issuable upon conversionof the Series B Convertible Preferred Stock. Digital River may alsorequest that we include its registrable securities in any registrationinitiated by us. In addition, this agreement provides that, after the executionof a strategic alliance agreement between us and Digital River and untilDigital River owns less than 10% of our outstanding voting stock, Digital Riverwill be entitled to designate a member of our Board of Directors.

 

Pursuantto the Standstill and Stock Restriction Agreement, Digital River may notacquire beneficial ownership of more than 15% of our voting power during thestandstill period. The standstill period terminates when either Digital Riverowns less than 10% of our voting power or upon change of control of Intraware,or is suspended for those periods during which a third party has acquired morethan 15% but less than 50% of our voting power, we enter into an agreement fora merger, asset sale or other transaction with a third party, or a third partycommences a tender offer for our voting stock. This agreement also subjectsDigital River’s right to transfer its shares (other than to affiliates) to aright of first refusal by us to purchase the shares. This agreement alsoimposes certain obligations on Digital River regarding quorum at stockholdermeetings and dissenter’s rights.

 

**NOTE 9. RESTRUCTURING**

 

During the three months ended November 30,2005, we incurred a $41,000 restructuring charge related to severance paymentsmade to employees who we terminated in connection with our sale of our Sunsoftware resale business to FusionStorm. We based the severance payments on the seniority of the respectiveemployees and their stock options holdings. This charge is recorded against operationsfor the three months ended November 30, 2005.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

The following discussion ofour financial condition and results of operations should be read in conjunctionwith our consolidated financial statements and related notes included in ourannual report on Form 10-K for the fiscal year ended February 28,2005, which was filed with the Securities and Exchange Commission (“SEC”) on April 22,2005, and the unaudited consolidated financial statements and related notescontained in this quarterly report on Form 10-Q.  This discussioncontains forward-looking statements that involve risks and uncertainties.Forward-looking statements include statements regarding trends in themarketplace, our future cash and liquidity position, the extent and timing offuture revenues and expenses and customer demand, the deployment of our productsand services or the anticipated performance of products or services, grossmargin expectations for Sun software and maintenance resold through SoftwareSpectrum, statements regarding the financial statement impact of SFAS 123R,statements regarding future economic conditions or performance, and ourreliance on third parties.  All forward-looking statements included inthis document are based on information available to us as of the date hereof,and we assume no obligation to update any forward-looking statement.  Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of certain factors, including but notlimited to, those discussed in “Risk Factors” below and elsewhere in thisquarterly report on Form 10-Q.

 

**INTRAWAREOVERVIEW**

 

Our goal is to become the defacto standard among digital delivery solution providers. We are pursuing afour-pronged strategy to achieve this goal. First, we are working to become aprofitable, cash-generating company by growing our SubscribeNet business andpracticing stringent fiscal responsibility. Second, we are seeking tostrengthen our technological advantage and extend the breadth of ourfunctionality in the electronic software delivery and management (“ESDM”) area byfurther improving our ESDM solutions through internal research and developmentand through alliances with adjacent technology providers.  Third, we arepreparing a production release of a new service called Digital Fastball, whichwill leverage our digital delivery expertise to enable small and medium-sizedbusinesses, as well as consumers, to send, receive and manage virtually alltypes and sizes of digital files over the Internet quickly, easily andsecurely. Fourth, we are seeking to extend and strengthen our customer base byexecuting on our sales and marketing plan and by providing exceptional customerservice.

 

We currently see a number oftrends in the marketplace that are potentially important for our business.First, growth in the technology sector has improved over the past severalquarters.  We have benefited from thistrend as technology companies experiencing growth have been more willing toinvest in technologies that support their own businesses.  However, with this growth have come inflationarypressures on energy and personnel costs, both of which are important componentsof our cost structure.  Second, thereappears to be an increasing pace of mergers and acquisitions in the enterprisesoftware sector. These consolidations pose both opportunities and risks for us,potentially leading either to growth in our contracts with those customers orto cancellation of customer contracts. Third, technology companies areincreasingly outsourcing operational functions to reduce costs. Our services enableenterprise software companies to outsource key operational functions in amanner that we believe is financially compelling. Therefore, we may benefitfrom this outsourcing trend. Fourth, the use of hosted web-based applications,which in the past has been limited by concerns about speed, reliability andsecurity, is now becoming more accepted among mainstream businesses, largelybecause of a desire for cost savings. This trend may benefit us because ourSubscribeNet service and planned Digital Fastball service are hosted web-basedapplications.  This paragraph contains forward-looking statements that aresubject to risks and uncertainties, and actual results could differ materiallyfrom those anticipated (see “Risk Factors” beginning on page 26 below).

 

Our management is focused onfour key areas. The first is broadening our SubscribeNet service to meetexpanding and more sophisticated requirements of the enterprise softwareindustry for digital delivery management systems, including requirements forlicense management and delivery, management of channel partner relationships,and electronic commerce.  The second is taking advantage, through ourplanned Digital Fastball service, of the growing acceptance by non-technologybusinesses and individual consumers of the Internet as a medium for exchangingall types of digital files.  The third is leveraging our relationshipswith our strategic allies to reach new and larger customers for ourSubscribeNet service. The fourth is to take advantage of the drive towardgreater efficiency among large information technology companies, as evidencedby the increasing consolidation in that sector, by emphasizing the cost savingsthat 

 

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can be realized throughbroad adoption of electronic software delivery and management.

 

We also face a number of keyrisks, which are described in the “Risk Factors” beginning on page 26 below.

 

We earn revenues andgenerate cash principally through recurring service fees charged for our SubscribeNetservice, and professional services fees charged for customization of ourSubscribeNet service.  Principal sourcesof revenue and cash also included, until August 1, 2005, costreimbursement received for our sales and marketing services provided to SoftwareSpectrum and, until January 3, 2006, our profit-sharing with SoftwareSpectrum. Historically, we have also raised substantial amounts of cash throughprivate stock placements.

 

We have incurred losses andnegative cash flow from operations during each fiscal year since inception. Forthe three and nine months ended November 30, 2005, we slightly improvedour net loss from the corresponding periods in the prior year, and reduced ournegative cash flows from those prior-year periods.  However, our cash balances could neverthelessdecline further.  Effective January 3, 2006, we terminated our salesalliance agreement with Software Spectrum, which accounted for more than 10% ofour total revenues in the nine months ended November 30, 2005.  For the period between December 1, 2005and January 3, 2006, we expect to have lower sales of Sun software andmaintenance, and to earn lower margins on those sales under the sales alliance agreement,thereby decreasing our shared gross profit and SubscribeNet fees from SoftwareSpectrum during that final month of the agreement. The preceding paragraphcontains forward-looking statements that are subject to risks anduncertainties, and actual results could differ materially from thoseanticipated (see “Risk Factors” beginning on page 26 below).

 

We believe that the effectsof our capital financings to date, of our past and current strategic actions toimprove revenue, and of our ongoing cost controls, will be adequate to generatethe cash resources we will need to fund our future operations.  However,if we fail to sufficiently increase our revenues or control spending, ourbusiness could be materially adversely affected.  The preceding paragraphcontains forward-looking statements that are subject to risks and uncertainties,and actual results could differ materially from those anticipated (see “RiskFactors” beginning on page 26 below).

 

At our annual meeting ofstockholders on September 8, 2005, our stockholders authorized our Boardof Directors to effect a one-for-ten reverse split of our common stock. On September 26, 2005, we filed a Certificate of Amendment to our Amendedand Restated Certificate of Incorporation with the Delaware Secretary of Stateto effect the reverse stock split.  The reverse stock split becameeffective at the close of business on September 26, 2005.

 

Effective January 3, 2006, we sold ourSun software resale business to FusionStorm in order to focus on our coredigital delivery service business. FusionStorm paid us $250,000 in consideration for these assets, and willbe required to pay us additional consideration of $200,000 if its gross profitfrom sales of certain Sun Microsystems software exceeds certain pre-establishedtargets during the 12 months following completion of the asset sale.

 

In connection with this asset sale, weterminated our sales alliance agreement with Software Spectrum. That salesalliance agreement accounted for substantially all of our alliance andreimbursement revenues, a significant portion of our online services andtechnology revenues, and more than 10% of our total revenues in the first threequarters of our 2006 fiscal year.  Wewill no longer recognize any alliance and reimbursement revenues after January 3,2006. We have signed a two-year SubscribeNet service agreement withFusionStorm, which will likely partially offset the decline in our onlineservices and technology revenues that will result from the termination of oursales alliance agreement with Software Spectrum. However, fees under that newSubscribeNet service agreement with FusionStorm could be substantially lessthan we anticipate if sales of Sun Java Enterprise System and Sun One softwareby FusionStorm are lower than expected. 

 

**CriticalAccounting Policies and Estimates**

 

This MD&A discusses ourconsolidated financial statements, which have been prepared in accordance withgenerally accepted accounting principles in the United States. In preparingthese financial statements, we are required to make estimates and assumptionsaffecting the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Onan ongoing basis, we evaluate our estimates and judgments. We base ourestimates and judgments on historical experience and on various other factorsbelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets and liabilitiesnot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

We consider accountingpolicies related to revenue recognition, costs of deferred revenue, stock-basedcompensation, allowance for doubtful accounts, and income taxes to be criticalaccounting policies due to the estimation process involved in each.

 

*RevenueRecognition*

 

We recognize revenue whenall of the following conditions are met:

 

•                  There is persuasive evidence of anarrangement;

 

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•                  We have provided the service to the customer,made the software available for customer download through our website, orshipped the software to the customer;

 

•                  We believe that collection of these fees isreasonably assured; and

 

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

 

Online services andtechnology revenue results primarily from four types of arrangements. First, it results from sales of our SubscribeNet digital delivery service tosoftware vendors and other companies that distribute software as part of theirbusiness.  Second, it results from professional services that we provideto customize our SubscribeNet service for customers, to convert data for customers,and to integrate our proprietary software.  Third, it results from ourresale of third-party services or software licenses complementary to ourSubscribeNet service. Fourth, it results from the sale of our proprietarysoftware licenses and related maintenance to companies using those productsinternally or using those products to provide web-based services to theircustomers. As a result of the sale of our Asset Management software business inMay 2002, we are not currently deriving revenue from licenses, maintenanceor integration services for our proprietary software; however, we may recognizesuch revenues in the future if opportunities arise to sell licenses for ourproprietary software underlying our SubscribeNet service and related maintenance.We sell our SubscribeNet service, and will sell proprietary software licensesif opportunities present themselves, primarily through our direct sales forceand authorized resellers.

 

Alliance and reimbursementrevenue primarily relates to our recently terminated alliance agreement withSoftware Spectrum for sales and marketing services. This revenue consists of apercentage of the gross profit derived from Software Spectrum’s sales of thethird-party software and maintenance for which we provided sales and marketingservices, and, prior to August 1, 2005, reimbursement for the costs ofmaintaining a sales team dedicated to providing sales and marketing services toSoftware Spectrum for that third-party software and maintenance. This revenuewas recognized as we provided the services to Software Spectrum.  On August 1,2005, we signed an updated agreement with Software Spectrum.  Under theupdated agreement, Software Spectrum paid us a higher percentage of the grossprofit derived from its sales of Sun software licenses and maintenance.  However, Software Spectrum stoppedreimbursing us for our direct costs in maintaining a team dedicated to sales ofSun software licenses and maintenance.  We terminated our allianceagreement with Software Spectrum effective January 3, 2006, in connectionwith the sale of our third-party software and maintenance resale business toFusionStorm.  That sale was completed on January 3,2006.  We ceased recognizing alliance andreimbursement revenue on that date.

 

We derive software productrevenues from our past resales of licenses and maintenance for multiplebusiness software product lines. As of July 1, 2001, we generally nolonger resell third-party software licenses and maintenance. Since July 1,2001, we have continued to recognize revenue from our resale of third-partysoftware licenses and related maintenance contracts over the life of thearrangements made prior to July 1, 2001. Vendor specific objectiveevidence of fair value for the maintenance element of the resold softwarearrangements has been based on historical and contractual renewal rates formaintenance. We deferred the maintenance revenue at the outset of eachrespective arrangement and recognized it ratably over the period during whichthe maintenance was to be provided.  This period normally commenced on thedate the software was delivered and generally continued for 12 months, althoughcertain maintenance contracts continued for longer periods.  Since thethree months ended May 31, 2004, we have no longer recognized any revenuerelating to software product sales.

 

We defer online services andtechnology revenues related to our SubscribeNet digital delivery service andgenerally recognize them ratably over the term of the service arrangement. SomeSubscribeNet service implementations for new customers involve customizationessential to the functionality of the service.  In those cases, we deferrevenue recognition until the service go-live date is reached and recognize therevenue on a ratable basis over the remaining contract term.  The go-livedate is the later of the date on which the essential functionality is deliveredor the point at which no additional customization is required.  OurSubscribeNet contracts with customers typically give the customer a period oftime (generally five days) to evaluate a SubscribeNet implementation after wehave completed it, and provide that the customer is deemed to have accepted theimplementation if it has not affirmatively rejected it within thatperiod.  We typically rely on such non-rejections by customers to indicatetheir acceptance of implementations.  Any subsequent indications by ourcustomers that their implementations have not been properly completed couldhave a material adverse 

 

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impact on our financialcondition or results of operations.

 

We also sell additionalprofessional services related to SubscribeNet agreements.  Generally,these services do not provide stand-alone value to a customer, and accordingly,we defer recognition of that revenue until the go-live date for theprofessional services, similar to the manner in which we treat SubscribeNetservice revenues as discussed above.  Such professional services revenuesare recognized ratably over the longer of the remaining estimated customer lifeor the remaining contract term, commencing with the completion of theprofessional services. Estimated customer life requires that we periodicallyestimate the projected life of our existing customers, based on historicalinformation, such as customer renewal rates. A 10% increase in our estimatedcustomer life during the three and nine months ended November 30, 2005,would have caused a net increase in our net loss of $6,000 and $8,000,respectively.

 

Online services andtechnology revenues related to our resale of third-party services or softwarelicenses complementary to our SubscribeNet service are generally recognized asthe service is provided.  If the service or license resold involvescustomization essential to the functionality of the underlying SubscribeNetservice, the fees charged for the customization is recognized as revenue in thesame manner in which we treat the professional services discussed above.Revenue related to these resold services or licenses is recognized as revenuebased on the fee charged to the customer, since we bear the credit risk forresold services or licenses, have the latitude to establish pricing at ourdiscretion, and are primarily responsible for acceptability of the services or licensesdelivered.  In addition, costs paid to the third-party providers arerecorded as cost of revenues and recognized in the same manner as the relatedrevenue. As mentioned above, a determination that the collection of fees isreasonably assured is a precursor to recognizing revenue. Determination ofcollectability of payments requires judgment on the part of management andincludes periodically evaluating customers’ credit-worthiness (see “Allowancefor Doubtful Accounts” below).

 

*Costs ofDeferred Revenue*

 

We capitalize direct costsof revenues related to significant SubscribeNet service implementations andestablished professional services contracts associated with our SubscribeNetservices.  Direct costs include compensation and payroll-related fringebenefits directly related to the time spent on significant implementation andprofessional services activities.  These costs are recognized over thelonger of the remaining estimated customer life or the remaining contract term(see “Revenue Recognition” above). Costs associated with professional servicesinvolving significant new functionality for the SubscribeNet service that arepartially or fully funded by customers but do not qualify as funded researchand development activities are expensed as cost of revenues as incurred until aworking model is delivered to the customer. Once a working model has beendelivered, all additional direct costs are capitalized in the same mannerdiscussed above. Any change in our revenue recognition estimates could resultin corresponding changes to our recognition of costs of deferredrevenues.  A 10% increase in our estimated customer life during the threeand nine months ended November 30, 2005, would have caused a net increasein our net loss of $6,000 and $8,000, respectively.  At November 30,2005, we had approximately $0.5 million in capitalized costs relating todeferred revenues.  We expense customer acquisition costs, including salescommissions, as incurred.

 

*Stock-basedCompensation*

 

We account for stock-based compensationfor our employees using the intrinsic value method presented in Accounting PrinciplesBoard (APB) No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations, and comply with the disclosure provisions of Statementof Financial Accounting Standard (SFAS) No. 123, “Accounting forStock-Based Compensation,” and with the disclosure provisions of SFAS No. 148,“Accounting for Stock-Based Compensation—Transition and Disclosure Amendment ofSFAS No. 123.” Under APB No. 25, compensation expense is based on thedifference, as of the date of the grant, between the fair value of our stockand the exercise price. For our fiscal quarter ended November 30, 2005, nostock-based compensation was recorded for stock options granted to our employeesbecause the exercise price of all stock options granted to our employees wasequal to the market price of the underlying stock on the date of grant.

 

In December 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised) “ShareBased Payment” (SFAS No. 123R). The standard requires companies to valueemployee stock options and stock issued under employee stock purchase plansusing the fair value based method on the grant date and record stock-basedcompensation expense. The fair value based models that companies are allowed touse can be different from the Black-

 

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Scholes option-pricingmodel, which we currently use to calculate the pro forma effect on net incomeand earnings per share if we had applied SFAS No. 123 to employee optiongrants. Note 2 to our unaudited interim consolidated financial statements showswhat the pro forma net loss and loss per share for the fiscal quarter ended November 30,2005 and November 30, 2004, would have been if we had applied SFAS No. 123. However, the actual impact to our results of operations upon adoption of thestandard could materially differ from the pro forma information included inNote 2 to our unaudited interim consolidated financial statements due todifferences in the option-pricing model used, estimates and assumptionsrequired, and options to be included in the calculation upon adoption. The fairvalue based models require the input of highly subjective assumptions and donot necessarily provide a reliable single measure of the fair value of ourstock options. In April 2005, the SEC issued a release which amends thecompliance dates for SFAS No. 123R.  Accordingly, we will be requiredto adopt the new accounting provisions beginning in the first quarter of ourfiscal year ending February 28, 2007.

 

*Allowancefor Doubtful Accounts*

 

We maintain an allowance fordoubtful accounts for estimated losses from our inability to collect requiredpayments from our customers. When evaluating the adequacy of this allowance, weanalyze specific accounts receivable, historical bad debts, customercredit-worthiness, current economic trends and changes in our customers’payment history.  We may need to record increases to our allowancebalances in the future.  At November 30, 2005, we had many accountsreceivable balances and one large unbilled receivable balance.  Anydispute, early contract termination or other collection issue related to thesereceivable balances could have a material adverse impact on our financialcondition or result of operations. At November 30, 2005, our unbilledreceivable balance was $0.2 million. This balance relates to our SoftwareSpectrum agreement (see “Revenue Recognition” above). There are no allowancesfor doubtful accounts related to this balance. This estimate involvesmanagement’s judgment, which takes into account Software Spectrum’s priorpayment history, current credit-worthiness and overall business condition.Changes in the above factors could have a material impact on actual bad debtsincurred.

 

*IncomeTaxes*

 

In conjunction withpreparing our financial statements, we must estimate our income taxes in eachof the jurisdictions in which we operate. This process involves estimating ouractual current tax expense together with assessing temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities. We must thenassess the likelihood that our deferred tax assets will be recovered fromfuture taxable income and to the extent we believe that recovery is not likely,we must establish a valuation allowance. Given that we have incurred lossessince inception and therefore have not been required to pay income taxes, wehave fully reserved our deferred tax assets at November 30, 2005.  Inthe event that we are able to realize our deferred tax assets in the future, anadjustment to the deferred tax asset would increase income in the period thatthis is determined.

 

**Results ofOperations**

 

*TotalRevenue*

 

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

 

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| ** **                                    | ** ** | **For the  three months ended** | ** ** | **For the  nine months ended** | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **November 30,  2005**     | ** ** | **November 30,  2004**    | ** ** | **November 30,  2005** | ** ** | **November 30,  2004** | ** ** |
| ** **                                    | ** ** | **Total**                       | ** ** | **Change**                     | ** ** | **% of   Revenue** | ** ** | **Total** | ** ** | **% of   Revenue** | ** ** | **Total** | ** ** | **Change** | ** ** | **% of  Revenue** | ** ** | **Total** | ** ** | **% of   Revenue** | ** ** |
| Revenues:                                     |       |                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Online  services and technology               |       | $                               | 2,320      |                           | $          | 288 |   | 92 | % | $ | 2,032 |   | 80 | % | $ | 7,124 |   | $ | 1,497 |   | 84 | % | $ | 5,627 |   | 70 | % |
| Alliance  and reimbursement                   |       | 203                             |       | (290                           | )          | 8 | % | 493 |   | 20 | % | 1,308 |   | (451 | ) | 16 | % | 1,759 |   | 22 | % |
| Related  party online services and technology |       | —                          |       | (4                             | )          | 0 | % | 4 |   | 0 | % | 4 |   | (538 | ) | 0 | % | 542 |   | 7 | % |
| Software  product sales                       |       | —                          |       | —                         |       | 0 | % | — |   | 0 | % | — |   | (42 | ) | 0 | % | 42 |   | 1 | % |
| Total  revenues                               |       | $                               | 2,523      |                           | $          | (6 | ) |   |   | $ | 2,529 |   |   |   | $ | 8,436 |   | $ | 466 |   |   |   | $ | 7,970 |   |   |   |

 

Combined online services andtechnology revenue results primarily from sales of our SubscribeNetservices.  The online services and technology revenue increase during thethree months ended November 30, 2005, as compared to the three monthsended November 30, 2004, is primarily due to two factors: first, approximately$0.2 million in revenue recognized from new SubscribeNet customers whosego-live date was achieved between December 1, 2004, and November 30,2005; and second, approximately $0.1 million in additional revenue recognizedfrom expanded contracts with existing customers.  The online services andtechnology revenue increase during the nine months ended November 30,2005, as compared to the nine months ended November 30, 2004, is primarilydue to three factors: first, approximately $0.5 million in revenue recognizedfrom new SubscribeNet customers whose go-live date was achieved between December 1,2004, and November 30, 2005; second, approximately $0.5 million in revenuerecognized from SubscribeNet customers whose go-live date was achieved between March 1,2004, and November 30, 2004  inwhich we recognized a full nine months of revenue; and third, approximately$0.3 million in additional revenue recognized from expanded contracts withexisting customers.  The related party online services and technologyrevenue decrease during the nine months ended November 30, 2005, resultedfrom our recognition of the remaining deferred revenue under our strategicalliance agreement with Zomax Incorporated, upon termination of that agreementin the prior year.  We expect our online services and technology revenuefor our fiscal quarter ending February 28, 2006, to be slightly higherthan those during the three months ended November 30, 2005, primarily dueto our entry into SubscribeNet service agreements with new customers, includingFusionStorm, and expansions of existing customer contracts.  However, our online services and technologyrevenues could decrease if our implementation of our SubscribeNet service for FusionStormis not completed on time, or if SubscribeNet fees due from FusionStorm are atrisk of being uncollectible, are reduced, or do not meet the criteria forrevenue recognition.  The previous sentencesare forward-looking statements that are subject to risks and uncertainties, andactual results could differ materially from those anticipated (see “RiskFactors” beginning on page 26 below).

 

Alliance and reimbursementrevenue primarily relates to our recently terminated alliance agreement withSoftware Spectrum for sales and marketing services. This revenue consists of apercentage of the gross profit derived from Software Spectrum’s sales of Sunsoftware and maintenance for which we provide sales and marketing services,and, prior to July 31, 2005, it also included reimbursement for the costsof maintaining a team dedicated to providing sales and marketing services toSoftware Spectrum for that third-party software and maintenance.  Thisalliance agreement with Software Spectrum accounted for more than 10% of ourtotal revenue during the three and nine months ended November 30, 2005.The decrease in alliance and reimbursement revenue for the three and ninemonths ended November 30, 2005, was primarily due to a reduction of thecost reimbursement for maintaining our team dedicated to providing sales and marketingservices for Software Spectrum, of $0.4 million and $0.5 million,respectively.  The reimbursement decrease was primarily due to theelimination of Software Spectrum’s reimbursement obligation under the salesalliance agreement as of August 1, 2005, as described above.   Weexpect our alliance and reimbursement revenues in our fiscal quarter ending February 28,2006, to be significantly lower than those in our fiscal quarter ended November 30,2005, primarily due to the termination or our sales alliance agreement withSoftware Spectrum effective January 3, 2006, in connection with the saleof our Sun Java Enterprise System and Sun ONE software resale business toFusionStorm. The previous sentence is a forward-looking statement that issubject to risks and uncertainties, and actual results could differ materiallyfrom those anticipated (see “Risk Factors” beginning on page 26 below).

 

The decline in softwareproduct revenue for the nine months ended November 30, 2005, was due toour transition out of the business of reselling third-party software productsand related maintenance.  We do not expect to recognize future revenuesfrom our exited third-party resale business.  However, we may recognizefuture revenues from third-party product licenses and related servicescomplementary to our SubscribeNet service, which we resell as part of acomprehensive ESDM solution.  The previous two sentences areforward-looking statements that are subject to risks and 

 

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uncertainties, and actualresults could differ materially from those anticipated (see “Risk Factors”beginning on page 26 below).

 

*Costs andExpenses*

 

The following table setsforth the costs and expenses, changes in costs and expenses and percentage of totalrevenue for the periods indicated (in thousands, except percentage amounts):

 
| ** **                  | ** ** | **For the  three months ended** | ** ** | **For the  nine months ended** | ** ** |
|-----------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                  | ** ** | **November 30,  2005**     | ** ** | **November 30,  2004**    | ** ** | **November 30,  2005** | ** ** | **November 30,  2004** | ** ** |
| ** **                  | ** ** | **Total**                       | ** ** | **Change**                     | ** ** | **% of  Revenue** | ** ** | **Total** | ** ** | **% of  Revenue** | ** ** | **Total** | ** ** | **Change** | ** ** | **% of  Revenue** | ** ** | **Total** | ** ** | **% of  Revenue** | ** ** |
|                        |       |                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total cost of  revenues     |       | $                               | 1,297      |                           | $          | 146 |   | 51 | % | $ | 1,151 |   | 46 | % | $ | 4,292 |   | $ | 1,026 |   | 51 | % | $ | 3,266 |   | 41 | % |
| Gross margin                |       | 1,226                           |       | (152                           | )          | 49 | % | 1,378 |   | 54 | % | 4,144 |   | (560 | ) | 49 | % | 4,704 |   | 59 | % |
| Operating  expenses:        |       |                            |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales and  marketing        |       | 712                             |       | (44                            | )          | 28 | % | 756 |   | 30 | % | 1,989 |   | (341 | ) | 24 | % | 2,330 |   | 29 | % |
| Product  development        |       | 303                             |       | (80                            | )          | 12 | % | 383 |   | 15 | % | 888 |   | (307 | ) | 11 | % | 1,195 |   | 15 | % |
| General and  administrative |       | 1,040                           |       | (67                            | )          | 41 | % | 1,107 |   | 44 | % | 2,886 |   | 88 |   | 34 | % | 2,798 |   | 35 | % |
| Restructuring               |       | 41                              |       | 116                            |       | 2 | % | (75 | ) | -3 | % | 41 |   | 116 |   | 1 | % | (75 | ) | -1 | % |
| Total operating  expenses   |       | $                               | 2,096      |                           | $          | (75 | ) | 83 | % | $ | 2,171 |   | 86 | % | $ | 5,804 |   | $ | (444 | ) | 69 | % | $ | 6,248 |   | 78 | % |

 

*Cost ofRevenues*

 

The increase in cost ofrevenues and decrease in margin percentage for the three months ended November 30,2005, is primarily due to the $0.2 million increase in online services andtechnology cost of revenues. Approximately $0.1 million of this increase wasdue to variable support costs for higher bandwidth utilization rates andincremental investments in our SubscribeNet service infrastructure. Inaddition, approximately $0.1 million of this increase was due to additionalcosts associated with revenue recognized from our resale of third-partyservices complementary to our SubscribeNet service.

 

The increase in cost ofrevenues and decrease in margin percentage for the nine months ended November 30,2005, is primarily due to the $1.1 million increase in online services andtechnology cost of revenues. Approximately $0.5 million of this increase wasdue to variable support costs for higher bandwidth utilization rates andincremental investments in our SubscribeNet service infrastructure. Approximately$0.2 million of this increase was due to additional costs associated withrevenue recognized from services for third-party products complementary to ourSubscribeNet service that we resold.  In addition, approximately $0.2million of this increase was due to increased utilization of our productdevelopment teams in cost of revenues activities since November 2004.

 

Cost of revenues primarilyconsists of certain allocated costs related to our Internet connectivity,assets supporting cost of revenues, and customer support, as well as the costsassociated with maintaining our team dedicated to helping Software Spectrumsell Sun software. Cost of revenues also consists of professional servicespersonnel costs and the cost of third-party products and services sold. When we were in the business of directly reselling third-party softwareproducts, we purchased those products at a discount from the third-parties’established list prices according to standard reseller terms.  We expecttotal cost of revenues for the current full fiscal year to be higher than ourfiscal year 2005 amounts.  We expect our gross profit margin related toalliance and reimbursement revenue for the fourth quarter of fiscal year 2006to be consistent with that for the three months ended November 30, 2005.  We expect our gross profit margin percentagefor the current full fiscal year to be lower than those for our fiscal year2005. Our quarterly cost of revenues may fluctuate based on multiplevariables including but not limited to revenue mix fluctuations, levels ofprofessional services activities, infrastructure costs, and variable externalsupport utilization rates, and we expect our margins to fluctuate accordingly.The previous sentences are forward-looking statements that are subject to risksand uncertainties. The actual mix of sales transactions and the timing of thetransactions may cause our cost of revenues and gross profit margins tofluctuate materially from those anticipated (see “Risk Factors” beginning on page26 below).

 

*Sales andMarketing Expenses*

 

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

 

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Our sales and marketingexpenses for the three months ended November 30, 2005, remained consistentwith the prior year balance. The decrease in the dollar amount of our sales andmarketing expenses for the nine months ended November 30, 2005, comparedto the nine months ended November 30, 2004, is primarily due to decreasesof approximately $0.3 million from outside services related to marketing andadvertising as we utilize more in-house marketing resources.

 

We expect our sales andmarketing expenditures in fiscal year 2006 to be approximately the same asthose in fiscal year 2005.

 

We plan to continue tomarket and sell our services, and may market and sell proprietary softwarelicenses, directly to customers using our existing sales force and through resellers.We also plan to continue to develop alliances with other companies to sell ourservices to a broader customer base. The previous three sentences areforward-looking statements that are subject to risks and uncertainties, andactual results could differ materially from those anticipated (see “RiskFactors” beginning on page 26 below).

 

*ProductDevelopment Expenses*

 

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

 

The decrease in our productdevelopment expenses for the three and nine months ended November 30,2005, compared to the three and nine months ended November 30, 2004, isdue primarily to a decrease in our internal efforts on product developmentactivities of approximately $0.1 million and $0.3 million, respectively. Duringthe three and nine months ended November 30, 2005, the product developmentteams temporarily increased their focus on cost of revenues activities, asdescribed in “Cost of Revenues” above.

 

We anticipate continuing toinvest in additional functionality for our SubscribeNet service and underlyingproprietary software. However, we expect those investments to fluctuate overtime, and expect our product development expenses to fluctuate accordingly. Weexpect total product development expenditures in fiscal year 2006 to be slightlylower than those in fiscal year 2005. The previous sentences areforward-looking statements that are subject to risks and uncertainties, andactual results could differ materially from those anticipated (see “RiskFactors” beginning on page 26 below). We cannot give assurance that our productdevelopment efforts will result in new or improved products, features orfunctionality or that the market will accept the improvements to existing ornew products, features or functionality developed.

 

*General andAdministrative Expenses*

 

General and administrativeexpenses consist primarily of compensation for administrative and executivepersonnel, fees for professional services and certain overhead costs.

 

Our general andadministrative expenses for the three and nine months ended November 30,2005, remained consistent with the prior year balances.

 

We expect total expendituresin fiscal year 2006 to be approximately the same as our fiscal year 2005levels. The previous sentence is a forward-looking statement that is subject torisks and uncertainties, and actual results could differ materially from thoseanticipated (see “Risk Factors” beginning on page 26 below).

 

*InterestExpense*

 

For the three months ended November 30,2005, interest expense was approximately $12,000, a decrease from $24,000 forthe three months ended November 30, 2004.  For the nine months ended November 30,2005, interest expense was approximately $47,000, a decrease from $79,000 forthe nine months ended November 30, 2004.

 

Interest expense primarilyrelates to obligations under capital leases and notes payable.  Thedecrease in interest expense for the three and nine months ended November 30,2005, is primarily due to the reduction of the principal

 

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balance on our notes payable.

 

*Interestand Other Income and Expenses, Net*

 

For the three months ended November 30,2005, interest and other income and expenses, net was approximately a $78,000credit, an increase from a $50,000 credit for the three months ended November 30,2004.   For the nine months ended November 30, 2005, interestand other income and expenses, net was approximately a $192,000 credit, anincrease from a $92,000 credit for the nine months ended November 30,2004.

 

Interest and other incomeand expenses, net primarily relates to interest earned on our investmentbalances.  The increase in interest and other income and expenses, net forthe three and nine months ended November 30, 2005, is primarily the resultof increased investment balances due to our November 9, 2005 issuance of Series BConvertible Preferred Stock, a sustained cash balance from the prior year, andan increase in the interest rates in the current year.

 

*IncomeTaxes*

 

From inception through February 28,2005, we incurred net losses for federal and state tax purposes and have notrecognized any tax provision or benefit. As of February 28, 2005, we hadapproximately $88 million of federal and $47 million of state net operatingloss carryforwards available to offset future taxable income, which expire invarying amounts between fiscal year 2006 and 2025. The Tax Reform Act of 1986limits the use of net operating losses and tax credit carryforwards in certaincircumstances where changes occur in the stock ownership of a company. Becauseof cumulative ownership changes in the past, the federal and state losscarryforwards have been reduced by the amount of the net operating losscarryforwards that will expire. Because of these cumulative ownership changes,federal loss carry forwards totaling approximately $44 million and state losscarry forwards totaling approximately $22 million are subject to limitation. AtFebruary 28, 2005, $44 million and $25 million of federal and state netoperating losses, respectively, are available without limitation to offsetfuture taxable income. Should there be a change of ownership in the future, theavailable net operating losses may be further limited. Given our limitedoperating history, losses incurred to date and the difficulty in accuratelyforecasting our future results, management does not believe that therealization of the related deferred income tax asset meets the criteriarequired by generally accepted accounting principles.

 

**Liquidityand Capital Resources**

 

The following table presentsour liquidity position at November 30, 2005 and 2004 (in thousands):

 
| ** **                                | ** ** | **For the nine months ended** | ** ** |
|-------------------------------------------|------------|-------------------------------|------------|
| ** **                                | ** ** | **November 30, 2005**    | ** ** | **November 30, 2004** | ** ** |
|                                      |       |                          |       |   |   |
| Cash and cash equivalents                 |       | $                             | 13,426     |   | $ | 10,145 |   |
| Working capital                           |       | $                             | 11,531     |   | $ | 7,555 |   |
| Net cash used in operating activities     |       | $                             | (979       | ) | $ | (1,928 | ) |
| Net cash used in investing activities     |       | $                             | (323       | ) | $ | (352 | ) |
| Net cash provided by financing activities |       | $                             | 5,265      |   | $ | 621 |   |

 

Our net cash used byoperations was $1.0 million for the nine months ended November 30, 2005,an improvement from $1.9 million net cash used in operations in the ninemonths ended November 30, 2004. This improvement was primarily due toincreased customer collections of approximately $0.8 million and reducedpayroll related expenditures of $0.1 million during the nine months ended November 30,2005.  Our ability to improve our uses of cash and generate continuedpositive cash flows in future periods will largely depend on our ability toincrease the number of customers of our SubscribeNet service while increasingexisting subscriptions through strong contract renewals. We expect our cashbalances to fluctuate from time to time due to the timing of customercollections and vendor payments in the ordinary course of business.  Thepreceding portion of this paragraph contains forward-looking statements thatare subject to risks and uncertainties, and actual results could differmaterially from those anticipated (see “Risk Factors” beginning on page 26below). It is also important for us to increase our current level of sales, andcontinue to control 

 

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our operational and customersupport costs in future periods.

 

Our net cash provided byfinancing activities was approximately $5.3 million for the nine monthsended November 30, 2005.  This primarily resulted from the issuanceof our Series B Convertible Preferred Stock to Digital River, nettingproceeds of approximately $5.7 million. There were also principal payments onour notes payable of approximately $0.8 million.  These payments werepartially offset by additional borrowings under our equipment advance agreement(see below) of $0.2 million, and by our issuance of approximately 37,000 sharesof common stock in connection with our stock option and employee stock purchaseplans for proceeds of approximately $0.1 million.

 

As of November 30,2005, we have an agreement with Silicon Valley Bank under which we have threeequipment advances outstanding.  The equipment advances bear annual interestrates of the greater of 1% in excess of the bank’s prime rate (7% at November 30,2005) or 5.25%, 5.50% and 7%, respectively, and are payable in fixed monthlyinstallments through September 2006, 2007 and December 2008,respectively.  At November 30, 2005, the interest rate for equipmentadvances was 8%.

 

All of our borrowings fromSilicon Valley Bank are collateralized by a senior security interest insubstantially all of our assets. The agreements also require us to comply withfinancial covenants, with which we were in compliance as of November 30,2005. The agreements further restrict us from incurring or assuming additionalindebtedness outside of the note payable and equipment advances, excludingtrade payables and certain other liabilities incurred in the ordinary course ofbusiness.

 

Our net cash used ininvesting activities during the nine months ended November 30, 2005, was$0.3 million. This amount was comprised of our purchases of fixed assets. Wepaid for these equipment purchases from our cash and cash equivalents, butlater drew down approximately $0.2 million under the above-mentioned secondequipment advance agreement to finance these purchases. We used these fixedasset purchases primarily to upgrade and expand our SubscribeNet infrastructureand corporate information systems. We entered into the third equipment advanceagreement on November 30, 2005. We will utilize it to finance additionalfixed asset purchases at levels that approximate or are slightly higher thanour prior year levels. The previous sentence is a forward-looking statementthat is subject to risks and uncertainties, and actual results could differmaterially from those anticipated (see “Risk Factors” beginning on page 26below).

 

We believe our existing cashand cash equivalents, together with any cash generated from future operations,will be sufficient to fund our operating activities, capital expenditures andfinancing arrangements for the foreseeable future. However, if our SubscribeNetbusiness fails to grow significantly or declines from its current level, wecould be forced to seek additional capital. The previous two sentences areforward-looking statements that are subject to risks and uncertainties, andactual results could differ materially from those anticipated (see “RiskFactors” beginning on page 26 below).

 

At November 30, 2005,we did not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities, which would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. As such, we are not materially exposed to any financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

 

The following tablesummarizes our debt and lease obligations at November 30, 2005, and theeffect such obligations are expected to have on our liquidity and cash flow infuture periods (in thousands). This table provides information through our yearending February 28, 2010, as we do not have any debt or lease obligationsbeyond that point.

 

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| ** **       | ** ** | **Payments due by period** | ** ** |
|------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Total**                  | ** ** | **Less than   1 Year** | ** ** | **1-3 years (a)** | ** ** | **3-5 years (b)** | ** ** |
| Long-term debt   |       | $                          | 604        | (c) | $ | 118 |   | $ | 486 |   | $ | — |   |
| Operating leases |       | 1,962                      |       | 130 |   | 1,566 |   | 266 |   |
|             |       | $                          | 2,566      |   | $ | 248 |   | $ | 2,052 |   | $ | 266 |   |

 

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(a)          Includes payments from March 1, 2006 through February 28,2009.

 

(b)         Includes payments from March 1, 2009 through February 28,2010.

 

(c)          This amount includes approximately $36,000 in interest.

 

As of November 30,2005, our Series A and Series B redeemable convertible preferredstock entitled its holders to liquidation preferences of $1.0 million and$6.6 million (or, if greater, the market price of the common stock into whichthe Series B Convertible Preferred Stock is convertible), respectively, inthe event of Intraware’s liquidation.

 

**RecentAccounting Pronouncements**

 

In December 2004, theFASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”).SFAS No. 123R addresses all forms of share-based payment (“SBP”) awards,including shares issued under employee stock purchase plans, stock options,restricted stock and stock appreciation rights. SFAS No. 123R will requireus to expense SBP awards with compensation cost for SBP transactions measuredat fair value. The FASB originally stated a preference for a lattice modelbecause it believed that a lattice model more fully captures the unique characteristicsof employee stock options in the estimate of fair value, as compared to theBlack-Scholes model which we currently use for our footnote disclosure. TheFASB decided to remove its explicit preference for a lattice model and notrequire a specific valuation methodology. In April 2005, the Securitiesand Exchange Commission (“SEC”) issued a release which amends the compliancedates for SFAS No. 123R.  Accordingly, we will be required to adoptthe new accounting provisions beginning in the first quarter of our fiscal yearending February 28, 2007.

 

On March 29, 2005, theSEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of theSEC regarding the interaction between SFAS No. 123R and certain SEC rules andregulations and provides the SEC’s views regarding the valuation of share-basedpayment arrangements for public companies. In particular, SAB 107 providesguidance related to share-based payment transactions with nonemployees, thetransition from nonpublic to public entity status, valuation methods (includingassumptions such as expected volatility and expected term), the accounting forcertain redeemable financial instrument issues under share-based paymentarrangements, the classification of compensation expense, non-GAAP financialmeasures, first-time adoption of SFAS No. 123R in an interim period,capitalization of compensation costs related to share-based paymentarrangements, the accounting for income tax effects of share-based paymentsarrangements upon adoption of SFAS No. 123R, the modification of employeeshare options prior to adoption of SFAS No. 123R, and disclosures inManagement’s Discussion and Analysis of Financial Condition and Results ofOperations subsequent to adoption of SFAS No. 123R. We expect the adoptionof SFAS No. 123R and SAB 107 will have a material adverse impact on ourresults of operations and loss per share. We are currently in the process ofevaluating the extent of such impact.

 

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections.” SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes”, andSFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS No. 154 requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change.  We do not expect the adoption of SFAS No. 154to have a material impact on our consolidated financial statements.

 

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**RISK FACTORS**

 

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

 

**Our sales and marketing services arrangement withSoftware Spectrum, Inc. terminated on January 3, 2006, as part of oursale of our Sun software resale business. As a result, we will no longer recognize alliance and reimbursementrevenues after January 3, 2006.**

 

Until January 3, 2006, we provided sales andmarketing services to Software Spectrum to assist in its resale and marketingof Sun Java Enterprise System and Sun One software licenses and maintenance,under a Sales Alliance Agreement between us and Software Spectrum.  Underthat agreement, Software Spectrum shared with us a portion of its gross profitfrom resales of licenses and maintenance for that Sun software, and paid us aSubscribeNet service fee for electronic delivery of that Sun software.  This agreement accounted for substantiallyall of our alliance and reimbursement revenues, a significant portion of our onlineservices and technology revenues, and more than 10% of our total revenues inthe first three quarters of our 2006 fiscal year.

 

Effective January 3, 2006, we sold our Sunsoftware resale business to FusionStorm and, in connection with that assetsale, terminated our Sales Alliance Agreement with Software Spectrum.  We will no longer recognize any alliance andreimbursement revenues after January 3, 2006.  We have signed a two-year SubscribeNetservice agreement with FusionStorm, which will likely partially offset the declinein our online services and technology revenues that will result from thetermination of our Sales Alliance Agreement with Software Spectrum.  However, fees under that new SubscribeNetservice agreement with FusionStorm could be substantially less than weanticipate if sales of Sun Java Enterprise System and Sun One software byFusionStorm are lower than expected.  

 

**The loss of one or more of our key customers couldcause our revenue growth to slow or cause our revenues to decline.**

 

A substantial portion of the revenues from ourSubscribeNet service comes from a relatively small number of customers. Our contracts with most of these customers are subject to renewal orcancellation annually.  If any of these customers elected to cancel theiragreements with us, our revenue growth would likely slow or our revenues mightdecline.

 

**Mergers and acquisitions in the technology sectorcould harm us by causing cancellation of customer contracts where our customersare acquired, or by strengthening our competitors.**

 

In recent years, there has been an increase inmergers and acquisitions among technology companies.  This trend poses risksfor us.  First, our customers are technology companies, and anyacquisitions of our customers could lead to cancellation of our contracts withthose customers by the acquiring companies.  Second, our competitors alsoare technology companies.  Any acquisitions of other companies by ourcompetitors, or acquisitions of our competitors by other companies, are likelyto result in stronger companies competing against us. Either of these types ofevents could reduce our revenue through loss of existing customers, or reduceour margins through increased price competition.

 

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**We have a history of losses and negative cash flow,and we have yet to achieve sustained profitability or positive cash flow.**

 

We have incurred significant losses since we wereformed in 1996, and have yet to achieve sustained profitability or positivecash flow.  As of November 30, 2005, we had an accumulated deficit ofapproximately $158 million.  Also, with the exception of our quarters endedNovember 30, 2002, and August 31, 2005, we have not achieved positivecash flow from operations since our formation in 1996.  We expect toreport an overall cash usage from operations for our 2006 fiscal year. Our operating history makes it difficult to evaluate whether or when we will beable to achieve sustained profitability or positive cash flow in the future.

 

**Competition from other electronic delivery andlicensing providers, and potential customers’ development of their ownelectronic delivery and/or licensing systems, could limit our revenue growthand reduce our gross margins.**

 

The market for selling electronic delivery andlicensing services is highly competitive.  Some of our competitors havelonger operating histories, greater financial, technical, marketing and otherresources, broader product and service offerings, better name recognition, anda larger installed base of customers than we do.  Some of our competitorsalso have well-established relationships with our potential customers and withthird-party information technology or consulting firms that help market ourcompetitors’ services.  We expect competition to intensify as currentcompetitors expand and improve their service offerings and new competitorsenter the market.  In addition, our current and potential customers areprimarily information technology companies with strong software developmentexpertise.  When considering their alternatives for implementing a systemfor electronic delivery of software or license keys, these companies sometimeselect to develop such systems in-house.  While we believe our competitiveposition is strong against both external competitors and in-house development,we have at times experienced reduced prices, reduced gross margins and lostsales as a result of such competitive factors.  Such competition is likelyto intensify, which could limit the growth of our revenues or gross margins.

 

**The market for our SubscribeNet electronic softwareand license delivery and management service is immature and volatile, and themarket for our Digital Fastball hosted digital delivery service is virtuallyuntested.  If the market for either service does not develop or developsmore slowly than we expect, our business will be harmed.**

 

The market for hosted digital delivery services,including both our SubscribeNet and Digital Fastball services, is relativelyunproven, and it is uncertain whether these services will achieve and sustainhigh levels of demand and market acceptance. Our success will depend to asubstantial extent on the willingness of companies, large and small, toincrease their use of hosted digital delivery services. If companies do notincrease their use of hosted digital delivery services, our operating resultswill be hurt.  In addition, in this unproven market, we have limitedinsight into trends that may develop and affect our business. We may makeerrors in predicting and reacting to relevant business trends, which could harmour business.

 

We market our SubscribeNet electronic software andlicense delivery and management service principally to softwarecompanies.  However, many software companies have invested substantialpersonnel and financial resources in developing their own electronic softwareand/or license delivery systems, and therefore may be unwilling to migrate to andpay for an outsourced service. In addition, some software companies haveadopted automatic update, or “phone home,” technology for delivering softwareupdates, whereby an end-user’s computer automatically contacts the softwarecompany’s server to check whether updates are available and, if so, downloadsand installs those updates. This method for delivering software updates couldbe viewed by our potential and existing customers as an alternative to ourdigital delivery technology, and therefore any increased adoption of thisautomatic update technology could hurt our business and results of operations.

 

We plan to market our Digital Fastball serviceprincipally to small and medium-sized companies that need to send large digitalfiles as part of their businesses.  However, many systems are alreadyavailable for sharing files over the Internet, in some cases at little or nocost.  In addition, some such systems have been the targets of widelypublicized litigation by copyright holders, which may make some companiesreluctant to use Internet-based digital delivery services such as DigitalFastball.

 

Further, some companies may be reluctant to useeither our SubscribeNet or Digital Fastball hosted digital delivery servicesbecause they are concerned about the security capabilities of these services.

 

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**Although our subscription-based sales model for ourSubscribeNet service limits the volatility of our online services andtechnology revenue, other factors may cause our operating results, andtherefore our stock price, to fluctuate.**

 

Our SubscribeNet service fees, which comprise mostof our online services and technology revenues, are recognized ratably overcontract terms of generally one year, thereby limiting the quarter-to-quartervolatility of those revenues.  Nevertheless, certain factors may cause ouronline services and technology revenues to fluctuate.  In addition to theother risk factors described in this section, factors that could cause suchfluctuation include:

 

•                  Deferral of SubscribeNet revenue recognitiondue to delays by customers in implementing the SubscribeNet service, due to newsales involving extensive implementations, or due to contract modificationsadding significant future deliverables;

 

•                  Lengthening of the sales cycle for ourSubscribeNet service due to macroeconomic or other factors;

 

•                  Actual events, circumstances, outcomes, andamounts differing from judgments, assumptions, and estimates used indetermining the values of certain assets (including the amounts of relatedvaluation allowances), liabilities and other items reflected in ourconsolidated financial statements or unaudited interim consolidated financialstatements; and

 

•                  Changes in accounting rules, such asrecording expenses for employee stock option grants.

 

Consequently, operating results for a particularfuture period are difficult to predict, and prior results are not necessarilyindicative of results to be expected in future periods.  Any of thesefactors could materially adversely affect our results of operations and stockprice.

 

**The technological and functional requirements we mustmeet to stay competitive are subject to rapid change.  If we are unable toquickly adapt to these changes and meet the demands of our current andpotential customers, we will likely lose sales and market share and our revenuegrowth will be limited.**

 

We market primarily to software publishers, whogenerally demand that a service like ours meet high technological andfunctional standards.  To remain competitive in this market and meet thedemands of current and prospective customers, we must continually adapt andupgrade our technology and functionality.  We are a small company withlimited resources available for enhancing and expanding our services. If we donot respond quickly enough to changing industry standards or the demands ofcustomers and potential customers, we will likely lose sales and market shareto competitors and our growth prospects will be limited.  In addition, wecould incur substantial costs to modify our services or infrastructure in orderto adapt to changing standards and demands.  If we incur such costs butour sales fail to increase commensurately, we may not be able to achievesustained profitability and positive operating cash flow.

 

**Defects in our SubscribeNet service could diminishdemand for the service and subject us to substantial liability.**

 

Our service is complex, and may have errors ordefects that users identify after they begin using it, which could harm ourreputation and our business.  Internet-based services frequently containundetected errors when first introduced or when new versions or enhancementsare released.  Despite taking precautions to avoid errors, we have fromtime to time found defects in our service and new errors in our existingservice may be detected in the future.  Since our customers use ourservice for important aspects of their business, any errors, defects or otherperformance problems with our service could hurt our reputation and may damageour customers’ businesses.  If that occurs, customers could elect not torenew their agreements with us, could be eligible for credits under our servicelevel agreements, and could delay or withhold payment to us.  We couldalso lose future sales, or customers may make warranty claims against us, whichcould result in an increase in our provision for doubtful accounts, an increasein collection cycles for accounts receivable or the expense and risk oflitigation.

 

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**Interruptions or delays in service from ourthird-party Web hosting facilities could impair the delivery of our service andharm our business.**

 

We provide our service through computer hardwarethat is currently located in a third-party Web hosting facilities in SantaClara, California operated by SAVVIS Communications, and in Ireland operated byData Electronics.  We do not control the operation of these facilities,and they are subject to damage or interruption from earthquakes, floods, fires,power loss, telecommunications failures and similar events.  Whilephysical security measures are in place, they are also subject to break-ins,sabotage, intentional acts of vandalism and similar misconduct.  Despiteprecautions taken at the facilities, the occurrence of a natural disaster, adecision to close a facility without adequate notice or other unanticipatedproblems at a facility could result in lengthy interruptions in ourservice.  In addition, the failure by either facility to provide ourrequired data communications capacity could result in interruptions in ourservice.  We have an agreement with SBC E-Services, an affiliate of SBCCommunications, Inc., to provide access to a geographically remotedisaster recovery facility that would provide us access to hardware, softwareand Internet connectivity in the event the SAVVIS facility becomesunavailable.  Even with this disaster recovery arrangement, however, ourservice would be interrupted during the transition.  Any damage to, orfailure of, our systems could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue creditsor pay penalties, cause customers to terminate their subscriptions andadversely affect our renewal rates.  Our business will be harmed if ourcustomers and potential customers believe our service is unreliable.

 

**Viruses may hinder acceptance of Internet-baseddigital delivery, which could in turn limit our revenue growth.**

 

The proliferation of software viruses is a key riskthat could inhibit acceptance by information technology professionals ofWeb-based delivery of digital goods.  Any well-publicized transmission ofa computer virus by us or another company using digital delivery could deterinformation technology professionals from using and deter software providersfrom outsourcing digital delivery, thereby adversely affecting ourbusiness.  Our SubscribeNet service enables our customers to upload theirsoftware products directly onto our systems for downloading by theirend-users.  Our systems automatically scan our customers’ softwareproducts for known computer viruses on an ongoing basis while they are on oursystems.  However, it is possible that, in spite of those periodic virusscans, our system could transmit the virus to one or more end-users.  Anysuch virus transmission could result in disputes, litigation and negativepublicity that could adversely affect our business.

 

**If our security measures are breached and unauthorizedaccess is obtained to a customer’s data, our service may be perceived as notbeing secure and customers may curtail or stop using our service.**

 

Our service involves the storage and transmission ofcustomers’ proprietary information, and security breaches could expose us to arisk of loss of this information, litigation and possible liability.  Ifour security measures are breached as a result of third-party action, employeeerror, malfeasance or otherwise, and, as a result, someone obtains unauthorizedaccess to one of our customers’ data, our reputation will be damaged, ourbusiness may suffer and we could incur significant liability.  Becausetechniques used to obtain unauthorized access or to sabotage systems changefrequently and generally are not recognized until launched against a target, wemay be unable to anticipate these techniques or to implement adequatepreventative measures.  If an actual or perceived breach of our securityoccurs, the market perception of the effectiveness of our security measures couldbe harmed and we could lose sales and customers.

 

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

 

Our business has benefited from the tax laws ofstates in which purchases of software licenses are not taxable if the softwareis received only electronically.  Some such states are considering whetherto change their laws to broaden the taxability of transactions fulfilled overthe Internet.  Any new imposition of taxes on sales of software licenses,where the software is received electronically, could substantially harm demandfor our services and thereby materially adversely affect our business,operating results and financial condition.  We have also benefited fromimplementing our services in Ireland, which offers tax advantages to softwarecompanies distributing their software from Ireland to other Europeancountries.  Any regulatory change in Ireland or elsewhere that diminishesthose advantages could harm our business.  Other changes in governmentregulations, in areas such as privacy and export compliance, could also requireus to implement changes in our services or operations that increase our cost ofdoing business and thereby hurt our financial performance.

 

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**Claims by third parties for intellectual propertyinfringement could force us to stop selling our services, force us to payroyalties, and force us to indemnify our customers.**

 

Our business involves a high risk that we will bethe target of intellectual property infringement claims.  These claimscould take a number of forms, including:

 

•                  Claims by other technology companies allegingthat current or future components of our digital delivery service or relatedservices infringe their intellectual property rights;

 

•                  Claims by our customers’ competitors allegingthat our customers’ software, which we store and electronically deliver for ourcustomers, infringes those competitors’ intellectual property rights (ourcustomers would typically be required to defend and indemnify us against suchclaims, but the claims could nevertheless disrupt our business); or

 

•                  Claims by our customers that we deliveredtheir software to unauthorized third parties, thereby infringing our customers’intellectual property rights.

 

Industry consolidation is increasing the risk thatwe will become a target of the types of claims described in the first twobullets above.  Consolidation among companies providing digital delivery,licensing, e-commerce and related technologies is resulting in more directcompetition among the surviving companies in that segment, heightening the riskof intellectual property infringement claims among those companies, includingus.  Similarly, consolidation in the enterprise software industryheightens the risk of intellectual property infringement claims among thecompanies remaining in that industry, including most of our customers.

 

These intellectual property claims could be made forpatent, copyright or trademark infringement or for misappropriation of tradesecrets.  They could be made directly against us, or indirectly throughour contractual indemnification obligations to our customers and channelpartners.  Any claims could result in costly litigation and be time-consumingto defend, divert management’s attention and resources, or cause delays inreleasing new or upgrading existing services.  Royalty or licensingagreements, if required, may be available only on onerous terms, if atall.  Although we carry general liability insurance, our insurance may notcover all potential claims or may not be adequate to protect us from allliability that may be imposed.

 

We believe we own the rights in, or have the rightsrequired to use, our SubscribeNet technology.  However, there can be noassurance that this technology does not infringe the rights of thirdparties.  In addition, we take steps to verify that end-users who downloadour customers’ software through our SubscribeNet service are entitled to deployand use that software.  However, there can be no assurance that thisverification procedure will help us defend against claims by, or protect usagainst liability to, our customers whose software is downloaded.

 

We are aware that certain other companies are usingthe name “Intraware” as a company name or as a trademark or service mark. While we have received no notice of any claims of trademark infringement fromany of those companies, we cannot assure you that these companies may not claimsuperior rights to “Intraware” or to other marks we use.

 

**If our export compliance system fails to preventunauthorized exports of our customers’ software, we could be sanctioned by theU.S. government.**

 

Through our SubscribeNet service, we globallydistribute software containing encryption technology and other technologiesrestricted by U.S. laws and regulations from exportation to certain countries,certain types of recipients, and certain specific end-users.  OurSubscribeNet solution incorporates automated procedures to help ensure that thesoftware we deliver electronically is not downloaded in violation of U.S.export laws and regulations.  However, these procedures may not preventunauthorized exports of restricted software in every case.  If anunauthorized export of software occurs through the SubscribeNet service and theU.S. government determines that we violated the U.S. export laws or 

 

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regulations,we could be sanctioned under those laws or regulations.  Sanctions includefines, suspension or revocation of export privileges, and imprisonment.

 

**If our key personnel left the company, our productdevelopment, sales, and corporate management could suffer.**

 

Our future success depends upon the continuedservice of our executive officers and other key technology, sales, marketingand support personnel.  None of our officers or key employees is bound byan employment agreement for any specific term.  If we lost the services ofone or more of our key employees, or if one or more of our executive officersor key employees decided to join a competitor or otherwise compete directly orindirectly with us, this could have a significant adverse effect on ourbusiness.

 

**The Financial Accounting Standards Board (“FASB”)’sadoption of Statement 123 (Revised 2004) will cause, and changes to existingaccounting pronouncements or taxation rules or practices may cause,adverse revenue fluctuations and/or affect our reported results of operationsand how we conduct our business.**

 

In December 2004, the FASB adopted Statement123 (Revised 2004), “Share-Based Payment,” which will require us to measurecompensation costs for all employee stock-based compensation (including stockoptions and our employee stock purchase plan) at fair value and take acompensation charge equal to that value.  We will be required to adopt theprovisions of SFAS No. 123R during our fiscal quarter beginning March 1,2006.  This new accounting pronouncement will likely have a materialeffect on our reported financial results. In addition, any future accounting pronouncements, taxationrules, and new interpretations of existing accounting pronouncements ortaxation rules, could also have a significant effect on our reported results,including our reporting of transactions completed before the effective date ofthe change.

 

**Recent legislation, especially the Sarbanes Oxley Actof 2002, requires that we evaluate our internal control structure.  While we believe we currently have adequateinternal controls in place, this exercise has no precedent available by whichto measure the adequacy of our compliance, and in addition it may cause ouroperating expenses to increase.**

 

The Sarbanes-Oxley Act of 2002, the CaliforniaDisclosure Act and newly proposed or enacted rules and regulations of theSEC and the National Association of Securities Dealers impose new duties on usand our executives, directors, attorneys and independent registered publicaccounting firms.  In order to comply with the Sarbanes-Oxley Act and suchnew rules and regulations, we are evaluating our internal control overfinancial reporting to allow management to report on, and our independentregistered public accounting firm to attest to, our internal control overfinancial reporting.  We are performing the system and process evaluationand testing (and any necessary remediation) required in an effort to complywith the management certification and independent registered public accountingfirm attestation requirements of Section 404 of the Sarbanes-OxleyAct.  As a result, we are incurring additional expenses and diversion ofmanagement’s time and we may be required to hire additional personnel as wellas to use additional outside legal, accounting and advisory services.  Anyof these developments could materially increase our operating expenses and accordinglyreduce our net income or increase our net losses.  While we anticipatebeing able to fully implement the requirements relating to internal controlover financial reporting and all other aspects of Section 404 in a timelyfashion, we cannot be certain as to the outcome of our testing and resultingremediation actions or the impact of the same on our operations since there isno precedent available by which to measure compliance adequacy.  If we arenot able to implement the requirements of Section 404 in a timely manneror with adequate compliance, we may be subject to sanctions or investigation byregulatory authorities, such as the SEC or The Nasdaq Stock Market and ourreputation may be harmed.  Any such action could adversely affect ourfinancial results and the price of our common stock.

 

Moreover, our management, including our CEO and CFO,does not expect that our disclosure controls or our internal controls over ourfinancial reporting will prevent all error and all fraud.  A controlsystem, no matter how well conceived and operated, can provide only reasonable,not absolute, assurance that the objectives of the control system aremet.  Our disclosure controls or procedures can be circumvented by theindividual acts of some persons, by collusion of two or more people or bymanagement override of the control.  Because of the inherent limitationsin a cost-effective control system, misstatements due to error or fraud mayoccur and not be detected.

 

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**We may raise additional capital to fund acquisitions,product development or general operations.  Any such capital financingwould dilute our shareholders’ investments.**

 

We may raise additional capital in the futurethrough private or public offerings of stock, or through other means.  Thepurposes of any such financing would be to increase our cash reserves forpotential use in acquiring other businesses, product development activities,funding our operations and generally strengthening our balance sheet.  Anysuch additional financing would likely dilute the investments of our currentshareholders.

 

**If we acquire any companies or technologies in thefuture, they could prove difficult to integrate, disrupt our business, dilutestockholder value and adversely affect our operating results.**

 

We may acquire or make investments in complementarycompanies, services and technologies in the future.  We are considerablysmaller now than we were when we made our past acquisitions, and therefore anynew acquisitions or investments could be more disruptive to our organizationthan in the past.  Acquisitions and investments involve numerous risks,including:

 

•                  difficulties in integrating operations,technologies, services and personnel;

 

•                  diversion of financial and managerialresources from existing operations;

 

•                  risk of entering new markets;

 

•                  potential write-offs of acquired assets;

 

•                  potential loss of key employees;

 

•                  inability to generate sufficient revenue tooffset acquisition or investment costs; and

 

•                  delays in customer purchases due touncertainty.

 

In addition, if we finance acquisitions by issuingconvertible debt or equity securities, our existing stockholders may be dilutedwhich could affect the market price of our stock.  As a result, if we failto properly evaluate and execute acquisitions or investments, our business andprospects may be seriously harmed.

 

**Provisions of our charter documents could make it moredifficult for a third party to acquire us even if the offer may be consideredbeneficial by our stockholders.**

 

Our certificate of incorporation and bylaws containprovisions that could make it harder for a third party to acquire us withoutthe consent of our Board of Directors.  Additionally, our Board ofDirectors has adopted a stockholder rights plan, or “poison pill,” which wouldsignificantly dilute the ownership of a hostile acquiror.  Theseprovisions make it more difficult for a third party to acquire us withoutnegotiation.  These provisions may apply even if the offer may beconsidered beneficial by our stockholders.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

AtNovember 30, 2005, we had cash and cash equivalents of $13.4 million.We have not used derivative financial instruments in our investment portfolioduring our 2005 fiscal year or the nine months ended November 30, 2005. Weplace our investments with high quality issuers, by policy, in an effort tolimit the amount of credit exposure to any one issue or issuer.

 

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

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

(a) *Evaluation of Disclosure Controls and Procedures*.Our management evaluated, with the participation of our Chief ExecutiveOfficer and our Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this quarterlyreport. Based on this evaluation, our Chief Executive Officer and our ChiefFinancial Officer have concluded that our disclosure controls and proceduresare effective to ensure that information we are required to disclose in reportsthat we file or submit under the Securities Exchange Act of 1934 (the “ExchangeAct”) is accumulated and communicated to our management, including our principalexecutive and principal financial officers, as appropriate to allow timelydecisions regarding required disclosure, and that such information is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms.

 

(b) *Changesin Internal Controls over Financial Reporting*. No changes in ourinternal control over financial reporting identified in connection with theevaluation required by paragraph (d) of Exchange Act Rules 13a-15 or15d-15 occurred during our last fiscal quarter that have materially affected orare reasonably likely to materially affect, our internal control over financialreporting.

 

**PART II**

 

**OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

**In re Intraware, Inc. Initial PublicOffering Securities Litigation**

 

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

 

33

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Lawsuits containing similar allegations have beenfiled in the Southern District of New York challenging over 300 other initialpublic offerings and secondary offerings conducted in 1999 and 2000.  Allof these lawsuits have been consolidated for pretrial purposes before UnitedStates District Court Judge Shira Scheindlin of the Southern District of NewYork.  On July 15, 2002, an omnibus motion to dismiss was filed inthe coordinated litigation on behalf of the issuer defendants, of whichIntraware and its three named current and former officers and directors are apart, on common pleadings issues.  On or about October 9, 2002, theCourt entered and ordered a Stipulation of Dismissal, which dismissed the threenamed current and former officers and directors from the litigation withoutprejudice.  On February 19, 2003, the Court entered an order denyingin part the issuer-defendants’ omnibus motion to dismiss, including thoseportions of the motion to dismiss relating to Intraware.

 

In June 2004, a stipulation of settlement forthe claims against the issuer-defendants, including us, was submitted to theCourt.  The underwriter-defendants in the *Inre Initial Public Offering Securities Litigation* (collectively, the “underwriter-defendants”),including the underwriters of our initial public offering, are not parties tothe stipulation of settlement.

 

The settlement provides that, in exchange for arelease of claims against the settling issuer-defendants, the insurers of allof the settling issuer-defendants will provide a surety undertaking toguarantee plaintiffs a $1 billion recovery from the non-settlingdefendants, including the underwriter-defendants.  The amount our insurerswould be required to pay to the plaintiffs could range from zero toapproximately $3.5 million, depending on plaintiffs’ recovery from theunderwriter-defendants and from other non-settling parties.  If theplaintiffs recover at least $1 billion from the underwriter-defendants,our insurers would have no liability for settlement payments under the terms ofthe settlement.  If the plaintiffs recover less than $1 billion, webelieve our insurance will likely cover our share of any payments towardssatisfying plaintiffs’ $1 billion recovery deficit.  Managementestimates that its range of loss relative to this matter is zero to$3.5 million.  Presently there is no more likely point estimate ofloss within this range.  As a consequence of the uncertainties describedabove regarding the amount we will ultimately be required to pay, if any, as ofAugust 31, 2005, we have not accrued a liability for this matter.

 

On August 31, 2005, the court grantedpreliminary approval of the settlement.  A fairness hearing for thesettlement is scheduled for April 2006.  There is no guarantee thesettlement will become final as it is subject to a number of conditions,including the final approval of the court.

 

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

 

In July 2004, a complaint was filed in theUnited States District Court for the District of Delaware, Civ. No. 04-822,against ComVest Venture Partners, LP; ComVest Management, LLC; CommonwealthAssociates Management Company, Inc.; Commonwealth Associates, LP; RMCCapital, LLC; Michael S. Falk; Robert Priddy; Travis L. Provow; KeithRosenbloom; and Intraware.  The complaint describes Intraware as a nominaldefendant.  The complaint alleges that, between August 2001 and January 2002,all of the defendants other than Intraware were members of a group, andtherefore should be treated as a single “person,” for purposes ofSections 13(d)(3) and 16(b) of the Securities Exchange Act of1934 (the “1934 Act”).  The complaint further alleges that ComVest VenturePartners, LP and Mr. Priddy, while they and the other alleged groupmembers collectively owned more man 10% of a class of our equity securities,bought and sold our equity securities within a 6-month period and failed todisgorge to us the profits allegedly realized in those trades, therebyviolating Section 16(b) of the 1934 Act.  Mr. Falk was amember of our Board of Directors from April 2001 to May 2002 and Mr. Provowwas a member of our Board of Directors from October 2001 to May 2002. The complaint demands that ComVest Venture Partners, LP and Mr. Priddy payover to Intraware the profits they allegedly realized and retained in violationof Section 16(b) of the 1934 Act, together with interest and legalcosts.  According to the complaint, the amount of those alleged profits isunknown to the plaintiff, however, the information alleged in the complaintsuggests that amount may be approximately $1.3 million.  Thecomplaint does not seek damages against us.  After the complaint wasfiled, the plaintiff and Intraware signed a stipulation acknowledging thatIntraware takes no position with respect to the claims in the action, andproviding that Intraware accepts service of the complaint, that Intraware isnot required to file an answer or other response to the complaint, and thatIntraware will otherwise have the rights and responsibilities of a party to theaction.  In June 2005, the court denied motions filed by thedefendants other than Intraware to dismiss the plaintiff’s claims. The parties,including Intraware, are currently engaged in discovery.  A trial in thiscase is currently scheduled to begin in July 2006.

 

34

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We are also subject to legal proceedings, claims andlitigation arising in the ordinary course of business.  We do not expectthat the ultimate costs to resolve these matters will have a material adverseeffect on our consolidated financial position, results of operations, or cashflows.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

On November 10, 2005, we sold 1,000 shares ofour Series B Convertible Preferred Stock to Digital River, Inc. foran aggregate purchase price of $6,000,000. Each share of Series B Convertible Preferred Stock is convertibleinto 1,000 shares of our common stock (subject to adjustment for stock splitsand the like) at any time at the option of Digital River.  In addition,each share of Series B Convertible Preferred Stock shall automaticallyconvert into 1,000 shares of our common stock upon any transfer, except fortransfers to an affiliate of Digital River.  The Series B ConvertiblePreferred Stock is also entitled to a liquidation preference upon a liquidationevent, such as an acquisition of Intraware, and certain non-cumulative dividendrights.  We also have certainredemption rights with respect to the Series B Convertible Preferred Stockif it has not been entirely converted to common stock by November 9, 2007.

 

We have agreed to file, upon Digital River’s requestat any time beginning November 10, 2007, a registration statement toregister the re-sale of the shares of common stock issuable upon conversion ofthe Series B Convertible Preferred Stock.  Digital River may alsorequest that we include its registrable securities in any registration that we initiate.

 

 The issuance of the Series B ConvertiblePreferred Stock was exempt from the registration requirements of the SecuritiesAct of 1933, as amended, in reliance on Section 4(2) thereof orRegulation D promulgated thereunder, as a transaction by an issuer notinvolving a public offering.

 

The sale of Series B Convertible PreferredStock to Digital River is described further in our Form 8-K dated November 9,2005, filed with the Securities and Exchange Commission on November 15,2005.

 

**ITEM 3. DEFAULTS UPONSENIOR SECURITIES**

 

None.

 

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

 

On September 8, 2005, we held our AnnualMeeting of Stockholders. Below are the results of matters submitted to a voteat that meeting.

 

*Proposal No. 1:*     The stockholders elected each of thefollowing persons as a Class I Director to hold office until the 2008Annual Meeting of Stockholders or until earlier resignation or removal.

 
| **Director’s  Name** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|---------------------------|------------|---------------|------------|-------------------------|------------|
|                      |       |          |       |                    |       |
| Peter F. Pervere          |       | 55,447,080    |       | 1,068,106               |       |
|                      |       |          |       |                    |       |
| Bradley M. Shuster        |       | 55,510,944    |       | 1,004,242               |       |

 

The following directors were not subject tore-election at the Annual Meeting, and each such director’s term continuedafter the Annual Meeting:  Mark. B. Hoffman, Peter H. Jackson, Brendan A.McLoughlin and Raymond L. Ocampo Jr.

 

*Proposal No. 2: *The stockholders authorized our Board ofDirectors to amend our Amended and Restated Certificate of Incorporation toeffect a one-for-ten reverse split of our common stock on or before February 28,2006, without further approval of the stockholders, upon a determination by theBoard that such a reverse stock split is in the best interests of Intraware andits stockholders.  There were 55,387,627votes for the proposal, 1,095,806 votes against the proposal, and 31,753 votesabstaining.

 

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*Proposal No. 3: *The stockholders ratified the Audit Committee’s appointment ofPricewaterhouseCoopers LLP as our independent registered public accounting firmfor the fiscal year ending February 28, 2006.  There were 56,389,880 votes for the proposal,95,741 votes against the proposal, and 29,565 votes abstaining.

 

**ITEM 5. OTHER INFORMATION**

 

**Completion of Acquisition or Disposition of Assets**

 

On January 3, 2006, we completed the sale toFusionStorm of certain assets relating to our Sun Microsystems, Inc.software resale business.  FusionStorm paidus $250,000 in consideration for these assets, and will be required to pay usadditional consideration of $200,000 if its gross profit from sales of certainSun Microsystems software exceeds certain pre-established targets during the 12months following completion of the asset sale. The consideration paid and payable by FusionStorm to Intraware for theseassets was determined as a result of arms-length negotiations between Intrawareand FusionStorm.   We will incur costs as a direct result of theasset sale.

 

During the fiscal year ended February 28, 2005and for the period from March 1, 2005 to December 31, 2005, Intrawarehas purchased from FusionStorm hardware products and services for approximately$182,000 and $256,000, respectively, in transactions not related to the assetpurchase described above.

 

This asset purchase is described further in our Form 8-Kdated October 28, 2005, filed with the Securities and Exchange Commissionon November 3, 2005.

 

**Financial Statements and Exhibits**

 

*Unaudited Pro Forma Financial Information*

 
| (i)   |   | Unaudited  pro forma consolidated balance sheet for Intraware at November 30, 2005.                                   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------|
| (ii)  |   | Unaudited  pro forma consolidated statement of operations for Intraware for the nine  months ended November 30, 2005. |
| (iii) |   | Unaudited  pro forma consolidated statement of operations for Intraware for its fiscal  year ended February 28, 2005. |
| (iv)  |   | Notes  to the unaudited pro forma financial information.                                                                   |

 

**UNAUDITEDPRO FORMA CONSOLIDATED FINANCIAL INFORMATION**

 

The following unaudited pro forma consolidatedfinancial information gives effect to the sale of Intraware’s Sun Microsystems, Inc.software resale business (“Software Resale Business”) to FusionStorm.  This pro forma financial information ispresented for illustrative purposes only, and is not necessarily indicative ofthe operating results and financial position that might have been achieved hadthe transaction described above occurred on the dates indicated, nor are theynecessarily indicative of operating results and financial position which mayoccur in the future. The unaudited pro forma consolidated balance sheet at November 30,2005, gives effect to the disposition of the Software Resale Business as if itoccurred as of February 28, 2005. The unaudited pro forma consolidatedstatement of operations for the nine months ended November 30, 2005, giveseffect to the disposition of the Software Resale Business as if it occurred asof March 1, 2005.  The unaudited proforma consolidated statement of operations for the year ended February 28,2005, gives effect to the disposition of the Software Resale Business as if itoccurred as of March 1, 2004.

 

The unaudited pro forma consolidated financial informationshould be read in conjunction with Intraware’s Annual Report on Form 10-Kfor the fiscal year ended February 28, 2005, filed with the SEC on April 22,2005.

 

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**INTRAWARE,INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (in thousands) November 30, 2005**

 
| ** **                                                                                                                                                               | ** ** | **Intraware  Historical** | ** ** | **Pro Forma   Adjustments** | ** ** | **Pro Forma** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|---------------|------------|
| **ASSETS**                                                                                                                                                               |       |                      |       |                        |       |          |       |
| Current assets:                                                                                                                                                          |       |                      |       |                        |       |          |       |
| Cash and cash equivalents                                                                                                                                                |       | $                         | 13,426     |                        | $          | 188           | (a)        | $ | 13,614 |   |
| Accounts receivable, net                                                                                                                                                 |       | 1,412                     |       | —                      |       | 1,412         |       |
| Costs of deferred revenue                                                                                                                                                |       | 404                       |       | —                      |       | 404           |       |
| Other current assets                                                                                                                                                     |       | 362                       |       | —                      |       | 362           |       |
| Total current assets                                                                                                                                                     |       | 15,604                    |       | 188                         |       | 15,792        |       |
| Cost of deferred revenue, less current portion                                                                                                                           |       | 88                        |       | —                      |       | 88            |       |
| Property and equipment, net                                                                                                                                              |       | 723                       |       | —                      |       | 723           |       |
| Other assets                                                                                                                                                             |       | 116                       |       | —                      |       | 116           |       |
| Total assets                                                                                                                                                             |       | $                         | 16,531     |                        | $          | 188           |       | $ | 16,719 |   |
| **LIABILITIES,  REDEEMABLE CONVERTIBLE PREFERRED STOCK & STOCKHOLDERS’ EQUITY**                                                                            |       |                      |       |                        |       |          |       |
| Current liabilities:                                                                                                                                                     |       |                      |       |                        |       |          |       |
| Notes payable                                                                                                                                                            |       | $                         | 383        |                        | $          | —        |       | $ | 383 |   |
| Accounts payable                                                                                                                                                         |       | 551                       |       | —                      |       | 551           |       |
| Accrued expenses                                                                                                                                                         |       | 1,068                     |       | —                      |       | 1,068         |       |
| Deferred revenue                                                                                                                                                         |       | 2,071                     |       | —                      |       | 2,071         |       |
| Related party deferred revenue                                                                                                                                           |       | —                    |       | —                      |       | —        |       |
| Total current liabilities                                                                                                                                                |       | 4,073                     |       | —                      |       | 4,073         |       |
| Deferred revenue, less current portion                                                                                                                                   |       | 217                       |       | —                      |       | 217           |       |
| Notes payable, less current portion                                                                                                                                      |       | 185                       |       | —                      |       | 185           |       |
| Total liabilities                                                                                                                                                        |       | 4,475                     |       | —                      |       | 4,475         |       |
| Contingencies                                                                                                                                                            |       |                      |       |                        |       |          |       |
| Redeemable convertible preferred stock;  $0.0001 par value; 10,000 shares authorized:                                                                                    |       |                      |       |                        |       |          |       |
| Series A; 552 at August 31 and  February 28, 2005 (aggregate liquidation preference of $1,000 at November 30  and February 28, 2005)            |       | 897                       |       | —                      |       | 897           |       |
| Series B; 1 at November 30, 2005  (aggregate liquidation preference of $6,630 at November 30, 2005)                                                       |       | 5,701                     |       | —                      |       | 5,701         |       |
| Total redeemable convertible preferred  stock                                                                                                                            |       | 6,598                     |       | —                      |       | 6,598         |       |
| Stockholders’ equity:                                                                                                                                               |       |                      |       |                        |       |          |       |
| Common stock; $0.0001 par value; 250,000  shares authorized; 6,082 and 6,045 shares issued and outstanding at November 30  and February 28, 2005, respectively |       | 1                         |       | —                      |       | 1             |       |
| Additional paid-in-capital                                                                                                                                               |       | 163,289                   |       | —                      |       | 163,289       |       |
| Accumulated deficit                                                                                                                                                      |       | (157,832                  | )          | 188                         |       | (157,644      | )          |
| Total stockholders’ equity                                                                                                                                          |       | 5,458                     |       | 188                         |       | 5,646         |       |
| Total liabilities, redeemable convertible  preferred stock and stockholders’ equity                                                                                 |       | $                         | 16,531     |                        | $          | 188           |       | $ | 16,719 |   |

 

The accompanying notes arean integral part of these unaudited pro forma consolidated financialstatements.

 

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**INTRAWARE,INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) For the nine months ended November 30, 2005**

 
| ** **                                    | ** ** | **Intraware  Historical** | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|----------------------------|------------|---------------|------------|
|                                          |       |                      |       |                       |       |          |       |
| Revenues:                                     |       |                      |       |                       |       |          |       |
| Online services and technology                |       | $                         | 7,124      |                       | $          | (541          | )(a)       | $ | 6,583 |   |
| Alliance and reimbursement                    |       | 1,308                     |       | (1,308                     | )(b)       | —        |       |
| Related party online services and  technology |       | 4                         |       | —                     |       | 4             |       |
| Total revenues                                |       | 8,436                     |       | (1,849                     | )          | 6,587         |       |
| Cost of revenues:                             |       |                      |       |                       |       |          |       |
| Online services and technology                |       | 3,215                     |       | —                     |       | 3,215         |       |
| Alliance and reimbursement                    |       | 1,077                     |       | (1,077                     | )(b)       | —        |       |
| Total cost of revenues                        |       | 4,292                     |       | (1,077                     | )          | 3,215         |       |
| Gross profit                                  |       | 4,144                     |       | (772                       | )          | 3,372         |       |
| Operating expenses:                           |       |                      |       |                       |       |          |       |
| Sales and marketing                           |       | 1,989                     |       | —                     |       | 1,989         |       |
| Product development                           |       | 888                       |       | —                     |       | 888           |       |
| General and administrative                    |       | 2,886                     |       | (21                        | )          | 2,865         |       |
| Restructuring                                 |       | 41                        |       | (41                        | )          | —        |       |
| Total operating expenses                      |       | 5,804                     |       | (62                        | )          | 5,742         |       |
| Loss from operations                          |       | (1,660                    | )          | (710                       | )          | (2,370        | )          |
| Interest expense                              |       | (47                       | )          | —                     |       | (47           | )          |
| Interest and other income and expenses, net   |       | 192                       |       | —                     |       | 192           |       |
| Net loss                                      |       | $                         | (1,515     | )                          | $          | (710          | )          | $ | (2,225 | ) |
| Basic and diluted net loss per share          |       | $                         | (0.25      | )                          |       |          | $          | (0.37 | ) |
| Weighted average shares - basic and diluted   |       | 6,062                     |       |                       |       | 6,062         |       |

 

The accompanying notes arean integral part of these unaudited pro forma consolidated financialstatements.

 

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**INTRAWARE,INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share data) For the year ended February 28, 2005**

 
| ** **                                    | ** ** | **Intraware   Hitorical** | ** ** | **Pro Forma  Adjustments** | ** ** | **Pro Forma** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|----------------------------|------------|---------------|------------|
| Revenues:                                     |       |                      |       |                       |       |          |       |
| Online services and technology                |       | $                         | 7,816      |                       | $          | (811          | )(a)       | $ | 7,005 |   |
| Alliance and reimbursement                    |       | 2,431                     |       | (2,431                     | )(b)       | —        |       |
| Related party online services and  technology |       | 546                       |       | —                     |       | 546           |       |
| Software product sales                        |       | 42                        |       | —                     |       | 42            |       |
| Total revenues                                |       | 10,835                    |       | (3,242                     | )          | 7,593         |       |
| Cost of revenues:                             |       |                      |       |                       |       |          |       |
| Online services and technology                |       | 3,009                     |       | —                     |       | 3,009         |       |
| Alliance and reimbursement                    |       | 1,523                     |       | (1,523                     | )(b)       | —        |       |
| Software product sales                        |       | 37                        |       | —                     |       | 37            |       |
| Total cost of revenues                        |       | 4,569                     |       | (1,523                     | )          | 3,046         |       |
| Gross profit                                  |       | 6,266                     |       | (1,719                     | )          | 4,547         |       |
| Operating expenses:                           |       |                      |       |                       |       |          |       |
| Sales and marketing                           |       | 2,892                     |       | —                     |       | 2,892         |       |
| Product development                           |       | 1,531                     |       | —                     |       | 1,531         |       |
| General and administrative                    |       | 3,767                     |       | —                     |       | 3,767         |       |
| Restructuring                                 |       | (75                       | )          | —                     |       | (75           | )          |
| Loss on disposal of assets                    |       | 47                        |       | —                     |       | 47            |       |
| Total operating expenses                      |       | 8,162                     |       | —                     |       | 8,162         |       |
| Loss from operations                          |       | (1,896                    | )          | (1,719                     | )          | (3,615        | )          |
| Interest expense                              |       | (101                      | )          | —                     |       | (101          | )          |
| Interest and other income and expenses, net   |       | 139                       |       | —                     |       | 139           |       |
| Net loss                                      |       | $                         | (1,858     | )                          | $          | (1,719        | )          | $ | (3,577 | ) |
| Basic and diluted net loss per share          |       | $                         | (0.31      | )                          |       |          | $          | (0.59 | ) |
| Weighted average shares - basic and diluted   |       | 6,013                     |       |                       |       | 6,013         |       |

 

The accompanying notes arean integral part of these unaudited pro forma consolidated financialstatements.

 

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**INTRAWARE, INC.NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION**

 

**NOTE 1—Unaudited Pro Forma Consolidated Balance SheetAdjustments**

 

The unaudited pro forma consolidated balance sheetassumes that the sale of our Sun Java Enterprise System and Sun ONE softwareresale business (“Software Resale Business”) to FusionStorm occurred as of November 30,2005. The asset purchase agreement between Intraware, Inc. (“Intraware”)and FusionStorm includes indemnifications by Intraware related primarily to anyviolation of a third party’s confidentiality or trade secret rights that mayresult from our sale or FusionStorm’s use of the customer list sold toFusionStorm as part of the Software Resale Business. Assumptions andadjustments to reflect the asset sale in the consolidated balance sheetinclude:

 

The table below reflects the estimated net proceedsand gain on sale of our Software Resale Business to FusionStorm (in thousands):

 
|   | Cash sales proceeds                                                                   |   | $      | 250    |   |
|--------|---------------------------------------------------------------------------------------|--------|--------|--------|--------|
|   | Estimated costs resulting directly from the  Sale including legal and accounting fees |   | (62    | )      |
|   |                                                                                  |   |   |   |
| (a)    | Estimated net proceeds                                                                |   | $      | 188    |   |

 

**NOTE 2—Unaudited Pro Forma Consolidated Statement ofOperations Adjustments**

 

The pro forma adjustments to the unaudited pro formaconsolidated statement of operations for the nine months ended November 30,2005, eliminate the results of operations directly related to the SoftwareResale Business. For purposes of this pro forma statement, the sale of the SoftwareResale Business to FusionStorm is assumed to have occurred as of March 1,2005. The statement does not include the gain on the disposal or the costsrelated to the sale.

 

(a)          Reflectsthe elimination of SubscribeNet revenue related to our Software Resale Business.

 

(b)         Reflectsthe elimination of alliance and reimbursement revenue and costs of revenuerelated to our Software Resale Business.

 

**NOTE 3—Unaudited Pro Forma Consolidated Statement ofOperations Adjustments**

 

The pro forma adjustments to the unaudited pro formaconsolidated statement of operations for the year ended February 28, 2005,eliminate the results of operations directly related to the Software ResaleBusiness. For purposes of this pro forma statement, the sale of the SoftwareResale Business to FusionStorm is assumed to have occurred as of March 1,2004. The statement does not include the gain on the disposal or the costsrelated to the sale.

 

(a)          Reflectsthe elimination of SubscribeNet revenue related to our Software Resale Business.

 

(b)         Reflectsthe elimination of alliance and reimbursement revenue and costs of revenuerelated to our Software Resale Business.

 

**ITEM 6. EXHIBITS**

 

**Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                        |
|---------------------|------------|--------------------------------------------------------------------------------------------------------|
| 3.1(1)              |       | Amended and Restated  Certificate of Incorporation of Intraware, Inc.                             |
| 3.2(1)              |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation of Intraware, Inc. |
| 3.3(2)              |       | Certificate of  Designations, Preferences and Rights of Series A Convertible Preferred  Stock     |

 

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| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  3.4(3)        |       | Certificate of  Designations, Preferences and Rights of Series B Convertible Preferred  Stock                                                                                                                                                                                                            |
|  3.5(1)        |       | Certificate of  Designations, Preferences and Rights of the Series D Convertible  Preferred Stock                                                                                                                                                                                                        |
|  3.6(4)        |       | Amended and Restated  Bylaws of Intraware, Inc.                                                                                                                                                                                                                                                          |
|  4.1(4)        |       | Preferred Stock Rights  Agreement, dated as of September 8, 2005, between Intraware, Inc.  and Computershare Investor Services LLC, including the Certificate of  Designation, the form of Rights Certificate and the Summary of Rights  attached thereto as Exhibits A, B and C, respectively |
| 10.1+               |       | Asset Purchase  Agreement dated October 28, 2005, between Intraware, Inc. and  FusionStorm                                                                                                                                                                                                          |
| 10.2                |       | Amendment One, dated  January 2, 2006, to Asset Purchase Agreement between Intraware, Inc. and FusionStorm                                                                                                                                                                                                    |
| 10.3(3)             |       | Series B Preferred  Stock Purchase Agreement dated November 9, 2005, by and between  Intraware, Inc. and Digital River, Inc.                                                                                                                                                              |
| 10.4(3)             |       | Investor Rights  Agreement dated November 9, 2005, by and between Intraware, Inc.  and Digital River, Inc.                                                                                                                                                                                     |
| 10.5(3)             |       | Standstill and Stock  Restriction Agreement dated November 9, 2005, by and between Intraware, Inc.  and Digital River, Inc.                                                                                                                                                                    |
| 10.6                |       | Third Amendment, dated November 30,  2005, to Loan and Security Agreement between Intraware, Inc. and Silicon  Valley Bank                                                                                                                                                                          |
| 31.1                |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act — Peter H. Jackson                                                                                                                                                                                                            |
| 31.2                |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act — Wendy A. Nieto                                                                                                                                                                                                              |
| 32.1                |       | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                         |

 

----

| +      |   | Confidential  treatment has been requested for certain portions of this exhibit.                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                     |
| (1)    |   | Incorporated  by reference to Intraware’s Quarterly Report on Form 10-Q for the  quarter ended August 31, 2005 (File                                                      |
|   |   | No. 000-25249),  filed with the SEC on October 5, 2005.                                                                                                                        |
|   |   |                                                                                                                                                                                     |
| (2)    |   | Incorporated  by reference to Intraware’s Current Report on Form 8-K dated  April 2, 2001 (File No. 000-25249), filed with the SEC on  April 13, 2001.          |
|   |   |                                                                                                                                                                                     |
| (3)    |   | Incorporated  by reference to Intraware’s Current Report on Form 8-K dated  November 9, 2005 (File No. 000-25249), filed with the SEC on  November 15, 2005.    |
|   |   |                                                                                                                                                                                     |
| (4)    |   | Incorporated  by reference to Intraware’s Current Report on Form 8-K dated  September 12, 2005 (File No. 000-25249), filed with the SEC on  September 12, 2005. |

 

41

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**SIGNATURE**

 

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

 
| ** **                 | **INTRAWARE, INC.** |
|----------------------------|---------------------|
|                       |                |   |
| Date: January 6, 2006 | By:                 | /s/ WENDY A. NIETO |
|                       |                | Wendy A. Nieto |
|                       |                | *Chief Financial Officer and Executive Vice   President of Intraware, Inc.* |

 

42

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                               |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  3.1(1)        |       | Amended and Restated  Certificate of Incorporation of Intraware, Inc.                                                                                                                                                                                                                                    |
|  3.2(1)        |       | Certificate of  Amendment to Amended and Restated Certificate of Incorporation of Intraware, Inc.                                                                                                                                                                                                        |
|  3.3(2)        |       | Certificate of  Designations, Preferences and Rights of Series A Convertible Preferred  Stock                                                                                                                                                                                                            |
|  3.4(3)        |       | Certificate of  Designations, Preferences and Rights of Series B Convertible Preferred  Stock                                                                                                                                                                                                            |
|  3.5(1)        |       | Certificate of  Designations, Preferences and Rights of the Series D Convertible  Preferred Stock                                                                                                                                                                                                        |
|  3.6(4)        |       | Amended and Restated  Bylaws of Intraware, Inc.                                                                                                                                                                                                                                                          |
|  4.1(4)        |       | Preferred Stock Rights  Agreement, dated as of September 8, 2005, between Intraware, Inc.  and Computershare Investor Services LLC, including the Certificate of  Designation, the form of Rights Certificate and the Summary of Rights  attached thereto as Exhibits A, B and C, respectively |
| 10.1+               |       | Asset Purchase  Agreement dated October 28, 2005, between Intraware, Inc. and  FusionStorm                                                                                                                                                                                                          |
| 10.2                |       | Amendment One, dated  January 2, 2006, to Asset Purchase Agreement between Intraware, Inc. and FusionStorm                                                                                                                                                                                                    |
| 10.3(3)             |       | Series B Preferred  Stock Purchase Agreement dated November 9, 2005, by and between  Intraware, Inc. and Digital River, Inc.                                                                                                                                                              |
| 10.4(3)             |       | Investor Rights  Agreement dated November 9, 2005, by and between Intraware, Inc.  and Digital River, Inc.                                                                                                                                                                                     |
| 10.5(3)             |       | Standstill and Stock  Restriction Agreement dated November 9, 2005, by and between  Intraware, Inc. and Digital River, Inc.                                                                                                                                                                    |
| 10.6                |       | Third Amendment, dated  November 30, 2005, to Loan and Security Agreement between  Intraware, Inc. and Silicon Valley Bank                                                                                                                                                                          |
| 31.1                |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act — Peter H. Jackson                                                                                                                                                                                                            |
| 31.2                |       | Certification pursuant  to Section 302 of the Sarbanes-Oxley Act — Wendy A. Nieto                                                                                                                                                                                                              |
| 32.1                |       | Certification pursuant  to Section 906 of the Sarbanes-Oxley Act                                                                                                                                                                                                                                         |

 

----

| +      |   | Confidential  treatment has been requested for certain portions of this exhibit.                                                                                                         |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                     |
| (1)    |   | Incorporated  by reference to Intraware’s Quarterly Report on Form 10-Q for the  quarter ended August 31, 2005 (File                                                      |
|   |   | No. 000-25249),  filed with the SEC on October 5, 2005.                                                                                                                        |
|   |   |                                                                                                                                                                                     |
| (2)    |   | Incorporated  by reference to Intraware’s Current Report on Form 8-K dated  April 2, 2001 (File No. 000-25249), filed with the SEC on  April 13, 2001.          |
|   |   |                                                                                                                                                                                     |
| (3)    |   | Incorporated  by reference to Intraware’s Current Report on Form 8-K dated November 9,  2005 (File No. 000-25249), filed with the SEC on November 15, 2005.     |
|   |   |                                                                                                                                                                                     |
| (4)    |   | Incorporated  by reference to Intraware’s Current Report on Form 8-K dated  September 12, 2005 (File No. 000-25249), filed with the SEC on  September 12, 2005. |

 

43

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