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SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549




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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31,
2001

Commission file number 0-28121



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RETEK INC.

(Exact Name of Registrant as Specified in its
Charter)


|                                                                          |  |                                                                             |  |                                                  
|------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | -------------------------------------------------
|Delaware
	(State or Other Jurisdiction of
	Incorporation or Organization) |  | Retek on the Mall
	950 Nicollet Mall
	Minneapolis, MN 55403
	(612) 587-5000 |  | 51-0392671
	(I.R.S. Employer
	Identification No.)

(Address, including zip code, and telephone
number, including area code,


of Registrants Principal Executive
Offices)


Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, par value $0.01 per
share


(Title of Class)




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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in part III of this Form 10-K or any amendment to
this
Form 10-K.     x

The aggregate market value of common stock held
by non-affiliates of the Registrant was approximately
$1,461,786,000 as of March 22, 2002, based upon the closing
price of $ 28.06 on the Nasdaq National Market reported on such
date. Shares of common stock held by each executive officer and
director and by each person who beneficially owns more than 5%
of the outstanding common stock have been excluded in that such
persons may under certain circumstances be deemed to be
affiliates. This determination of executive officer and
affiliate status is not necessarily a conclusive determination
for other purposes.

As of March 22, 2002, the number of shares
of common stock outstanding was 52,095,008.

DOCUMENTS INCORPORATED BY REFERENCE:Information required by Part III of
this document is incorporated by reference to certain portions
of our definitive Proxy Statement for its 2001 Annual Meeting of
Stockholders to be held June 4, 2002 (to be filed).



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RETEK INC.

FORM 10-K

For the Fiscal Year Ended December 31,
2001


INDEX

|         |                                                                                                |    |   
|-------- | ---------------------------------------------------------------------------------------------- | -- | --
|PART I   |                                                                                                | 3 
|         | Item 1: Business                                                                               |    | 3 
|         | Item 2: Property                                                                               |    | 14
|         | Item 3: Legal Proceedings                                                                      |    | 14
|         | Item 4: Submission of Matters to a Vote of
	Security Holders                                   |    | 14
|PART II  |                                                                                                | 15
|         | Item 5: Market for Registrants Common
	Equity and Related Stockholder Matters                 |    | 15
|         | Item 6: Selected Consolidated Financial Data                                                   |    | 16
|         | Item 7: Managements Discussion and
	Analysis of Financial Condition and Results of Operations |    | 16
|         | Item 7A: Qualitative And Quantitative
	Disclosures About Market Risk                           |    | 31
|         | Item 8: Financial Statements and
	Supplementary Data                                           |    | 32
|         | Item 9: Changes In and Disagreements With
	Accountants on Accounting and Financial Disclosure  |    | 32
|PART III |                                                                                                | 33
|         | Item 10: Directors and Executive Officers of
	the Registrant                                   |    | 33
|         | Item 11: Executive Compensation                                                                |    | 33
|         | Item 12: Security Ownership of Certain
	Beneficial Owners and Management                       |    | 33
|         | Item 13: Certain Relationships and Related
	Transactions                                       |    | 33
|PART IV  |                                                                                                | 33
|         | Item 14: Exhibits, Financial Statement
	Schedules and Reports on Form 8-K                      |    | 34

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SPECIAL NOTE REGARDING FORWARD-LOOKING
INFORMATION

This Annual Report on Form 10-K contains
forward-looking statements in Item 7 
Managements Discussion and Analysis of Financial Condition
and Results of Operations, Item 7A 
Quantitative and Qualitative Disclosures About Market
Risk, and elsewhere. These statements relate to future
events or our future financial performance. In some cases,
forward-looking statements may be identified by terminology such
as may, will, should,
expects, plans, anticipates,
believes, estimates,
predicts, potential,
continue or the negative of these terms or other
comparable terminology. These statements are only predictions
and involve known and unknown risks, uncertainties and other
factors that may cause our or our industrys actual
results, levels of activity, performance or achievements to be
materially different from any future results, levels of
activity, performance or achievements expressed or implied by
these forward-looking statements. Such risks, uncertainties and
other factors include, among other things, the matters described
in Item 7  Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Factors that May Impact Future Results of
Operations.

Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of
these statements. We are under no duty to update any of the
forward-looking statements after the date of this Annual Report
on Form 10-K to conform these statements to actual future
results.

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PART I

Item 1:  Business

General

Retek is a leading provider of software solutions
and services to the retail industry. Reteks collaborative
solutions help the retail industry create, manage and fulfill
consumer demand. Reteks offering encompasses Reteks
proven strategies, sophisticated software applications,
predictive technology, unparalleled services, and the best
practices of its customers and partners. Our software solutions
enable retailers to use the Internet to communicate and
collaborate efficiently with suppliers, distributors,
wholesalers, logistics providers, brokers, transportation
companies, consolidators, and manufacturers that make up the
global retail supply chain.

We market our software solutions through our
direct and indirect sales channels primarily to retailers who
sell to their customers through traditional retail stores,
catalogs, and/or Internet-enabled storefronts. To date, we have
licensed our solutions across a variety of retail industry
sectors to over 180 retailers.

We were originally incorporated in Ohio in 1985
as Practical Control Solutions, Inc., which was renamed Retek
Logistics, Inc. in April 1999. In September 1999,
Retek Logistics, Inc. was reincorporated as a Delaware
corporation and renamed Retek Inc. On November 23, 1999, we
completed our initial public offering. Prior to the completion
of our initial public offering, we were a wholly-owned
subsidiary of HNC Software, Inc. (HNC), a
business-to-business software company that develops and markets
predictive software solutions. On October 2, 2000, HNC
announced that it had completed the separation of Retek from HNC
effective September 29, 2000 through the distribution pro
rata to HNCs stockholders, as a dividend, of all of the
shares of Retek common stock owned by HNC.

Our principal executive offices are located at
950 Nicollet Mall, 4th floor, Minneapolis, Minnesota 55403 and
our telephone number is (612) 587-5000. Our common stock is
listed on the Nasdaq National Market under the symbol
RETK. Our web site is http://www.retek.com. The
information on our web site is not part of this Annual Report on
Form 10-K.

Retek is a trademark of Retek and
retail.com is a service mark of Retek. All other
trademarks or service marks appearing in this Annual Report on
Form 10-K are trademarks or service marks of the respective
companies that use them. Unless otherwise stated, the terms
Retek, we or us used in this
Annual Report on Form 10-K refer to Retek Inc. and its
consolidated subsidiaries.

Retek Solution

Most large and mid-sized retailers have
historically relied upon custom-built systems, typically
developed internally, to manage their interactions with trading
partners and customers. Many of these systems use 1970s
mainframe technology, are not Internet-enabled, and do not
permit collaboration among the retailers partners,
suppliers and other members of the supply chain. More recently,
retailers have begun to purchase packaged solutions with a
specific retail industry focus. These products typically lack
the scalability required by larger retailers and are not
Internet-enabled. Being scalable means being able to
handle and verify large volumes of data regarding products,
customers, and stores. Enterprise resource planning systems have
also been adopted on a limited scale. These complex systems are
expensive to implement and maintain, typically lack the
scalability required by retailers, and do not have a specific
retail industry focus. Business-to-business electronic commerce
products do not offer specific retail industry focus and
typically lack the scalability and integration required by
retailers.

Today, retailers face the additional challenges
posed by operating in a multi-channel environment. Not only must
they address the inventory management challenges of traditional
store operations, retailers are expanding sales outlets to
include the Internet, catalog, kiosk and other distribution
networks. This multi-channel environment increases the
complexity of coordinating inventories and creates a need for a
supply chain and inventory management solution. It is a major
challenge for retailers as customers want the best price, but
they also demand the best service. To meet consumer expectations
a retailer needs to deliver the

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retailing experience on the customers
terms, which means having the right product, at the right time,
in the right place. Therefore, a retailer needs a comprehensive,
integrated software infrastructure that spans from supplier to
consumer  giving the retailer the visibility,
flexibility and control to meet that demand.


We believe that a market opportunity exists to
provide retailers with a software solution that is both server
and Internet-enabled, collaborative and designed specifically
for the retail industry. This solution should be easy-to-use,
leverage a retailers existing investments in information
technology and be sufficiently flexible to meet the specific
needs of a particular retail sector, such as fashion, mass
merchandise or food and drug. In addition, the solution should
be highly scalable to process and analyze vast amounts of
product sales and supplier performance data unique to the retail
industry.

We have developed and deployed server and
Internet-enabled software solutions that enable retailers to
manage all of their operations throughout the retail supply
chain. These operations include customer relationship
management, merchandising, supply chain management and planning
and optimization operations. The key features of our software
solutions are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Real time visibility.Our solutions provide retailers with
	critical information on product availability and demand when
	they need it. This information helps our customers maintain
	optimal inventory levels and increase customer satisfaction.                                                                                                                                                                                                                            
|
| |  | Optimization.Our
	solutions leverage advanced mathematical algorithms to develop
	accurate and effective plans and forecasts which enable
	retailers to price and stock items at optimal levels.                                                                                                                                                                                                                                                                              
|
| |  | Value-based solutions.Our solutions are designed to quickly
	and measurably drive financial returns for retailers by
	increasing sales, reducing overall inventory levels, enabling
	faster inventory turns, and improving customer satisfaction.                                                                                                                                                                                                                             
|
| |  | Collaborative supply chain.Our solutions link retailers with
	their trading partners to facilitate collaboration across all
	aspects of the supply chain, from the initial prediction of
	customer demand through product design and manufacturing, to
	inventory management. We believe that by facilitating this
	collaboration we will enable retailers to reduce unnecessary
	costs and time-to-market delays, while increasing product
	quality and improving margins.   
|
| |  | Robust, predictive and analytic technologies.Our solutions provide advanced
	predictive tools to process and analyze the vast amounts of data
	available to retailers. Our unique, proprietary technologies
	enable retailers to identify patterns in data that may not
	otherwise be visible. This information helps our customers
	reduce inventories, increase marketing effectiveness and improve
	customer satisfaction.                                                 
|
| |  | Internet-enabled, easy-to-use and rapidly
	deployable solutions.Our
	Internet-enabled software solutions are easy to use and rapidly
	deployable. Retailers and their trading partners can access many
	of our solutions from any desktop with an Internet interface,
	and our software can be made available to all employees.
	Furthermore, because our software solutions are
	Internet-enabled, their deployment can reduce capital
	infrastructure and maintenance costs.
|
| |  | Highly scalable and retail sector focused.Our solutions are built specifically
	to address the unique scalability requirements of the retail
	industry. In addition, we have developed solutions that meet the
	specific requirements of particular retail sectors, including
	fashion, mass merchandise and food and drug.                                                                                                                                                   

Strategy

Our mission is to help the retail industry
create, manage and fulfill consumer demand. In pursuing this
goal, we intend to maintain our status as a leading provider of
fully scalable server and Internet-enabled software solutions
for the retail industry. Key elements of our strategy include:



| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Continue to secure commitments for the
	replacement of large scale merchandising systems.We are a leading provider of these
	large scale solutions and we intend to build upon our position by

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | enhancing our product offerings, expanding our
	distribution capabilities, and ensuring our replacement systems
	tightly integrate with our other key software solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Gain market share among larger retailers in
	the rapidly growing customer relationship management, supply
	chain management, and planning and optimization segments of the
	retail market.Retailers are
	increasingly focusing on these areas of the retail supply chain,
	among others, for opportunities to improve their business
	performance. They are looking to increase sales, improve
	customer satisfaction, reduce inventories, reduce
	time-to-market, and reduce overall costs. We believe our
	solutions in each of these areas can provide the benefits
	retailers are seeking.                                                                                                                                                                                                                                         
|
| |  | Enhance our distribution efforts to more
	broadly and rapidly deliver our robust software solutions.We have historically relied primarily
	on our own sales force to sell our products. As we expand our
	product offerings we intend to identify and take advantage of
	new distribution alternatives including, among others,
	partnerships and acquisitions in order to enhance the
	effectiveness of our distribution efforts.                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Adapt our services offerings to changing
	market requirements.We intend to
	emphasize our high-value propositions and our traditional
	implementation models in order to address the lower cost of
	deployment requirements of mid-market retailers. The needs of
	our customers are constantly changing and we are aggressively
	pursuing new ways to provide high value added services which
	complement our software solutions.                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Introduce existing customers to a broader
	offering of our software solutions.We
	intend to expand the use of our products within existing client
	accounts. We have sold our software solutions to more than 180
	retailers, primarily large companies, across a range of retail
	sectors. We intend to further penetrate these accounts by
	cross-selling our other software solutions or suites of software
	solutions, all of which are independently deployable, and by
	introducing clients to our new collaborative software solutions.                                                                                                                                                                                                                                                                                         
|
| |  | Leverage our experience in retail.We will continue to leverage our
	expertise in providing solutions to retailers. Since our
	formation, we have developed and deployed software solutions
	designed specifically for retailers. Our solutions address the
	need of retailers to process and track the millions of
	transactions they complete with their consumers and to
	communicate and transact business with their large,
	geographically diverse supply chain members. This focus on the
	retail industry permits us to constantly update and expand our
	offerings and to effectively develop new technologies to address
	the specific needs of the retail industry.                                                                                                                                                          
|
| |  | Expand our relationship with implementation
	and hosting partners.We have
	established relationships with large, international system
	integrators and consulting firms, such as Accenture and IBM.
	These firms provide sales leads, implementation expertise and
	valuable third party endorsement of our software solutions. We
	plan to expand these relationships to increase our capacity to
	sell and implement our solutions. Systems integrators and
	consulting firms have a strong influence on software purchasing
	decisions within large retailers and they are looking for
	solutions which can be quickly deployed, are customizable, and
	will deliver promised benefits to their customers.                                                                                                                          
|
| |  | Extend our technological leadership.We intend to increase our
	technological and product leadership by enhancing the core
	functionality and high performance analytic features of our
	products. We believe that our software solutions derived from
	proprietary analytic and predictive technology and enhanced by
	our research scientists, provide us with a competitive advantage
	and an essential basis for our comprehensive Internet-enabled
	software solutions. We intend to continue to devote substantial
	resources to the development of new and innovative
	Internet-enabled retail solutions and to continue to incorporate
	emerging Internet technologies. In addition, by implementing and
	actively promoting new industry standards, we intend to
	facilitate widespread adoption of our solutions by retailers.

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Products

We have developed and deployed server and
Internet-enabled software solutions that address a
retailers entire operation. Our software solutions help
retailers create, manage and fulfill demand by maximizing market
opportunities while minimizing supply chain costs. Our solutions
focus on the consumer by linking demand creation to demand
fulfillment, and are characterized by real time visibility,
collaboration and optimization. We help our customers achieve
the fastest path to sustainable business value through three
main functionalities: flexible deployment options, an adaptive
technology platform, and an innovative approach to industry best
practices. Our principal software solutions consist of four
integrated, but independently deployable, components, which are
accessed via an Internet browser and can be hosted by an
individual organization or an applications service provider. In
addition, our solutions are coordinated business solutions that
provide retailers with a single comprehensive inventory
management system and are retail proven.

Retek
Retail Customer Relationship Management

Retek Retail Customer Relationship Management
(CRM) is based on a single view of retailer-customer
interactions, across all sales channels. Increasingly, retailers
are using sophisticated techniques for making the most of these
one-to-one relationships. However, most transactions occur
without ever identifying the customer. Unlike other CRM
applications, Retek Retail CRM solutions do not ignore the
anonymous customers  an important segment of a
retailers business. For the most effective CRM systems, a
retailer needs to maximize the revenue potential of allcustomers by also focusing on these one-to-many
relationships. We do this by providing retailers, not only with
information regarding individual customers, but also with
information about clusters of customers with similar
characteristics. Retek Retail CRM provides retailers with the
data necessary to widen customer bases, increase customer
visits, realize increased sales, reduce in-store and customer
service costs, and better align product offerings with key
customer groups or individuals.

Retek Retail CRM solutions address:



| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek Store Operations  Our solutions
	empower a retailers customer-facing employees with the
	information and flexible capabilities needed to convert every
	customer interaction into a selling opportunity.                                                                                                          
|
| | Retek Customer Order Management  Our
	solutions provide each distribution channel with accurate
	visibility to inventory and customer information; customers are
	presented with a consistent shopping experience across all sales
	channels; and the retailer maintains a comprehensive view of the
	customer lifecycle.

Retek Retail CRM solutions include:



| |   |                                
| | - | -------------------------------
| |  | Retek Customer Order Management
|
| |  | Retek Store Systems            

Retek
Merchandising Operations Management

Merchandising enables retailers to coordinate
their operations and maintain a single, comprehensive source of
consistent and accurate data. Every retailer strives to fulfill
consumer demand with the lowest cost operations and with the
highest asset utilization. Retek Merchandising Operations
Management delivers coordinated operations so that retailers can
provide consumers with the right product, at the right place and
time, in the right quantities and for the right price. By
linking execution to the supply chain and fulfillment processes,
Retek enables retailers to drive and manage demand. For the
retailer, the result can be increased sales, higher gross
margin, reduced inventories, and fewer markdowns.

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Retek Merchandising Operations Management
solutions address:



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek Integrated Merchandising
	Operations  Our solutions support end-to-end
	merchandising for multi-channel operations with an integrated,
	scalable data infrastructure and real-time inventory tracking.                                                                                    
|
| | Retek Performance analysis  Our
	solutions increase efficiency by enabling retailers to focus on
	analysis, not data collection.                                                                                                                                                                
|
| | Retek Exception Management Workflow 
	Our solutions increase productivity by enabling users to manage
	problems by exception.                                                                                                                                                                   
|
| | Retek Integration Bus (RIB)  Our
	solutions use message-based integration for near real time
	visibility to inventory and sales; reduced application
	complexity, maintenance and upgrade overhead; rapid deployment
	of new modules; and eased legacy and third-party application
	integration.

Merchandising Operations Management solutions
include:



| |   |                                 
| | - | --------------------------------
| |  | Retek Merchandising System      
|
| |  | Retek Sales Audit               
|
| |  | Retek Invoice Matching          
|
| |  | Retek Price Management          
|
| |  | Retek Competitive Shopping      
|
| |  | Retek Data Warehouse            
|
| |  | Retek Active Retail Intelligence
|
| |  | Retek Integration Bus           
|
| |  | Retek Integrator                

Retek
Supply Chain Management

Supply Chain Management links demand to a
collaborative and efficient supply chain network. An effective
supply chain increases sales by improving in-stock positions,
while at the same time reducing costs by eliminating excess
inventory  the essence of retail execution. Whether
operating on a global, local, multi- or single channel basis,
supply chain optimization is key to any retailers success.
The best retailers are optimizing their supply chains by:
introducing consumer insight into all demand and supply
decisions; synchronizing processes within their business and
across the extended supply chain; coordinating planning and
optimization systems with execution systems for maximum results;
and considering supply chain constraints in the merchandising
process.

Retek Supply Chain Management solutions address:



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek Warehouse Management  Our
	solutions enable retailers to plan, manage and optimize
	operations within the distribution center.                
|
| | Retek Collaborative Global Logistics 
	Our solutions give retailers visibility to merchandise
	throughout the distribution network and allow them to

|                                                       | 
|------------------------------------------------------ | 
|respond to operational constraints and dynamic demand. | 



| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek Collaborative Design and
	Source  Our solutions provide an interactive network
	to parties involved in processes to develop product, manage its

|                                        | 
|--------------------------------------- | 
|production and facilitate its delivery. | 

Retek Supply Chain Management solutions include:



| |   |                              
| | - | -----------------------------
| |  | Retek Distribution Management
|
| |  | G-LOG                        

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| |   |                       
| | - | ----------------------
| |  | Retek Design          
|
| |  | Retek WebTrack        
|
| |  | Retek Trade Management
|
| |  | Retek Retail Commerce 

Advanced Retail
Planning and Optimization

The most lucrative option for many retailers to
quickly improve performance and drive down costs is better
management of their inventory pipelines. The combination of
large product assortments and large sales volumes presents great
opportunity for performance improvements by more accurately
matching supply with demand. Reteks Advanced Retail
Planning and Optimization solutions provide a closed loop
process, which enables retailers to unite their planning
functions with execution systems. These applications use
optimization techniques to drive improvements in inventory turns
and profitability. Reteks unparalleled scalability can
handle massive data volumes, enabling more detailed planning
across potentially thousands of stores down to the stock keeping
unit (SKU) level. By synchronizing with downstream
warehousing and transaction systems, retailers can execute in a
coordinated manner, with real time visibility to inventory flow
and constraints. By creating and managing demand while
simultaneously coordinating and optimizing the flow of supply to
fulfill that demand, retailers can bring products to market
faster, reduce inventories, reduce costs and increase sales.

Retek Advanced Retail Planning and Optimization
solutions address:



| |                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek Assortment and Space
	Optimization  Our solutions give retailers the
	ability to leverage core business information to optimise the
	assortment and presentation of merchandise at a SKU/store level,
	thereby driving improved service levels and lower inventory
	levels.                                                                                                  
|
| | Retek Price Strategy Optimization 
	Our solutions enable retailers to easily and efficiently analyze
	and execute optimized pricing strategies through the use of
	business constraints and goals to drive targeted price points
	based on markdown, price relationships and competitive pricing;
	the system then monitors and recommends changes to the strategy.                
|
| | Retek Customer Revenue Optimization 
	Our solutions helps retailers acquire, develop and retain the
	best and most profitable customers by profiling customer
	behavior and evaluating promotion effectiveness.                                                                                                                                                                    
|
| | Retek Consumer Demand Forecasting 
	Our solutions generate accurate forecasts using inputs such as
	demand influences and promotion/price impact and then integrate
	these forecasts into planning replenishment and allocation
	systems.                                                                                                                                          
|
| | Retek Integrated Predictive Planning 
	Our solutions provide comprehensive planning tools that allow
	retailers to vary inventory assortments by store grade, space
	constraints or other relevant store characteristics. These
	solutions allow retailers to perform continual collaborative
	assessments and adjustments to their plan throughout the year as
	conditions change.
|
| | Retek Advanced Replenishment and
	Allocation  Our solutions provide retailers with
	inventory replenishment requirements at the store and
	distribution center level by using automated rationing logic and
	analyzing local market conditions.                                                                                                                                    

Retek Advanced Retail Planning and Optimization
solutions include:



| |   |                       
| | - | ----------------------
| |  | Retek Assort          
|
| |  | Retek Price Management
|
| |  | Retek KeyPlan         
|
| |  | Retek Promote         

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| |   |                                    
| | - | -----------------------------------
| |  | Retek Customer Revenue Optimization
|
| |  | Retek Demand Forecasting           
|
| |  | Retek TopPlan                      
|
| |  | Retek Collaborate                  
|
| |  | Retek Replenishment Optimization   
|
| |  | Retek Allocation                   
|
| |  | Retek Vendor Managed Inventory     

Retek Professional Services

Retek Professional Services helps retailers and
their integration partners implement Retek solutions rapidly and
cost effectively for maximum business benefit. We offer a
comprehensive range of services designed with a retailers
business and technical objectives in mind, including Consulting,
Training and Custom Solutions services.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Consulting services consist primarily of
	technical and implementation services and customization of our
	products for a customers specific needs. These services
	are customarily billed at a fixed daily rate plus out-of-pocket
	expenses. We have vendor-specific objective evidence of fair
	values for these consulting services and we recognize revenue as
	these services are performed.
|
| |  | Technical support or maintenance services consist
	primarily of customer support services provided after
	implementation of our solutions. Revenue from technical support
	or maintenance services is recognized on a straight-line basis
	over the contract period.                                                                                                                              

We also provide strategic technical advisory
services after the delivery of our products. By providing
project management level support to our customers in their
dealings with third party integrators, these strategic technical
advisory services are designed to help our customers exploit the
full value and functionality of our products. Under licenses
where these strategic technical advisory services are provided,
license fee and services revenues are recognized as these
services are performed over the contract period.

Our services range from technical and
implementation support to business benefit realization
consulting, which assists retailers in utilizing our software
solutions to optimize their potential benefits. We offer
high-quality, timely, technical support to customers via phone,
e-mail and the Internet. Additionally, we publish online
versions of manuals, release notes and updates to existing
documentation. We provide a number of training programs in the
United States. Courses cover topics such as technical
architecture, business use of the merchandizing functionality
and development standards and methodology.

Customers

We market our software solutions primarily to
retailers who sell to their customers via traditional retail
stores, catalogs and/or Internet storefronts. Historically, we
have focused on organizations with gross sales in excess of $500
million a year. We market across all formats of retailing,
including fashion, department stores, catalog and consumer
direct, specialty retailers, mass merchandise retailers and
food, drug and convenience stores. During fiscal year 2001, we
had two customers who accounted for greater than 10% of total
revenues.

Government Contracts

No material portion of our business is subject to
renegotiation of profits or termination of contracts or
subcontracts at the election of the government.

Strategic Alliances

On September 5, 2000 we entered into a
strategic relationship with International Business Machines
Corporation (IBM). Pursuant to this relationship,
Retek and IBM agreed to jointly market, sell, and

9



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service a comprehensive retail e-business
solution consisting of Retek applications and IBM software and
hardware technologies. In connection with entering into this
relationship, we and IBM entered into a Common Stock Purchase
Agreement pursuant to which we issued 300,000 shares of our
common stock to IBM in exchange for IBM entering into the
relationship and providing to us, at no cost, IBM hardware and
software for use by us during the initial term of the
relationship. The Stock Purchase Agreement also requires us to
issue shares of our common stock to IBM upon reaching certain
revenue targets related to our software applications sold under
the joint marketing and selling arrangements through 2003. Under
the Stock Purchase Agreement, we will be obligated to pay IBM
$10 million and $15 million related to 2002 and 2003,
respectively, in shares of our common stock if annual revenue
targets, as stated in the Stock Purchase Agreement, are met. The
Stock Purchase Agreement provides for increases or decreases of
the amounts to be paid to IBM in the event these revenue targets
are exceeded or are partially met. The revenue targets for the
year ended December 31, 2001, were not met; therefore, no
amounts were paid to IBM under this agreement.


On April 2, 2001, we signed a stock purchase
agreement, a warrant agreement, and a software development and
distribution agreement with Henderson Ventures, Inc.
(Henderson), a retail enterprise solution developer.
In connection with these agreements, we issued a warrant to
purchase 750,000 shares of our common stock in exchange for
an ownership interest of approximately 7.7% of the outstanding
common stock of Henderson and a distribution agreement to resell
the developed software. Under the software development and
distribution agreement, we will pay royalties to Henderson for
any software sold by us that we developed in conjunction with
Henderson. The warrant issued to Henderson is fully vested with
a term of five years and is exercisable at $18.625 per share.
The fair value of the warrant of $12.1 million was
calculated using the Black-Scholes valuation model using the
following assumptions: dividend yield of 0%, risk-free interest
rate of 5.83%, contractual life of five years and a volatility
of 137.27%. The fair value of the common stock of Henderson of
$0.4 million is accounted for under the cost method and is
included as a component of other assets. The value of the
development and distribution rights of $12.1 million is included
as a component of intangible assets and is being amortized using
the straight-line method over the life of the agreement.

On May 16, 2001, we established a strategic
relationship with Accenture LLP (Accenture) pursuant
to which Accenture became a development partner for our
predictive applications. In connection with entering into this
relationship, we issued 976,000 shares of our common stock
valued at $30.2 million to Proquire LLC
(Proquire), an affiliate of Accenture, in exchange
for the license from Proquire to us of certain intellectual
property that will enable us to enhance our suite of
retail-specific software. The agreement with Accenture also
requires us to issue to Accenture warrants to purchase our
common stock upon our achievement of certain revenue milestones
in fiscal years 2002, 2003, 2004, and 2005. The maximum number
of warrants to be issued in each fiscal year is limited to 2% of
the number of shares of our common stock then outstanding. For
any amounts earned by Accenture in excess of 2% of our common
stock then outstanding, we may elect to pay in cash, rather than
issue additional warrants.

We have also developed strategic relationships
with various system integrators that assist us with sales lead
generation by recommending that their clients purchase our
software solutions. Additionally, these system integrators
provide a range of services to our customers, including project
implementation services and first-line technical support. We
have certified and trained system integrators for the
implementation and operation of our solutions at Accenture,
Deloitte & Touche LLP, IBM, KPMG LLP, ON-LINE Resources and
Active Intelligence.

In addition to providing implementation and
support services for our software solutions, Accenture has
dedicated full-time consultants to help us in research and
development and custom modifications. This allows us to rapidly
expand our research and development efforts without incurring
the costs associated with hiring additional staff internally.

Sales, Marketing and Distribution

We market and sell our software solutions
worldwide through a combination of a direct sales force,
resellers and distributors. Our sales, marketing and
distribution approaches are designed to help customers

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understand both the business and technical
benefits of our software solutions. We conduct a variety of
marketing programs worldwide to educate our target market,
create awareness and generate leads for our solutions. To
achieve these goals, we have engaged in marketing activities
including e-business seminars, direct mailings, print and online
advertising campaigns and trade shows. These programs are
targeted at key information technology executives and business
users, as well as chief information officers and other senior
executives.


Markets outside the United States are currently
served by our direct sales offices in the United Kingdom,
France, Germany, Australia, and Japan. In addition, we have
established distribution relationships with Itochu
Techno-Science Corporation and KPMG, which distribute our
software solutions in Japan and Australia, respectively.

To date, we have not experienced difficulties in
obtaining raw materials for the manufacture of our products. We
had no material backlog of orders as of December 31, 2001.
Revenues derived from and expenses associated with our business
operations are not generally subject to seasonal fluctuations.

Financial information concerning us for each of
the three fiscal years ended December 31, 2001, 2000 and
1999, including the amount of total revenue contributed by
classes of similar products or services that accounted for 10%
or more of our consolidated revenue in any one of those periods
and information with respect to our operations by geographic
area, is set forth in the consolidated financial statements and
the notes thereto in Item 14 of this Annual Report on
Form 10-K beginning on page 34.

Research and Development

Our research and development group has been a
critical component of our overall success. We believe that we
have built a reputation for delivering on our solution
commitments in a timely manner. As of December 31, 2001,
our research and development group was comprised of individuals
in Atlanta, GA, Cincinnati, OH, Minneapolis, MN and Cambridge,
UK. In addition, we have developed close alliances with a number
of consulting companies to provide additional staffing if
required. These relationships allow us to increase our
development capacity as quickly as necessary to address new
market and product demand.

The majority of our research and development
group is organized around product offering teams. Each of these
teams is responsible for the product management processes,
strategy and release path, delivery, and support of its
respective applications. In addition to these product-offering
teams, a centralized enterprise team within research and
development is responsible for maintaining consistency across
the products teams with respect to quality assurance and testing
processes, documentation, application architecture, and
methodology.

The success of the research and development group
is based on a consistent and well-defined development
methodology. This methodology enables the delivery of
high-quality products in a timely and predictable manner. It
involves the traditional checkpoints of development processes
such as business requirements, functional and technical
specifications, unit, string and integration test plans, and
regression analysis. In addition, we use a highly interactive
review process to engage future users of the product in the
product release cycle through iterative prototypes to ensure the
application design goal is met.

In addition to predictable delivery cycles, speed
to market is critical to our success. We believe that we have
effectively used build, buy, and partner strategies over the
past several years to expand our solution offerings. The key in
using each of these strategies is the consistency in the
underlying technologies and an overall application architecture
that allows modular design and development.

Research and development expenses were
$42.6 million, $42.8 million and $23.0 million in
2001, 2000, and 1999, respectively. We believe that further
significant investments in research and development will be
required in the future to remain competitive. As a consequence,
we intend to increase the absolute amount of our research and
development expenses.

Competition

The market for our software solutions is
intensely competitive and rapidly evolving. We expect
competition to continue to increase both from our approximately
forty existing competitors and new

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market entrants. We encounter current competition
from a number of different sources, including software providers
such as i2 Technologies, Manugistics, Manhattan Associates,
Yantra. Inc., SAP and JDA Software. We believe that our ability
to compete depends on many factors both within and beyond our
control, including:




| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | the ease of use, performance, features, price and
	reliability of our solutions as compared to those of our
	competitors;      
|
| |  | the timing and market acceptance of new solutions
	and enhancements to existing solutions developed by us and our
	competitors;
|
| |  | the quality of our customer service; and                                                                                       
|
| |  | the effectiveness of our sales and marketing
	efforts.                                                                         

We believe that we currently compete favorably
with respect to these factors. In particular, we believe that
our products are better than those of our competitors in their
ease of use, performance, features and reliability. In addition,
we have in the past introduced new solutions and enhancements to
our existing solutions in a timelier manner and have more proven
customer installations than our competitors. Our prices are
generally higher than our competitors reflecting, we believe,
the added value of our software solutions. Because the market
for our software solutions is intensely competitive and rapidly
evolving, we cannot be assured that we will maintain our
competitive position against current and potential competitors,
especially those with greater name recognition and greater
financial, marketing and other resources.

Proprietary Rights and Licensing

Our success and ability to compete are dependent
in part on our ability to develop and maintain the proprietary
aspects of our technology. We rely on a combination of
trademark, trade secret, and copyright law and contractual
restrictions to protect the proprietary aspects of our
technology. We seek to protect our source code for our software,
documentation and other written materials under trade secret and
copyright laws. We license our software under signed license
agreements, which impose restrictions on the licensees
ability to utilize the software. Finally, we seek to avoid
disclosure of our intellectual property by requiring employees
and consultants with access to our proprietary information to
execute confidentiality agreements with us and by restricting
access to our source code.

We rely on technology that we license from third
parties, including software that is integrated with internally
developed software and used in our line of products to perform
key functions. For example, we license DSS Web software from
MicroStrategy, Inc. and the ACCUMATE component software from
Lucent Technologies. Each of these licenses is non-exclusive,
worldwide and royalty-based. Each license has a term of one year
and renews automatically unless notice of termination is given
by either party. The royalties we paid MicroStrategy and Lucent
under these licenses were, in each case, less than 5% of our
total revenue in each of the 2001 and 2000 fiscal years. We have
also entered into a technology license agreement with HNC,
giving us a license to specified HNC predictive technology. This
license is non-exclusive, non-transferable, worldwide, perpetual
and royalty-free. We also license and will continue to license
certain products integral to our products and services from
other third parties, including IBM, Oracle Corp. and Sun
Microsystems, Inc. If we are unable to continue any of theses
licenses, we will face delays in releases of our software until
equivalent technology can be identified, licensed or developed,
and integrated into our current products. These delays, if they
occur, could seriously harm our business.

There has been a substantial amount of litigation
in the software and Internet industries regarding intellectual
property rights. It is possible that in the future third parties
may claim that we or our current or potential future software
solutions infringe on their intellectual property. We expect
that software product developers and providers of electronic
commerce products will increasingly be subject to infringement
claims as the number of products and competitors in our industry
segment grows and the functionality of products in different
industry segments overlaps. Any claims, with or without merit,
could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into

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royalty or licensing agreements. Royalty or
licensing agreements, if required, may not be available on terms
acceptable to us or at all, which could seriously harm our
business.


Environmental Matters

We are in substantial compliance with federal,
state and local provisions that have been enacted or adopted
relating to the protection of the environment. We do not expect
that continued compliance with these provisions would have any
material effect upon our capital expenditures and earnings.

Employees

At December 31, 2001, we had a total of 761
employees based in North America, Europe, Asia, Australia and
other countries. None of our employees are subject to a
collective bargaining agreement, and we believe that our
relations with our employees are good.

Executive Officers

The names of our executive officers and certain
information regarding these persons, including their ages as of
January 15, 2002, are set forth below:

|                   |  |     |    |          |  |                                                                                                    
|------------------ |  | --- | -- | -------- |  | ---------------------------------------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Steven D. Ladwig   |  |     | 44 |          |  | Chief Executive Officer                                                                            
|Jeremy P.M. Thomas |  |     | 59 |          |  | Chief Technology Officer                                                                           
|John L. Goedert    |  |     | 36 |          |  | Chief Operating Officer                                                                            
|Gregory A. Effertz |  |     | 39 |          |  | Senior Vice President, Finance &
	Administration, Chief Financial Officer, Treasurer, and Secretary
|David A. J. Bagley |  |     | 37 |          |  | Chief Strategy Officer                                                                             
|James B. Murdy     |  |     | 39 |          |  | Controller                                                                                         

Steven D. Ladwigjoined us in August 2001 and is
currently our chief executive officer. From July 1998 to July
2001, he served as senior vice president and president, Data
Storage and Information Management at Imation Corp. Prior to
that, Mr. Ladwig served at IBM most recently as the General
Manager for Network Computing and Software for Global Small and
Medium Businesses. Mr. Ladwig holds a Bachelor of Computer
Science and Business Administration from Minnesota State
University, Mankato.

Jeremy P.M. Thomasjoined us in October 1999 and is
currently our chief technology officer. From August 1997 to
October 1999, Mr. Thomas served as managing director and a
director of WebTrak Limited, a company that specializes in
developing Internet solutions for retailers, which we acquired
in October 1999. Mr. Thomas served as a director of TSL
Limited, a company that specializes in software testing from
October 1997 to October 1998, and as TSLs chairman from
January 1998 to October 1998. From January 1994 to January 1998,
Mr. Thomas served as a director of Drawitem Limited, a
company that specializes in software products and services.
During the period from January 1994 to July 1997,
Mr. Thomas also served as chief executive officer and a
director of Workspace Corporation, a corporation that develops
collaborative software. Mr. Thomas holds a Bachelor of
Science degree in Physics from the University of Southampton.

John L. Goedertjoined us in June 1996 as senior vice
president, research and development and is currently our chief
operating officer. From 1987 to 1996, Mr. Goedert was with
Andersen Consultings Consumer Products Practice,
specifically in retail and distribution, serving most recently
as senior manager. Mr. Goedert holds a Bachelor of Business
Administration in Finance from Iowa State University.

Gregory A. Effertzjoined us in March 1997 as vice
president, finance and administration and chief financial
officer. From 1988 to 1997, Mr. Effertz was with American
Paging, Inc., a paging service provider, serving most recently
as executive director, sales and marketing, corporate controller
and

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treasurer. Mr. Effertz is a certified public
accountant certificate holder and holds a Bachelor of Business
Administration in Accounting and Management Information Systems
from the University of Wisconsin  Eau Claire.


David A. J. Bagleyjoined us in May 1997 as vice
president, services and is currently vice president, product
strategy and marketing. From 1989 to 1997, Mr. Bagley was
with Andersen Consultings Consumer Products Practice,
serving most recently as senior manager. Mr. Bagley holds a
Master of Arts in Classics from St. Annes College, Oxford
University.

James B. Murdyjoined us in April 1997 as controller.
From 1988 to 1997 Mr. Murdy was with American Paging, Inc,
a paging service provider, serving most recently as Assistant
Controller. Mr. Murdy is a certified public accountant
certificate holder and holds a Bachelor of Business
Administration in Accounting from the University of North Dakota.

Item 2:     Property

Our principal administrative, sales, marketing,
and research and development facility occupies approximately
242,000 square feet in Minneapolis, Minnesota under a lease that
expires in 2014.

We also have leased regional offices located in
Atlanta, Georgia; Chicago, Illinois; Cincinnati, Ohio; St.
Petersburg, Florida; Australia, Canada, France and the United
Kingdom. Properties leased by us are leased on terms and for
durations that are reflective of commercial standards in the
communities where these properties are located. We believe that
our existing facilities are adequate for our current needs and
that the new lease we recently entered into will ensure that we
have sufficient additional space to meet our future requirements.

Item 3:     Legal
Proceedings

Between June 11 and June 26, 2001,
three class action complaints alleging violations of
Sections 11 and 15 of the Securities Act of 1933 and
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 were filed in the Southern District of New York against us,
certain of our officers and directors and certain underwriters
of our initial public offering. The complaints allege that the
prospectus was false or misleading in that it failed to disclose
(i) That the underwriters allegedly were paid excessive
commissions by certain customers in return for receiving shares
in the initial public offering and (ii) that certain of the
underwriters customers allegedly agreed to purchase
additional shares of our common stock in the aftermarket in
return for an allocation of shares in the initial public
offering. Plaintiffs contend that, as a result of these
omissions from the prospectus, the price of our common stock was
artificially inflated between November 18, 1999 and
December 6, 2000 and that the defendants are liable for
unspecified damages to those persons who purchased our common
stock during that period. On August 9, 2001, these actions
were consolidated for pre-trial purposes before a single judge
along with similar actions involving the initial public
offerings of numerous other issuers.

On February 14, 2002, the parties signed and
filed a stipulation dismissing the consolidated action without
prejudice against us and the individual officers and directors
named in the various suits. The Court approved and ordered the
dismissal without prejudice on March 1, 2002.

In addition to the matters discussed above, we
are subject to various legal proceedings and claims that arise
in the ordinary course of business. We believe that the
resolution of such matters will not have a material impact on
our financial position, results of operations or cash flows.

Item 4:     Submission
of Matters to a Vote of Security Holders

No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year ended
December 31, 2001.

14



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PART II

Item 5:     Market
for Registrants Common Equity and Related Stockholder
Matters

Shares of our common stock have been traded on
the Nasdaq National Market under the symbol RETK
since November 18, 1999. Prior to November 18, 1999,
we were a wholly owned subsidiary of HNC Software Inc., a
Delaware corporation.

The following table shows the high and low sales
price for shares of our common stock for the periods indicated:

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|2000:          |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 86.44 |     |  | $ | 41.00 | 
|Second Quarter |  | $    | 45.00 |     |  | $ | 15.00 | 
|Third Quarter  |  | $    | 54.00 |     |  | $ | 23.75 | 
|Fourth Quarter |  | $    | 60.00 |     |  | $ | 20.81 | 
|2001:          |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 35.44 |     |  | $ | 15.56 | 
|Second Quarter |  | $    | 48.00 |     |  | $ | 15.81 | 
|Third Quarter  |  | $    | 43.85 |     |  | $ | 11.65 | 
|Fourth Quarter |  | $    | 32.95 |     |  | $ | 11.45 | 

On March 22, 2002, the last reported sale
price for shares of our common stock on the Nasdaq National
Market was $28.06 per share.

There were approximately 184 holders of record of
our common stock as of March 22, 2002.

We have not paid or declared any dividends on our
common stock since inception and we anticipate that our future
earnings will be retained to finance the continuing development
of our business. The payment of any future dividends will be at
the discretion of our Board of Directors and will depend upon,
among other things, future earnings, the success of our business
activities, regulatory and capital requirements, our general
financial condition and general business conditions.

On November 23, 1999, we completed the
initial public offering of our common stock. The managing
underwriters in the offering were Credit Suisse First Boston,
Robertson Stephens and U.S. Bancorp Piper Jaffray. The shares of
the common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement
on Form S-1 (No. 333-86841). The Securities and
Exchange Commission declared the Registration Statement
effective on November 17, 1999.

The offering commenced on November 18, 1999
and terminated on November 23, 1999 after we had sold all
of the 6,325,000 shares of common stock registered under the
Registration Statement (including 825,000 shares sold in
connection with the exercise of the underwriters
over-allotment option). The initial public offering price was
$15.00 per share for an aggregate initial public offering of
$94.875 million.

We have paid a total of $6.6 million in
underwriting discounts and commissions and approximately
$3.6 million for costs and expenses related to the
offering. None of the costs and expenses related to the offering
were paid directly or indirectly to any of our directors,
officers, general partners or their associates, persons owning
10 percent or more of any class of our equity securities or
any of our affiliates.

After deducting the underwriting discounts and
commissions and the offering expenses, the net proceeds to Retek
from the offering were approximately $84.7 million. A
portion of the net offering proceeds have been used for general
corporate purposes, to provide working capital to develop
products and to expand our operations. A portion of the net
offering proceeds were also used to pay $15.4 million in
inter-company debt owed to HNC and $18.7 million was used
in connection with the acquisition of HighTouch Technologies,
Inc. Funds that have not been used have been invested in money
market funds,

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certificate of deposits and other investment
grade securities. We also may use a portion of the net proceeds
to acquire or invest in businesses, technologies, products or
services.


Item 6:     Selected
Consolidated Financial Data

The following selected consolidated financial
data is qualified by reference to and should be read in
conjunction with our consolidated financial statements and notes
thereto included in Item 14 and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7.

|                                                      |  |                                       |         |      |  |      |         |      |  |      |        |   |  |   |        |  |  |   |        | 
|----------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ |  |  | - | ------ | 
|                                                      |  |                                      
|                                                      |  | Year Ended December 31,              
|                                                      |  |                                      
|                                                      |  | 2001                                  |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                                      |  |                                       |         |      |  |      |         |      |  |     
|                                                      |  |                                      
|                                                      |  | (in thousands, except per share data)
|Consolidated Statement of Income
	Data:               |  |                                       |         |      |  |      |         |      |  |      |        |   |  |   |        |  |  |   |        | 
|Total revenue                                         |  | $                                     | 179,474 |      |  | $    | 91,957  |      |  | $    | 69,159 |   |  | $ | 55,033 |  |  | $ | 30,923 | 
|Gross profit                                          |  |                                       | 104,449 |      |  |      | 38,212  |      |  |      | 45,166 |   |  |   | 41,181 |  |  |   | 27,278 | 
|Operating (loss) income                               |  |                                       | (23,319 | )    |  |      | (65,598 | )    |  |      | (7,096 | ) |  |   | 8,088  |  |  |   | 6,619  | 
|Net (loss) income                                     |  |                                       | (14,310 | )    |  |      | (42,905 | )    |  |      | (5,369 | ) |  |   | 3,878  |  |  |   | 3,476  | 
|Basic and diluted net (loss) income per
	common share |  | $                                     | (0.29   | )    |  | $    | (0.91   | )    |  | $    | (0.13  | ) |  | $ | 0.10   |  |  | $ | 0.09   | 

|                                 |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        | 
|-------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------ |  |  | - | ------ | 
|                                 |  |               
|                                 |  | December 31,  
|                                 |  |               
|                                 |  | 2001           |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                 |  |                |         |      |  |      |         |      |  |     
|                                 |  |               
|                                 |  | (in thousands)
|Consolidated Balance Sheet Data: |  |                |         |      |  |      |         |      |  |      |         |  |  |   |        |  |  |   |        | 
|Cash and cash equivalents        |  | $              | 70,166  |      |  | $    | 31,058  |      |  | $    | 83,680  |  |  | $ | 415    |  |  | $ | 2,469  | 
|Working capital                  |  |                | 59,309  |      |  |      | 35,069  |      |  |      | 84,977  |  |  |   | 12,876 |  |  |   | 5,016  | 
|Total assets                     |  |                | 299,370 |      |  |      | 195,183 |      |  |      | 154,233 |  |  |   | 51,283 |  |  |   | 37,896 | 
|Payable to HNC Software Inc.     |  |                |        |      |  |      | 598     |      |  |      | 15,399  |  |  |   | 5,944  |  |  |   | 6,491  | 
|Debt obligations                 |  |                | 236     |      |  |      | 453     |      |  |      |        |  |  |   |       |  |  |   |       | 
|Total stockholders equity       |  |                | 203,523 |      |  |      | 124,595 |      |  |      | 123,975 |  |  |   | 36,016 |  |  |   | 24,607 | 



|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7: | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

The following discussion of our financial
condition and results of operations should be read in
conjunction with our consolidated financial statements and the
related notes, and the other financial information included in
this Annual Report on Form 10-K. This discussion and
analysis contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a
result of specified factors, including those set forth in the
section below entitled Factors That May Impact Future
Results of Operations and elsewhere in this Annual Report
on Form 10-K.

Overview

We completed our initial public offering on
November 23, 1999. Prior to the completion of our initial
public offering, we were a wholly owned subsidiary of HNC
Software Inc., a business-to-business software company that
develops and markets predictive software solutions. On
October 2, 2000, HNC announced it had completed its
separation of Retek from HNC through a distribution prorata to
HNCs stockholders of HNCs entire holding of
40 million shares of our common stock. HNC previously
received a private letter ruling from the Internal Revenue
Service that HNCs pro rata distribution of its shares of
our common stock would be tax-free to HNC and its stockholders
for U.S. federal income tax purposes. After the close of the
Nasdaq National Market on September 29, 2000, HNC
stockholders who were

16



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##### 



stockholders of record as of September 15,
2000 were distributed 1.243 shares of our common stock for
each share of HNC stock held as of the record date.


We generate revenue from the sale of software
licenses, maintenance and support contracts, and professional
consulting and contract development services. Until the fourth
quarter of 1999, we generally licensed products to customers on
a perpetual basis and recognized revenue upon delivery of the
products. Starting in the fourth quarter of 1999, we revised the
terms of our software licensing agreements for the majority of
our software products sold. Under the revised terms, we provide
technical advisory services after the delivery of our products
to help customers exploit the full value and functionality of
our products. Revenue from the sale of software licenses under
these agreements is recognized over the period the technical
advisory services are performed if all other criteria for
recognition of revenue are met. These periods of technical
advisory services generally range from 12 to 24 months, as
determined by each customers objectives. Deferred revenue
consists principally of the unrecognized portion of amounts
received under license and maintenance service agreements.
Deferred license revenue is recognized ratably over the
technical advisory period (if applicable), or on a percentage of
completion basis, or when all criteria for recognition of
revenue are met based on the contract terms. Deferred
maintenance revenue is recognized ratably over the term of the
service agreement.

Customers who license our software generally
purchase maintenance contracts, typically covering renewable
annual periods. In addition, customers may purchase consulting
services, which are customarily billed at a fixed daily rate
plus out-of-pocket expenses. Contract development services,
including new product development services, are typically
performed for a fixed fee. We also offer training services that
are billed on a per student or per class session basis.

The growth of our customer base is primarily
attributable to our increased market penetration and our
expanding product offering. Our investments in research and
development, and recent acquisitions and alliances have helped
us bring new software solutions to market. These investments
produced a suite of decision support solutions in 1997; the
retooling of our applications for the web in 1998; the delivery
of Internet-enabled business-to-business collaborative planning,
critical path and product design solutions in 1999; several
additional collaborative offerings available for delivery
through public marketplaces, private exchanges and Reteks
own hosted service through 2000 and message-based integration in
2001 that enables near real time visibility to inventory and
sales, reduced application complexity, maintenance and upgrade
overhead, and rapid deployment of new modules. To support our
growth during these periods, we also continued to invest in
internal infrastructure by hiring employees across various
departments.

We market our software solutions worldwide
through direct and indirect sales channels. Revenue generated
from our direct sales channel accounted for approximately 96%,
93% and 76% of our total revenue in 2001, 2000 and 1999,
respectively. Indirect sales channel revenue primarily arises
from our relationship with Oracle.

Revenue attributable to customers outside of
North America accounted for approximately 33%, 20% and 37% of
our total revenues in 2001, 2000 and 1999, respectively.
Approximately 28%, 9% and 14% of our sales were denominated in
currencies other than the U.S. Dollar for 2001, 2000 and 1999,
respectively.

Acquisitions and Strategic
Relationships

On October 29, 1999, we completed the
purchase of all the outstanding capital stock of WebTrak
Limited. WebTrak owns the WebTrack Critical Path and Portfolio
Private Label products that we currently distribute. In
connection with the purchase of WebTrak, we issued to former
WebTrak shareholders notes, which were due on November 26,
1999, in the principal amount of $5.33 million and a
convertible note, which was due on November 26, 1999, in
the principal amount of $2.67 million. The convertible note
was, at the option of the holder, convertible at the time of
payment into the number of shares of our common stock equal to
the principal amount of the note divided by our initial public
offering price of $15.00. On November 29, 1999, we issued
177,778 shares of our common stock to the holder of the
convertible note in full satisfaction of our obligations. The
remaining notes were paid in full on their due date.

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On May 10, 2000, we completed our
acquisition of HighTouch Technologies, Inc., a provider of
real-time transaction management and customer service solutions
that support multi-channel customer interactions. HighTouch owns
certain direct consumer management technologies that we have
incorporated into Retek Retail CRM, our enterprise-level
customer interaction system. In connection with the purchase of
HighTouch, we paid $18.7 million in cash, including direct
acquisition costs, and issued 389,057 shares of our common
stock to the former sole shareholder of HighTouch.

On September 5, 2000, we entered into a
strategic relationship with International Business Machines
Corporation. Pursuant to this relationship, Retek and IBM agreed
to jointly market, sell, and service a comprehensive retail
e-business solution consisting of Retek applications and IBM
software and hardware technologies. In connection with entering
into this relationship, we and IBM entered into a Common Stock
Purchase Agreement pursuant to which we issued
300,000 shares of our common stock to IBM in exchange for
IBM entering into the relationship and IBM providing to us, at
no cost, IBM hardware and software for use by us during the
initial term of the relationship. This arrangement has been
accounted for as a capital lease of the hardware and software.
Accordingly, the aggregate fair value of our common shares
issued of $10.2 million has been included in property and
equipment and is being amortized using the straight-line method
over the twenty-seven month term of this portion of the
arrangement.

The Stock Purchase Agreement also requires us to
issue shares of our common stock to IBM upon reaching certain
revenue targets related to our software applications sold under
the joint marketing and selling arrangements through 2003. Under
the Stock Purchase Agreement, we will be obligated to pay IBM
$10 million and $15 million related to 2002 and 2003,
respectively, in shares of our common stock if annual revenue
targets, as stated in the Stock Purchase Agreement, are met. The
Stock Purchase Agreement provides for increases or decreases of
the amounts to be paid to IBM in the event these revenue targets
are exceeded or are partially met. The revenue targets for the
year ended December 31, 2001, were not met; therefore, no
amounts were paid to IBM under this agreement.

On April 2, 2001, we signed a stock purchase
agreement, a warrant agreement, and a software development and
distribution agreement with Henderson Ventures, Inc.
(Henderson), a retail enterprise solution developer.
In connection with these agreements, we issued a warrant to
purchase 750,000 shares of our common stock in exchange for
an ownership interest of approximately 7.7% of the outstanding
common stock of Henderson and a distribution agreement to resell
the developed software. Under the software development and
distribution agreement, we will pay royalties to Henderson for
any software sold by us that we developed in conjunction with
Henderson.

The warrant issued to Henderson is fully vested
with a term of five years and is exercisable at $18.625 per
share. The fair value of the warrant of $12.1 million was
calculated using the Black-Scholes valuation model using the
following assumptions: dividend yield of 0%, risk-free interest
rate of 5.83%, contractual life of five years and a volatility
of 137.27%. The fair value of the common stock of Henderson of
$0.4 million is accounted for under the cost method and is
included as a component of other assets. The value of the
development and distribution rights of $12.1 million is included
as a component of intangible assets and is being amortized using
the straight-line method over the life of the agreement.

On May 16, 2001, we established a strategic
relationship with Accenture LLP (Accenture) pursuant
to which Accenture will become a development partner for our
predictive applications. In connection with entering into this
relationship, we issued 976,000 shares of our common stock
valued at $30.2 million to Proquire LLC
(Proquire), an affiliate of Accenture, in exchange
for the license from Proquire to us of certain intellectual
property that will enable us to enhance our suite of
retail-specific software.

The agreement with Accenture also requires us to
issue to Accenture warrants to purchase our common stock upon
our achievement of certain revenue milestones in fiscal
years 2002, 2003, 2004, and 2005. The maximum number of
warrants to be issued in each fiscal year is limited to 2% of
the number of shares of our common stock then outstanding. For
any amounts earned by Accenture in excess of 2% of our common
stock then outstanding, we may elect to pay in cash, rather than
issue additional warrants.

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On June 21, 2000, we signed a shareholders
agreement, a resellers agreement, a consulting services
agreement and a subscription agreement with Multiasia, Inc.
(MAI), for 7,960,000 shares or 19.9% of the shares
of MAI. MAI is a Business-to-Business and Business-to-Consumer
web based e-commerce company in the Peoples Republic of
China. In exchange for the common shares, MAI received the right
to certain of our software solutions and the right to sell our
software solutions to the e-business community in the Republic
of China. The value of the shares received of $4.0 million
is accounted for under the cost method and is included as a
component of other assets and deferred revenue. Under the
resellers agreement we are entitled to receive royalties from
MAI for the sale of our software.

Critical Accounting Policies and
Estimates

Our discussion and analysis of financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates,
based on historical experience, and various other assumptions
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

We believe the following critical accounting
policies affect significant judgments and estimates used in the
preparation of our consolidated financial statements:

Revenue
Recognition

We recognize revenues in accordance with the
provisions of the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2,
Software Revenue Recognition, as amended by
SOP 98-4 and SOP 98-9, as well as Technical Practice
Aids issued from time to time by the American Institute of
Certified Public Accountants, and in accordance with the
Securities and Exchange Commission Staff Accounting Bulletin
No. 101, Revenue Recognition in Financial
Statements.

We recognize software license revenue upon
meeting each of the following criteria: execution of a license
agreement or contract; delivery of software; the license fee is
fixed or determinable; collectibility of the proceeds is
assessed as being probable; and vendor specific objective
evidence (VSOE) exists to allocate revenue to
undelivered elements of the arrangement. VSOE is based on the
price charged when an element is sold separately, or if not yet
sold separately, is established by authorized management.
Starting in the fourth quarter of 1999, we revised the terms of
the software licensing agreements for the majority of the
software products sold. Under these terms, we provide technical
advisory services after the delivery of our products to help our
customers exploit the full value and functionality of our
products. Revenue from the sale of software licenses under these
agreements is recognized over the period that the technical
advisory services are performed because VSOE does not exist for
our technical advisory services. For sales made through
distributors, resellers and original equipment manufacturers, we
recognize revenue at the time these partners report to us that
they have sold the software to the end user and all revenue
recognition criteria have been met. Service revenue includes
maintenance revenue, which is deferred and recognized ratably
over the maintenance period, and revenue from consulting and
training services, which is recognized as services are
performed. Consulting services are customarily billed at a fixed
daily rate plus out-of-pocket expenses.

Our revenue from contract development services is
generally recognized as the services are performed using the
percentage of completion method based on costs incurred to date
compared to total estimated costs at completion. Amounts
received under contracts in advance of performance are recorded
as deferred revenue and are generally recognized within one year
from receipt. Contract losses are recorded as a charge to income
in the period such losses are first identified. Unbilled
accounts receivable are stated at estimated realizable value.

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Deferred revenue consists primarily of deferred
license and maintenance revenue.

Deferred tax assets

As part of the process of preparing our
consolidated financial statements we are required to estimate
our income taxes in each of the jurisdictions in which we
operate. This process involves us estimating our actual current
tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are
included within our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we
believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of
operations.

Significant management judgment is required in
determining whether any valuation allowance should be recorded
against our net deferred tax assets. Our aggregate deferred tax
asset as of December 31, 2001, was $74.2 million. We have
not recorded a valuation allowance as of December 31, 2001,
as we expect to be able to utilize all of our deferred tax
assets, primarily consisting of net operating losses carried
forward, a tax basis difference from a prior year
pooling-of-interest transaction and other book and tax
differences. The realization of the deferred tax assets is
solely dependent on our ability to generate future taxable
income. In the event that we adjust our estimates of future
taxable income we may need to establish a valuation allowance,
which could materially impact our financial position and results
of operations.

Allowance for doubtful
accounts

Our software license and installation agreements
and commercial development contracts are primarily with large
customers in the retail industry. We maintain allowances for
doubtful accounts for estimated losses resulting from the
inability of our customers to make required payments. If the
financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments,
additional allowances may be required.

Valuation
of long-lived and intangible assets and goodwill

We assess the impairment of identifiable
intangibles, long-lived assets and related goodwill whenever
events or changes in circumstances indicate that the carrying
value may not be recoverable.

When we determine that the carrying value of
intangibles, long-lived assets and related goodwill may not be
recoverable we measure any impairment based on a projected
discounted cash flow method using a discount rate determined by
our management to be commensurate with the risk inherent in our
current business model. Net intangible assets, long-lived
assets, and goodwill amounted to $90.5 million as of
December 31, 2001.

In 2002, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets became effective and as a result,
we will cease to amortize approximately $13.5 million of
goodwill. We had recorded approximately $4.4 million of
amortization on these amounts during 2001 and would have
recorded approximately $4.4 million of amortization during 2002.
In lieu of amortization, we are required to perform an initial
impairment review of our goodwill in 2002 and an annual
impairment review thereafter. We expect to complete our initial
review during the first quarter of 2002.

We currently do not expect to record an
impairment charge upon completion of the initial impairment
review. However, there can be no assurance that at the time the
review is completed a material impairment charge will not be
recorded.

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Results of Operations

The following table presents selected financial
data for the periods indicated as a percentage of our total
revenue. Our historical reporting results are not necessarily
indicative of the results to be expected for any future period.

|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |    |     | 
|-------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------ | --- | ---- | --- | ---- | --- | -- | --- |  | --- | -- | --- | 
|                                                                                             |                                                 |                         
|                                                                                             |                                                 | As a Percentage of      
|                                                                                             |                                                 | Total Revenue           
|                                                                                             |                                                 | Year Ended              
|                                                                                             |                                                 | December 31,            
|                                                                                             |                                                 |                         
|                                                                                             |                                                 | 2001                     |     | 2000 |     | 1999
|                                                                                             |                                                 |                          |     |      |     |     
|Revenue:                                                                                     |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                             | License and maintenance                         |                          |     | 73   | %   |      |     | 63 | %   |  |     | 66 | %  
|                                                                                             | Services and other                              |                          |     | 27   |     |      |     | 37 |     |  |     | 34 |    
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                             |                                                 | Total revenue            |     |      | 100 |      |     |    | 100 |  |     |    | 100 | 
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Cost of revenue:                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                             | License and maintenance                         |                          |     | 22   |     |      |     | 29 |     |  |     | 10 |    
|                                                                                             | Services and other                              |                          |     | 20   |     |      |     | 29 |     |  |     | 25 |    
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                             |                                                 | Total cost of revenue    |     |      | 42  |      |     |    | 58  |  |     |    | 35  | 
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Gross margin                                                                                 |                                                 |                          | 58  |      |     |      | 42  |    |     |  | 65  |   
|Operating expenses:                                                                          |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                             | Research and development                        |                          |     | 23   |     |      |     | 46 |     |  |     | 34 |    
|                                                                                             | Sales and marketing                             |                          |     | 30   |     |      |     | 45 |     |  |     | 29 |    
|                                                                                             | General and administrative                      |                          |     | 12   |     |      |     | 13 |     |  |     | 9  |    
|                                                                                             | Acquired in-process research and development    |                          |     | 0    |     |      |     | 4  |     |  |     | 2  |    
|                                                                                             | Acquisition related amortization of intangibles |                          |     | 6    |     |      |     | 5  |     |  |     | 1  |    
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                             |                                                 | Total operating expenses |     |      | 71  |      |     |    | 113 |  |     |    | 75  | 
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Operating loss                                                                               |                                                 |                          | (13 | )    |     |      | (71 | )  |     |  | (10 | ) 
|Other income, net                                                                            |                                                 |                          | 1   |      |     |      | 2   |    |     |  |    |   
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Loss before income tax benefit                                                               |                                                 |                          | (12 | )    |     |      | (69 | )  |     |  | (10 | ) 
|Income tax benefit                                                                           |                                                 |                          | (4  | )    |     |      | (23 | )  |     |  | (2  | ) 
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Net loss                                                                                     |                                                 |                          | (8  | )%   |     |      | (46 | )% |     |  | (8  | )%
|                                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Cost of license and maintenance revenue, as a
	percentage of License and maintenance revenue |                                                 |                          | 30  | %    |     |      | 47  | %  |     |  | 15  | % 
|Cost of services and other revenue, as a
	percentage of Services and other revenue           |                                                 |                          | 75  | %    |     |      | 78  | %  |     |  | 73  | % 

Years Ended December 31,
2001, 2000 and 1999

Revenue

Total revenue.Total
revenue increased 95% to $179.5 million in 2001 and 33% to $92.0
million in 2000 from $69.2 million in 1999.

License and maintenance revenue.License and maintenance revenue
increased 128% to $131.7 million in 2001 and 26% to $57.7
million in 2000 from $46.0 million in 1999. The increase in 2001
and 2000 license revenue was primarily due to the addition of
new customers and an increase in the average dollar sale per
customer. As noted above in the section entitled
Overview, we revised the terms of our software
license agreements starting in the fourth quarter of 1999 so
that revenue is generally recognized over a number of quarters
rather than upon delivery. Due to the revised terms of the
software license agreements, year over year revenue growth
increased at a slower rate in 2000. Maintenance revenue

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increased $8.7 million and $4.0 million in 2001
and 2000, respectively, due to a growing base of customers that
have installed our software solutions.


Services and other revenue.Services and other revenue increased
40% to $47.8 million in 2001 and 48% to $34.2 million in 2000
from $23.2 million in 1999. The increase in services revenue
between these years was primarily a result of our expanding
customer base. In addition, the increase in 2001 and 2000 was
due to a $11.1 million and $12.0, respectively, increase in
consulting and custom development projects. Third party
consultants are used on an as needed basis depending upon our
allocation of available internal resources.

Costs
and Expenses

Non-cash charges.Non-cash charges included with cost of
sales, research and development, sales and marketing and general
and administrative are amortization of stock-based compensation
and amortization of certain purchased intangible assets.
Deferred stock-based compensation represents the difference
between the exercise price and the fair value of our common
stock for accounting purposes on the date that certain stock
options were granted. This amount is included as a component of
stockholders equity and is being amortized on an
accelerated basis by charges to operations over the vesting
period of the options, consistent with the method described in
Financial Accounting Standards Board Interpretation No. 28.
Amortization of stock-based compensation was $5.3 million, $10.9
million and $1.9 million for the years ended December 31,
2001, 2000 and 1999, respectively. Amortization of certain
purchased intangible assets stem from our purchase of certain
core technologies from our acquisitions of Retek Logistics,
Inc., WebTrak, Inc. and HighTouch Technologies, Inc.
Amortization of intangible assets is included in non-cash cost
of revenues license and maintenance and was $3.3 million, $3.1
million, and $0.7 million for the years ended December 31,
2001, 2000 and 1999, respectively.

Cost
of Revenue

Cost of license and maintenance revenue.Cost of license and maintenance
revenue includes salaries and related expenses of our customer
support third party software products that are integrated into
our products; fees paid to third-party consultants and an
allocation of our facilities and depreciation expense. Cost of
license and maintenance revenue increased 45% to $39.0 million
in 2001 and 283% to $27.0 million in 2000 from $7.0 million in
1999. The absolute dollar increases during 2001 and 2000 are
attributable to the additional support personnel required to
meet the growth in our license and maintenance revenue. In
addition, during 2001 third party consultant costs increased
$8.8 million. We expect the cost of license and maintenance
revenue to continue to increase in absolute dollars as license
and maintenance revenue increases.

Cost of services and other revenue.Cost of services and other revenue
includes salaries and related expenses of our consulting
organization; cost of third parties contracted to provide
consulting services to our customers; and an allocation of our
facilities and depreciation expense. Cost of services and other
revenue increased 35% to $36.0 million in 2001 and 58% to $26.8
million in 2000 from $16.9 million in 1999. The increase in cost
of services and other revenue during 2001 and 2000 were due to
the additional personnel and consultants required to service our
growing customer base. These costs were offset by a decrease in
the non-cash charges for fiscal year 2001. As a percentage of
services and other revenue, cost of services and other revenue
was 75%, 78%, and 73% in 2001, 2000, and 1999, respectively. In
2000, higher non-cash charges caused cost of services and other
revenue as a percentage of services and other revenue to
increase.

Operating
Expenses

Research and development.Research and development expenses,
which are expensed as incurred, consist primarily of salaries
and related costs of our engineering organization; fees paid to
third-party consultants; and an allocation of our facilities and
depreciation expenses. Research and development expenses
decreased 1% to $42.6 million in 2001 and increased 86% to $42.8
million in 2000 from $23.0

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million in 1999. The decrease in total research
and development for 2001 is primarily due to a $2.7 million
decrease in non-cash charges and a $0.7 million decrease in
third party consulting costs, which was offset by a $3.3 million
increase in occupancy allocation. In 2000 and 1999 the absolute
dollar increases were due to increases in labor costs, which
included hiring additional personnel and third party
consultants. In 2000 research and development personnel and
related costs increased $9.2 million and third party consulting
costs increased $3.7 million. In addition, we recorded a $4.6
million increase in non-cash charges and a $2.2 million increase
in occupancy allocation. During 2000 we invested in the
development and integration of our customer relationship
management solutions as well as supply chain solutions. We
expect the absolute dollar of expenditures in research and
development to increase as we invest in the development of other
new solutions.


Sales and marketing.Sales and marketing expenses consist
primarily of salaries and related costs of our sales and
marketing organization; sales commissions; costs of our
marketing programs, including public relations, advertising,
trade shows, collateral sales materials, and its customer user
reference group program; rent and facilities costs associated
with our regional and international sales offices; and an
allocation of our facilities and depreciation expenses. Sales
and marketing expense increased 30% to $53.4 million in 2001 and
100% to $41.0 million in 2000 from $20.6 million in 1999. The
increase in 2001 was due to a $13.4 million increase in
personnel and related costs, $1.7 million increase in marketing
program expenses, and a $1.6 million increase in occupancy
allocation. The increase in 2000 was due to increases of $8.6
million in personnel and related costs, $3.0 million in third
party consulting, $1.8 million in occupancy allocation and $1.5
million in non-cash sales and marketing expenses. The increase
in sales and marketing costs in 2001 and 2000 were due to the
expansion of our sales and marketing functions necessary to
support the introduction of several new product offerings.

General and administrative.General and administrative expenses
consist primarily of costs from our finance and human resources
organizations; third party professional service fees; and an
allocation of our facilities costs and depreciation expenses.
General and administrative expenses increased 79% to $21.0
million in 2001 and 84% to $11.8 million in 2000 from $6.4
million in 1999. The increase in 2001 was due to a $3.1 million
increase in personnel and related costs and a $4.8 million
increase in occupancy allocation. In 2000, personnel and related
expenses increased $2.2 million, professional fee expenses
increased $1.4 million and non-cash charges increased $0.8
million. The increase in absolute dollars in general and
administrative expenses in 2001 and 2000 was due to the
additional personnel required to support our growth. We expect
general and administrative expenses to increase in absolute
dollars in the foreseeable future to support expected
infrastructure growth.

Acquired in-process research and development.In connection with our recent
acquisitions of HighTouch Technologies, Inc. in May 2000
and WebTrak in October 1999, acquired in-process research
and development of $4.0 million and $1.5 million, respectively,
was charged to results of operation on each respective
acquisition date. The classification of the technology as
complete or under development was made in accordance with the
guidelines of Statement of Financial Accounting Standards
No. 86, Statement of Financial Accounting Standards
No. 2 and Financial Accounting Standards Board
Interpretation No. 4. Prior to its acquisition, HighTouch
primarily sold customized software and services to a variety of
customers in the retail industry. At the time of acquisition,
HighTouch had technology under development relating to the
creation of the companys first fully integrated
standardized off-the-shelf CRM product. This in-process research
and development project achieved technological feasibility in
2000. Also, at the time of acquisition certain products of
WebTrak were complete in certain areas and under development in
others. Products classified as under development subsequently
achieved technological feasibility.

For the WebTrak and HighTouch acquisitions we
used an independent appraisal firm to assist in the valuation of
the fair market value of the purchased assets. Fair market value
is defined as the estimated amount at which an asset might be
expected to be exchanged for between a willing buyer and willing
seller assuming the buyer continues to use the assets in its
current operations. We provided assumptions by product line of
revenue, cost of goods sold and operating expense to the
appraiser to assist in the valuation.

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These projections were made based on an
assessment of customer needs and the expected pricing and cost
structure.


The in-process research and development projects
were valued through the use of a discounted cash flow analysis,
taking into account projected future cash flows associated with
these projects once they achieve technological feasibility,
their stage of completion as of the acquisition date, and the
expected return requirements (i.e. discount rate) for present
valuing of the projected cash flows. Stage of completion was
estimated by considering time, cost, and complexity of tasks
completed prior to the acquisition as a percentage of total
time, cost and effort required for the total project up to
achieving technological feasibility.

With respect to the discount rates used in the
valuation approach, the incomplete technology represents a mix
of near and mid-term prospects for the business and imparts a
level of uncertainty to its prospects. A reasonable expectation
of return on the incomplete technology would be higher than that
of completed technology due to these inherent risks. As a
result, the earnings associated with incomplete technology were
discounted at a rate of 26.2% for HighTouch and 26.4% for
WebTrak based upon the following methodology:

The Capital Asset Pricing Model was used to
determine the cost of equity. It combines a risk free rate of
return with an equity risk premium multiplied by a factor,
referred to as Beta, which is based on the performance of common
stock prices of similar publicly traded companies. Employing
these data, the discount rate attributable to the business was
22.2%, which was used for valuing completed technology. Since
incomplete technology would require a higher return than
completed technology, the valuation report prepared by our
appraiser used a rate of 26.2% to present value cash flows (in
excess of a return on other assets of the business) attributable
to in-process research and development projects.

In connection with the acquisition of WebTrak, we
estimated that the acquired in-process research and development
related to Retek Design was 58% complete as of the acquisition
date. This estimate was based upon research and development
efforts incurred to date as compared to total estimated
development efforts.

We utilized the income valuation approach to
determine the estimated fair value of the acquired in-process
research and development. This estimate is based on the
following assumptions:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The estimated revenues are based upon projected
	average annual revenue from future products expected to be
	derived once technological feasibility is achieved during the
	period from 2000 through 2002.
|
| |  | Expenses were applied at levels commensurate with
	the entire Retek Design product line on a percentage of revenue
	basis.                                                                                
|
| |  | The discount rate utilized in the valuation was
	26.4%.                                                                                                                                                   

Acquisition-related amortization of
intangibles.In connection with our
purchase of HighTouch in 2000, the application of the purchase
method of accounting for the acquisition resulted in an excess
of cost over net assets acquired of $30.4 million, of which
$26.4 million was allocated to intangibles and $4.0 million was
allocated to in-process research and development. In conjunction
with the purchase, we recorded various intangible assets, which
are being amortized over estimated useful lives ranging from
three to five years. In connection with the purchase of WebTrak
in 1999, the application of the purchase method of accounting
for the acquisition resulted in an excess of cost over net
assets acquired of $8.1 million, of which $6.6 million was
allocated to intangibles and $1.5 million was allocated to
in-process research and development. In conjunction with the
purchase, we recorded various intangible assets, which are being
amortized over estimated useful lives ranging from three to five
years.

Other income, net.Other income, net increased to $1.8
million in 2001 from $1.7 million in 2000 and $30,000 in 1999.
The increase in other income in 2001 and 2000 was due to an
increase in interest income, which was partially offset by
interest expense related to notes payable.

24



---



##### 



Income tax benefit.The income tax benefit was $7.2
million, $21.0 million, and $1.7 million in 2001, 2000, and
1999, respectively. The income tax benefit for each of the three
years includes the impact of non-deductible expense for the
amortization of certain portions of the stock-based compensation.

Liquidity and Capital Resources

At December 31, 2001, our cash, cash
equivalents and investment balance was $85.6 million.

Net cash provided by operating activities was
$23.6 million, $6.4 million and $0.2 million in 2001, 2000, and
1999, respectively. Sources of cash in 2001, which offset our
net loss and an increase in accounts receivable were
depreciation and amortization, increases to the provision for
doubtful accounts, amortization of stock-based compensation and
increases in deferred revenue. Sources of cash in 2000, which
offset our net loss and increases in certain assets, were
depreciation and amortization, increases to the provision for
doubtful accounts, amortization of stock-based compensation and
acquired in-process research and development, increases in
accounts payable, accrued liabilities and deferred revenue.
Sources of cash in 1999, which offset our net loss and increases
in certain assets, were depreciation and amortization, increases
to the provision for doubtful accounts, amortization of
stock-based compensation and acquired in-process research and
development, increases in accounts payable and increases in
deferred revenue.

Uses of cash in 2000 were due to increases in
deferred assets, other assets and accounts receivable, which
were partially offset by an increase in the provision for
doubtful accounts. Uses of cash in 1999 were due to increases in
accounts receivable and other asset balances, which were
partially offset by increases in the provision for doubtful
accounts. The increases in the bad debt provisions in 2000 and
1999 were primarily attributed to increased accounts receivable
levels due to higher sales volume and in 1999, reserving for
specific customers. During 1999, we increased our provision for
doubtful accounts by $1.2 million for a customer that was
unwilling to pay amounts due.

Net cash used in investing activities was $13.3
million, $53.2 million and $10.8 million in 2001, 2000, and
1999, respectively. In 2001, uses of cash were due to the
acquisition of property and equipment and purchases of
investments available for sale, which was partially offset by
the sale of investments available for sale. In 2000, uses of
cash were due to the acquisition of property and equipment,
purchases of investments available for sale and cash paid for
the HighTouch acquisition, which was partially offset by cash
purchased in the acquisition. In 1999, uses of cash were due to
the acquisition of property and equipment and cash paid for the
WebTrak acquisition, which was offset by cash purchased in the
acquisition.

Net cash provided by financing activities was
$28.5 million in 2001. Net cash used by financing activities was
$5.4 million in 2000. Net cash provided by financing activities
was $94.4 million in 1999. Net cash provided by financing
activities in 2001 were due to the issuance of common stock for
employee stock option exercises and stock plan purchases. Net
cash used by financing activities in 2000 included $1.5 million
in note payable payments and $15.4 million in payments to HNC,
which was offset by $0.6 million in borrowings from HNC and
$11.2 million in net proceeds from the issuance of common stock.

We believe that our current cash, cash
equivalents, investments and net cash provided by operating
activities, will be sufficient to meet our working capital and
capital expenditure requirements for at least the next
12 months. One of the major components of our positive
operating cash flow is our collection on receivables from our
customers. Operating cash flows would be negatively impacted if
we were unable to sign new customer contracts or if a
significant number of customers were unable to pay for our
solutions and services. Consumer spending, consumer confidence
and other economic measures in the US economy impact our
customer base in the retail industry and negative trends in
these measures may impact the amount and type of capital
expenditures made by them.

Management intends to invest our cash in excess
of current operating requirements in short-term,
interest-bearing, investment-grade securities.

25



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##### 



A portion of our cash could also be used to
acquire or invest in complementary businesses or products or
otherwise to obtain the right to use complementary technologies
or data. We regularly evaluate, in the ordinary course of
business, potential acquisitions of such businesses, products,
technologies or data.

In addition, our ability to enter into any
acquisition of a business or assets may be limited due to HNC
distribution of our stock. Specifically, pursuant to the terms
of a corporate rights agreement between HNC and us, until at
least September 29, 2002, and possibly longer, our ability
to issue common stock in connection with acquisitions, offerings
or otherwise will be limited.

The following summarizes our contractual
obligations, including purchase commitments at December 31,
2001, and the effect such obligations are expected to have on
our liquidity and cash flow in future periods.

|                        |                                    |      |       |       |  |      |       |       |  |       |       |       |  |   |       |       |  |   |        |        | 
|----------------------- | ---------------------------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | ----- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                        |                                    |      |       |       |  |      |       |       |  | After
|Contractual Obligations |                                    | 2002 |       | 2003  |  | 2004 |       | 2005  |  | 2005 
|                        |                                    |      |       |       |  |      |       |       |  |      
|Operating leases        |                                    | $    | 6,840 |       |  | $    | 6,938 |       |  | $     | 6,657 |       |  | $ | 5,747 |       |  | $ | 45,370 |       
|Notes payable           |                                    |      | 90    |       |  |      | 90    |       |  |       | 90    |       |  |   | 15    |       |  |   |       |       
|                        |                                    |      |       |       |  |      |       |       |  |       |       |       |  |   |       |       |  |   |        |       
|                        | Total contractual cash obligations |      | $     | 6,930 |  |      | $     | 7,028 |  |       | $     | 6,747 |  |   | $     | 5,762 |  |   | $      | 45,370 | 
|                        |                                    |      |       |       |  |      |       |       |  |       |       |       |  |   |       |       |  |   |        |       

|                             |                                    |      |       |       |  |      |   |      |  |       |   |   |  |   |   |   |  |   |       |       | 
|---------------------------- | ---------------------------------- | ---- | ----- | ----- |  | ---- | - | ---- |  | ----- | - | - |  | - | - | - |  | - | ----- | ----- | 
|                             |                                    |      |       |       |  |      |   |      |  | After
|Other Commercial Commitments |                                    | 2002 |       | 2003  |  | 2004 |   | 2005 |  | 2005 
|                             |                                    |      |       |       |  |      |   |      |  |      
|Standby letters of credit    |                                    | $    | 3,422 |       |  | $    |  |      |  | $     |  |   |  | $ |  |   |  | $ | 1,701 |      
|                             |                                    |      |       |       |  |      |   |      |  |       |   |   |  |   |   |   |  |   |       |      
|                             | Total contractual cash obligations |      | $     | 3,422 |  |      | $ | 0    |  |       | $ | 0 |  |   | $ | 0 |  |   | $     | 1,701 | 
|                             |                                    |      |       |       |  |      |   |      |  |       |   |   |  |   |   |   |  |   |       |      

As of December 31, 2001, there were no
balances drawn against the line of credit or standby letters of
credit.

We have commitments with our strategic alliance
partners, IBM and Accenture, whereby upon achieving certain
revenue targets we may be obligated to issue shares and to make
payments as outlined in footnotes 5 and 7 to the
consolidated financial statements.

Factors That May Impact Future Results of
Operations

An investment in our common stock involves a
high degree of risk. Investors evaluating us and our business
should carefully consider the factors described below and all
other information contained in this Annual Report on
Form 10-K before purchasing our common stock. Any of the
following factors could materially harm our business, operating
results and financial condition. Additional factors and
uncertainties not currently known to us or that we currently
consider immaterial could also harm our business, operating
results and financial condition. Investors could lose all or
part of their investment as a result of these factors.

IF WE DO NOT RESPOND ADEQUATELY TO OUR
INDUSTRYS RAPID PACE OF CHANGE, SALES OF OUR PRODUCTS MAY
DECLINE.

If we are unable to develop new software
solutions or enhancements to our existing products on a timely
and cost-effective basis, or if new products or enhancements do
not achieve market acceptance, our sales may decline. The life
cycles of our products are difficult to predict because the
market for our products is characterized by rapid technological
change and changing customer needs. The introduction of products
employing new technologies could render our existing products or
services obsolete and unmarketable.

26



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In developing new products and services, we may:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fail to respond to technological changes in a
	timely or cost-effective manner;                                                                                                                                
|
| |  | encounter products, capabilities or technologies
	developed by others that render our products and services
	obsolete or noncompetitive or that shorten the life cycles of
	our existing products and services;
|
| |  | experience difficulties that could delay or
	prevent the successful development, introduction and marketing
	of these new products and services; or                                                            
|
| |  | fail to achieve market acceptance of our products
	and services.                                                                                                                                               

WE EXPECT TO SIGNIFICANTLY INCREASE OUR OPERATING
EXPENSES, WHICH WILL IMPACT OUR PROFITABILITY.

We intend to significantly increase operating
expenses as we:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | increase research and development activities;                                            
|
| |  | increase services activities;                                                            
|
| |  | expand our distribution channels;                                                        
|
| |  | increase sales and marketing activities,
	including expanding our direct sales force; and
|
| |  | build our internal information technology system.                                        

We will incur expenses before we generate any
revenue from this increase in spending. If we do not
significantly increase revenue from these efforts, our business
and operating results could be seriously harmed.

COMPETITIVE PRESSURES COULD REDUCE OUR MARKET
SHARE OR REQUIRE US TO REDUCE OUR PRICES, WHICH WOULD REDUCE OUR
REVENUE AND/ OR OPERATING MARGINS.

The market for our software solutions is highly
competitive and subject to rapidly changing technology.
Competition could seriously impede our ability to sell
additional products and services on terms favorable to us.
Competitive pressures could reduce our market share or require
us to reduce prices, which would reduce our revenues and/or
operating margins. Many of our competitors have substantially
greater financial, marketing or other resources, and greater
name recognition than us. In addition, these companies may adopt
aggressive pricing policies that could compel us to reduce the
prices of our products and services in response. Our competitors
may also be able to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. Our
current and potential competitors may:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | develop and market new technologies that render
	our existing or future products obsolete, unmarketable or less
	competitive;                                                                                         
|
| |  | make strategic acquisitions or establish
	cooperative relationships among themselves or with other
	solution providers, which would increase the ability of their
	products to address the needs of our customers; and
|
| |  | establish or strengthen cooperative relationships
	with our current or future strategic partners, which would limit
	our ability to sell products through these channels.                                             

As a result, we may not be able to maintain a
competitive position against current or future competitors.

27



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##### 



IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT
AND RETAIN ADDITIONAL PERSONNEL, OUR ABILITY TO GROW OUR
BUSINESS COULD BE HARMED.

We believe that our future success will depend
upon our ability to attract and retain highly skilled personnel,
including Steve Ladwig, our chief executive officer and
president; John L. Goedert, our chief operating officer; Gregory
A. Effertz, our vice president, finance and administration and
chief financial officer and Jeremy Thomas, our chief technology
officer. We currently do not have any key-man life insurance
relating to key personnel, who are employees at-will and are not
subject to employment contracts. The loss of the services of any
one or more of these key persons could harm our ability to grow
our business.

We also must attract, integrate and retain
skilled sales, research and development, marketing and
management personnel. Competition for these types of employees
is intense, particularly in our industry. Failure to hire and
retain qualified personnel would harm our ability to grow the
business.

IF WE FAIL TO ESTABLISH, MAINTAIN AND EXPAND OUR
RELATIONSHIPS WITH THIRD PARTIES WHO IMPLEMENT OUR PRODUCTS, OUR
ABILITY TO MEET OUR CUSTOMERS NEEDS COULD BE HARMED.

We rely, and expect to continue to rely, on a
number of third parties to implement our software solutions at
customer sites. If we are unable to establish and maintain
effective, long-term relationships with these implementation
providers, or if these providers do not meet the needs or
expectations of our customers, our revenue will be reduced and
our customer relationships will be harmed. Our current
implementation partners are not contractually required to
continue to help implement our software solutions. If the number
of product implementations continues to increase, we will need
to develop new relationships with additional third-party
implementation providers to provide these services.

We may be unable to establish or maintain
relationships with third parties having sufficient qualified
personnel resources to provide the necessary implementation
services to support our needs. If third-party services are
unavailable, we will be required to provide these services
internally, which would significantly limit our ability to meet
customers implementation needs and would increase our
operating expenses and could reduce gross margins. A number of
our competitors have significantly more established
relationships with these third parties and, as a result, these
third parties maybe more likely to recommend competitors
products and services rather than our own. In addition, we
cannot control the level and quality of service provided by our
current and future implementation partners.

IF WE FAIL TO OBTAIN ACCESS TO THE INTELLECTUAL
PROPERTY OF THIRD PARTIES, OUR BUSINESS AND OPERATING RESULTS
COULD BE HARMED.

We must now, and may in the future have to,
license or otherwise obtain access to the intellectual property
of third parties, including HNC Software, MicroStrategy, IBM and
Oracle. Our business would be seriously harmed if the providers
from whom we license such software cease to deliver and support
reliable products or enhance their current products. In
addition, the third-party software may not continue to be
available to us on commercially reasonable terms or prices or at
all. Our inability to maintain or obtain this software could
result in shipment delays or reduced sales of our products.
Furthermore, we might be forced to limit the features available
in our current or future product offerings. Either alternative
could seriously harm business and operating results.

IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY
PROTECTED, OUR COMPETITORS MAY GAIN ACCESS TO OUR TECHNOLOGY AND
WE MAY LOSE CUSTOMERS.

We depend on our ability to develop and maintain
the proprietary aspects of our technology. To protect
proprietary technology, we rely primarily on a combination of
contractual provisions, confidentiality procedures, trade
secrets, and copyright and trademark laws. We seek to protect
our software,

28



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##### 



documentation and other written materials under
trade secret and copyright laws, which afford only limited
protection.


Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our
products or obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is
difficult and expensive, and while we are unable to determine
the extent to which piracy of its software products exists,
software piracy may be a problem. In addition, the laws of some
foreign countries do not protect our proprietary rights to the
same extent as do the laws of the United States. We intend to
vigorously protect intellectual property rights through
litigation and other means. However, such litigation can be
costly to prosecute and we cannot be certain that we will be
able to enforce our rights or prevent other parties from
developing similar technology, duplicating our products or
designing around our intellectual property.

IF, IN THE FUTURE, THIRD PARTIES CLAIM THAT OUR
PRODUCTS INFRINGE ON THEIR INTELLECTUAL PROPERTY, WE MAY INCUR
SIGNIFICANT COSTS.

There has been a substantial amount of litigation
in the software industry and the Internet industry regarding
intellectual property rights. It is possible that in the future
third parties may claim that our current or potential future
products infringe their intellectual property. We expect that
software product developers and providers of electronic commerce
solutions will increasingly be subject to infringement claims as
the number of products and competitors in our industry segment
grow and the functionality of products in different industry
segments overlap. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product
shipment delays or require us to enter into royalty or licensing
agreements. Royalty or licensing agreements, if required, may
not be available on terms acceptable to us or at all, which
could seriously harm our business.

FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS
COULD CAUSE OUR STOCK PRICE TO DECLINE.

Our quarterly operating results have fluctuated
in the past and are expected to continue to fluctuate in the
future. If our quarterly operating results fail to meet
analysts expectations, the trading price of our common
stock could decline. In addition, significant fluctuations in
our quarterly operating results may harm our business operations
by making it difficult to implement our budget and business
plan. Factors, many of which are outside of our control, which
could cause our operating results to fluctuate include:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | the size and timing of customer orders, which can
	be affected by customer budgeting and purchasing cycles;   
|
| |  | the demand for and market acceptance of our
	software solutions;                                              
|
| |  | competitors announcements or introductions
	of new software solutions, services or technological innovations;
|
| |  | our ability to develop, introduce and market new
	products on a timely basis;                                 
|
| |  | customer deferral of material orders in
	anticipation of new releases or new product introductions;           
|
| |  | our success in expanding our sales and marketing
	programs;                                                   
|
| |  | technological changes or problems in computer
	systems; and                                                   
|
| |  | general economic conditions which may affect our
	customers capital investment levels.                       

Additionally, our reporting period operating
results would be impacted if our customers did not purchase
technical advisory support with our software solutions. Since we
sell solutions with technical advisory support, revenues are
recognized ratably over the advisory period, if all other
revenue recognition criteria are met. Without the advisory
services, revenues would be recognized when we execute the
license agreement or contract; deliver the software; determine
that collections of the proceeds is probable; and VSOE exists to
allocate revenue to undelivered elements of the arrangement.
Using these criteria, rather

29



---



##### 



than our current revenue recognition policy with
advisory services, could materially impact period over period
results in our consolidated financial statements.


In addition, we have incurred, and will continue
to incur, compensation expense in connection with our grants of
options under our 1999 Equity Incentive Plan, our HighTouch
Technologies, Inc. 1999 Stock Option Plan and our 1999 Directors
Stock Option Plan. This expense will be amortized over the
vesting period of these granted options, which is generally four
years, resulting in lower quarterly income.

Our quarterly expense levels are relatively fixed
and are based, in part, on expectations as to future revenue. As
a result, if revenue levels fall below our expectations, net
income will decrease because only a small portion of our
expenses vary with our revenue.

OUR BUSINESS IS SUBJECT TO ECONOMIC, POLITICAL
AND OTHER RISKS 
 ASSOCIATED WITH INTERNATIONAL SALES.

Since we sell products worldwide, our business is
subject to risks associated with doing business internationally.
To the extent that our sales are denominated in foreign
currencies, the revenue we receive could be subject to
fluctuations in currency exchange rates. If the effective price
of the products we sell to our customers were to increase due to
fluctuations in foreign currency exchange rates, demand for our
technology could fall, which would, in turn, reduce our revenue.
We have not historically attempted to mitigate the effect that
currency fluctuations may have on our revenue through use of
hedging instruments, and we do not currently intend to do so in
the future.

We anticipate that revenue from international
operations will continue to represent a substantial portion of
our total revenue. Accordingly, our future results could be
harmed by a variety of factors, including:



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | changes in foreign currency exchange rates;                                                                      
|
| |  | greater risk of uncollectable accounts;                                                                          
|
| |  | changes in a specific countrys or
	regions political or economic conditions, particularly in
	emerging markets;
|
| |  | trade protection measures and import or export
	licensing requirements;                                          
|
| |  | potentially negative consequences from changes in
	tax laws;                                                     
|
| |  | difficulty in staffing and managing widespread
	operations;                                                      
|
| |  | international variations in technology standards;                                                                
|
| |  | differing levels of protection of intellectual
	property; and                                                    
|
| |  | unexpected changes in regulatory requirements.                                                                   

ERRORS AND DEFECTS IN OUR PRODUCTS COULD RESULT
IN SIGNIFICANT COSTS TO US AND COULD IMPAIR OUR ABILITY TO SELL
OUR PRODUCTS.

Our products are complex and, accordingly, may
contain undetected errors or failures when we first introduce
them or as we release new versions. This may result in loss of,
or delay in, market acceptance of our products and could cause
us to incur significant costs to correct errors or failures or
to pay damages suffered by customers as a result of such errors
or failures. In the past, we have discovered software errors in
new releases and new products after their introduction. We have
incurred costs during the period required to correct these
errors, although to date such costs, including costs incurred on
specific contracts, have not been material. We may in the future
discover errors in new releases or new products after the
commencement of commercial shipments.

30



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WE ARE SUBJECT TO CONTRACTUAL LIMITATIONS THAT
COULD LIMIT THE 
 CONDUCT OF OUR BUSINESS AND OUR ABILITY TO PURSUE OUR BUSINESS
OBJECTIVES.

Our ability to enter into any acquisition of a
business or assets or any merger, reorganization or other
business combination transaction may be limited until
September 29, 2002, and possibly longer, pursuant to the
terms of a separation agreement between HNC Software, Inc. and
us. In addition, our ability to issue common stock in connection
with acquisitions, offerings or otherwise will be limited until
September 29, 2002, and possibly longer.

Recent Accounting Pronouncements

In January 2002, the Emerging Issues Task Force
(EITF) issued EITF No. 01-14, Income Statement
Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred (formerly
EITF Abstracts, Topic No. D-103). This EITF requires
that reimbursements received for out-of-pocket expenses incurred
should be characterized as revenue in the income statement as
opposed to a reduction of expenses incurred. These out-of-pocket
expenses may include airfare, mileage, hotel stays and
out-of-town meals that the customer will reimburse the service
provider. The EITF is effective for financial reporting periods
beginning after December 15, 2001. We do not expect the
EITF No. 01-14 to have a material impact on our financial
position and results of operations.

In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141,
Business Combinations, which addresses accounting and financial
reporting for business combinations. This statement was
effective for business combinations completed after
June 30, 2001, and had no impact on our financial
statements.

In June 2001, the FASB issued SFAS
No. 142, Goodwill and Other Intangible Assets, which
addresses accounting and financial reporting for goodwill and
intangible assets. Under this new statement, goodwill and
intangible assets with indefinite lives are no longer amortized,
but are subject to impairment testing on at least an annual
basis. This statement is effective in its entirety for us on
January 1, 2002. As of December 31, 2001, the net book
value of our goodwill was $13.5 million, and goodwill
amortization expense for 2001 was $4.4 million 2001 and we
would have recorded approximately $4.4 million of
amortization during 2002.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of and supersedes SFAS
No. 121 and APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. SFAS
No. 144 is effective for fiscal years beginning after
December 15, 2001. We do not expect the adoption of SFAS
No. 144 to have a material impact on our financial position
and results of operations.

Item 7A:     Qualitative
and Quantitative Disclosures About Market Risk

The following discusses our exposure to market
risk related to changes in interest rates, foreign currency
exchange rates and equity prices.

Interest Rate Risk

The fair value of our cash, cash equivalents, and
investments available for sale at December 31, 2001 was
$85.6 million. The objectives of our investment policy are
safety and preservation of invested funds and liquidity of
investments that is sufficient to meet cash flow requirements.
Our policy is to place our cash, cash equivalents and
investments available for sale with high credit quality
financial institutions and commercial companies and government
agencies in order to limit the amount of credit exposure. It is
also our policy to maintain certain concentration limits and to
invest only in certain allowable securities as
determined by our management. Our investment policy also
provides that our investment portfolio must not have an average
portfolio maturity of beyond one year. Investments are
prohibited in certain industries

31



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##### 



and speculative activities. Investments must be
denominated in U.S. dollars. An increase in market interest
rates would not materially affect our financial results as our
$0.2 million in notes payable are at a fixed interest rate.


|                      |  |                        |     |      |  |      |     |      |  |       |     |            |  |   |     |   |  |   |     |   |  |   |     | 
|--------------------- |  | ---------------------- | --- | ---- |  | ---- | --- | ---- |  | ----- | --- | ---------- |  | - | --- | - |  | - | --- | - |  | - | --- | 
|                      |  |                       
|                      |  | Expected Maturity Date
|                      |  |                       
|December 31, 2001     |  | 2002                   |     | 2003 |  | 2004 |     | 2005 |  | Total |     | Fair Value
|                      |  |                        |     |      |  |      |     |      |  |       |     |           
|                      |  |                       
|                      |  | (US$ in thousands)    
|Liabilities:          |  |                        |     |      |  |      |     |      |  |       |     |            |  |   |     |   |  |   |     |   |  |   |     | 
|Long Term Debt        |  | $                      | 90  |      |  | $    | 90  |      |  | $     | 90  |            |  | $ | 15  |   |  | $ | 285 |   |  | $ | 236 | 
|Average Interest Rate |  |                        | 7.0 | %    |  |      | 7.0 | %    |  |       | 7.0 | %          |  |   | 7.0 | % |  |   | 7.0 | % |  |   |     | 

Foreign Currency Exchange Rate Risk

We develop products in the United States and sell
in North America, Asia and Europe. As a result, our financial
results could be affected by various factors, including changes
in foreign currency exchange rates or weak economic conditions
in foreign markets. Our foreign currency risks are mitigated
principally by contracting primarily in U.S. dollars and
maintaining only nominal foreign currency cash balances. Working
funds necessary to facilitate the short-term operations of our
subsidiaries are kept in local currencies in which they do
business, with excess funds transferred to our offices in the
United States. Approximately 28%, 9%, and 14% of our total sales
were denominated in currencies other than the U.S. dollar in
2001, 2000 and 1999, respectively.

Equity Price Risk

We own several investments in the common stock of
certain companies that we have entered into for strategic
business purposes. As of December 31, 2001 our total
investments of this type were $4.4 million. We mitigate
risk of loss by monitoring our investments, however, many of
these investments are in the common stock of privately held,
non-public companies and thus we may be unable to sell or
achieve liquidity in those them prior to an adverse change in
their values.

Impact of European Monetary
Conversion

We are aware of the issues associated with the
changes in Europe resulting from the formation of a European
economic and monetary union, or EMU. One change resulting from
this union required EMU member states to irrevocably fix their
respective currencies to a new currency, the euro, as of
January 1, 1999, at which date the euro became a functional
legal currency of these countries. Through December 31,
2002, business in the EMU member states will be conducted in
both the existing national currencies, such as the French franc
or the Deutsche mark, and the euro. As a result, companies
operating or conducting business in EMU member states need to
ensure that their financial and other software systems are
capable of processing transactions and properly handling these
currencies, including the euro. We have assessed the impact that
conversion to the euro will have on our internal systems, the
sale of its solutions and the European and global economies and
do not expect it to have a material impact on our financial
statements.

Item 8:     Financial
Statements and Supplementary Data

The financial statements required pursuant to
this item are included in Item 14 of this Annual Report on
Form 10-K and are presented beginning on page 34.

Item 9:     Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure

There were no disagreements on any matter of
accounting principles, financial statement disclosure, or
auditing scope or procedure to be reported under this item.

32



---



##### 



PART III

Item 10.     Directors
and Executive Officers of the Registrant

Certain information required by this item is
incorporated by reference from the information contained in our
Proxy Statement for the Annual Meeting of Shareholders expected
to be filed with the Securities and Exchange Commission on
April 29, 2002, under the captions Election of
Directors, Executive Officers and
Section 16(a) Beneficial Ownership Reporting
Compliance. Certain information regarding our executive
officers is included in Part I of this Annual Report on
Form 10-K under the caption Executive Officers.

Item 11.     Executive
Compensation

The information required by this item is
incorporated by reference from the information contained in our
Proxy Statement for the Annual Meeting of Shareholders expected
to be filed with the Securities and Exchange Commission on
April 29, 2002, under the caption Executive
Compensation.

Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this item is
incorporated by reference from the information contained in our
Proxy Statement for the Annual Meeting of Shareholders expected
to be filed with the Securities and Exchange Commission on
April 29, 2002, under the caption Security Ownership
of Certain Beneficial Owners and Management.

Item 13.     Certain
Relationships and Related Transactions

The information required by this item is
incorporated by reference from the information contained in our
Proxy Statement for the Annual Meeting of Shareholders expected
to be filed with the Commission on April 29, 2002, under
the caption Certain Transactions.

33



---



##### 



PART IV

Item 14:     Exhibits,
Financial Statement Schedules and Reports on
Form 8-K

(a) Documents filed as part of this
Annual Report

1. Financial Statements. The
following consolidated financial statements, and the related
notes thereto, of us and the Report of Independent Accountants
are filed as a part of this Annual Report on Form 10-K.

|                                                                                                      |  |        |    | 
|----------------------------------------------------------------------------------------------------- |  | ------ | -- | 
|                                                                                                      |  | Page  
|                                                                                                      |  | Number
|                                                                                                      |  |       
|Retek Inc.:                                                                                           |  |        |    | 
|Report of Independent Accountants                                                                     |  |        | 35 | 
|Consolidated Balance Sheets as of
	December 31, 2001 and 2000                                         |  |        | 36 | 
|Consolidated Statements of Operations as of
	December 31, 2001, 2000 and 1999                         |  |        | 37 | 
|Consolidated Statements of Cash Flows for the
	years ended December 31, 2001, 2000 and 1999           |  |        | 38 | 
|Consolidated Statements of Stockholders
	Equity for the years ended December 31, 2001, 2000 and 1999 |  |        | 39 | 
|Notes to Consolidated Financial Statements                                                            |  |        | 40 | 

2. Financial Statement Schedules.Schedules not listed below have been omitted because they
are not applicable or are not required or the information
required to be set forth in those schedules is included in the
financial statements or related notes.

|                                                                                                       |  |  |    | 
|------------------------------------------------------------------------------------------------------ |  |  | -- | 
|                                                                                                       |  | 
|Schedule II  Valuation and
	Qualifying Accounts for the years ended December 31, 2001,
	2000 and 1999 |  |  | 59 | 

3. Exhibits.The exhibits filed in
response to Item 601 of Regulation S-K are listed in the
Index to Exhibits.

(b) Reports on Form 8-K

We filed a report on Form 8-K (Item 5)
on May 31, 2001 announcing establishment of a strategic
relationship with Accenture LLP to develop predictive
applications and our issuing 976,000 shares of our common
stock to Proquire LLC, an affiliate of Accenture LLP, in
exchange for the license of certain intellectual property. We
plan to issue Accenture additional warrants if certain revenue
milestones are reached in fiscal years 2002, 2003, 2004 and 2005.

34



---



##### 



Report of Independent Accountants

To the Board of Directors and Stockholders of

Retek Inc.


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 14(a)(1) on page 34, present fairly, in all
material respects, the financial position of Retek Inc. (the
Company) and its subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. In addition,
in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 34
presents fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota


January 21, 2002


35



---



##### 



Retek Inc.

Consolidated Balance Sheet

(in thousands, except per share
data)


|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |         |         | 
|----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                      |                                                                                                                                                                 |                           
|                                                      |                                                                                                                                                                 | December 31,              
|                                                      |                                                                                                                                                                 |                           
|                                                      |                                                                                                                                                                 | 2001                       |         | 2000   
|                                                      |                                                                                                                                                                 |                            |         |        
|ASSETS                                               
|Current assets:                                       |                                                                                                                                                                 |                            |         |         |         |   |         |        
|                                                      | Cash and cash equivalents                                                                                                                                       |                            | $       | 70,166  |         |   | $       | 31,058  |        
|                                                      | Investments                                                                                                                                                     |                            |         | 13,408  |         |   |         | 14,664  |        
|                                                      | Accounts receivable, net                                                                                                                                        |                            |         | 41,409  |         |   |         | 27,972  |        
|                                                      | Deferred income taxes                                                                                                                                           |                            |         | 22,349  |         |   |         | 11,623  |        
|                                                      | Other current assets                                                                                                                                            |                            |         | 7,661   |         |   |         | 11,190  |        
|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |        
|                                                      |                                                                                                                                                                 | Total current assets       |         |         | 154,993 |   |         |         | 96,507  | 
|Investments                                           |                                                                                                                                                                 |                            | 2,043   |         |         |   | 6,053   |        
|Deferred income taxes                                 |                                                                                                                                                                 |                            | 51,878  |         |         |   | 38,195  |        
|Property and equipment, net                           |                                                                                                                                                                 |                            | 29,641  |         |         |   | 26,249  |        
|Intangible assets, net                                |                                                                                                                                                                 |                            | 56,235  |         |         |   | 28,094  |        
|Other assets                                          |                                                                                                                                                                 |                            | 4,580   |         |         |   | 85      |        
|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |        
|                                                      |                                                                                                                                                                 |                            | $       | 299,370 |         |   | $       | 195,183 |        
|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |        
|LIABILITIES AND STOCKHOLDERS
	EQUITY                
|Current liabilities:                                  |                                                                                                                                                                 |                            |         |         |         |   |         |        
|                                                      | Accounts payable                                                                                                                                                |                            | $       | 10,735  |         |   | $       | 11,089  |        
|                                                      | Accrued liabilities                                                                                                                                             |                            |         | 14,167  |         |   |         | 6,022   |        
|                                                      | Deferred revenue                                                                                                                                                |                            |         | 70,709  |         |   |         | 44,129  |        
|                                                      | Note payable, current portion                                                                                                                                   |                            |         | 73      |         |   |         | 198     |        
|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |        
|                                                      |                                                                                                                                                                 | Total current liabilities  |         |         | 95,684  |   |         |         | 61,438  | 
|Note payable, net of current portion                  |                                                                                                                                                                 |                            | 163     |         |         |   | 255     |        
|Deferred revenue, net of current portion              |                                                                                                                                                                 |                            |        |         |         |   | 8,895   |        
|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |        
|                                                      |                                                                                                                                                                 | Total liabilities          |         |         | 95,847  |   |         |         | 70,588  | 
|Commitments and Contingencies (Notes 3, 5, 7
	and 16) |                                                                                                                                                                 |                            |         |         |         |   |         |        
|Stockholders equity:                                 |                                                                                                                                                                 |                            |         |         |         |   |         |        
|                                                      | Preferred stock, $0.01 par value 
	5,000 shares authorized; no shares issued and outstanding                                                                   |                            |         |        |         |   |         |        |        
|                                                      | Common stock, $0.01 par value  150,000
	shares authorized, 51,739 shares and 48,163 shares issued and
	outstanding at December 31, 2001 and 2000, respectively |                            |         | 518     |         |   |         | 482     |        
|Paid-in capital                                       |                                                                                                                                                                 |                            | 262,021 |         |         |   | 173,892 |        
|Deferred stock-based compensation                     |                                                                                                                                                                 |                            | (4,756  | )       |         |   | (9,705  | )      
|Accumulated other comprehensive loss                  |                                                                                                                                                                 |                            | (1,026  | )       |         |   | (1,150  | )      
|Accumulated deficit                                   |                                                                                                                                                                 |                            | (53,234 | )       |         |   | (38,924 | )      
|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |        
|                                                      |                                                                                                                                                                 | Total stockholders equity |         |         | 203,523 |   |         |         | 124,595 | 
|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |        
|Total liabilities and stockholders equity            |                                                                                                                                                                 | $                          | 299,370 |         |         | $ | 195,183 |        
|                                                      |                                                                                                                                                                 |                            |         |         |         |   |         |        



See accompanying notes to consolidated financial
statements.


36



---



##### 



Retek Inc.

Consolidated Statements of
Operations

(in thousands, except per share
data)


|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |        |        | 
|-------------------------------------------------------------------------------------- | ------------------------------------------------ | --------------------------------------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                                                                                       |                                                  |                                              
|                                                                                       |                                                  | Year Ended December 31,                      
|                                                                                       |                                                  |                                              
|                                                                                       |                                                  | 2001                                          |         | 2000    |         | 1999
|                                                                                       |                                                  |                                               |         |         |         |     
|Revenue:                                                                               |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       | License and maintenance                          |                                               | $       | 131,682 |         |      | $       | 57,729  |         |   | $      | 45,965 |       
|                                                                                       | Services and other                               |                                               |         | 47,792  |         |      |         | 34,228  |         |   |        | 23,194 |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Total revenue                                 |         |         | 179,474 |      |         |         | 91,957  |   |        |        | 69,159 | 
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|Cost of revenue:                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       | License and maintenance                          |                                               |         | 35,277  |         |      |         | 23,323  |         |   |        | 5,950  |       
|                                                                                       | Non-cash cost of license and maintenance revenue |                                               |         | 3,724   |         |      |         | 3,664   |         |   |        | 1,095  |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Total cost of license and maintenance revenue |         |         | 39,001  |      |         |         | 26,987  |   |        |        | 7,045  | 
|                                                                                       | Services and other                               |                                               |         | 34,978  |         |      |         | 24,889  |         |   |        | 16,625 |       
|                                                                                       | Non-cash cost of services and other revenue      |                                               |         | 1,046   |         |      |         | 1,869   |         |   |        | 323    |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Total cost of services and other revenue      |         |         | 36,024  |      |         |         | 26,758  |   |        |        | 16,948 | 
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Total cost of revenue                         |         |         | 75,025  |      |         |         | 53,745  |   |        |        | 23,993 | 
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Gross profit                                  |         |         | 104,449 |      |         |         | 38,212  |   |        |        | 45,166 | 
|Operating expenses:                                                                    |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       | Research and development                         |                                               |         | 40,261  |         |      |         | 37,784  |         |   |        | 22,612 |       
|                                                                                       | Non-cash research and development expense        |                                               |         | 2,289   |         |      |         | 4,989   |         |   |        | 422    |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Total research and development expense        |         |         | 42,550  |      |         |         | 42,773  |   |        |        | 23,034 | 
|                                                                                       | Sales and marketing                              |                                               |         | 52,337  |         |      |         | 38,561  |         |   |        | 19,625 |       
|                                                                                       | Non-cash sales and marketing expense             |                                               |         | 1,025   |         |      |         | 2,469   |         |   |        | 943    |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Total sales and marketing expense             |         |         | 53,362  |      |         |         | 41,030  |   |        |        | 20,568 | 
|                                                                                       | General and administrative                       |                                               |         | 20,420  |         |      |         | 10,788  |         |   |        | 6,257  |       
|                                                                                       | Non-cash general and administrative expense      |                                               |         | 597     |         |      |         | 1,018   |         |   |        | 174    |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Total general and administrative expense      |         |         | 21,017  |      |         |         | 11,806  |   |        |        | 6,431  | 
|                                                                                       | Acquired in-process research and development     |                                               |         |        |         |      |         | 4,000   |         |   |        | 1,480  |       
|                                                                                       | Acquisition related amortization of intangibles  |                                               |         | 10,839  |         |      |         | 4,201   |         |   |        | 749    |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       |                                                  | Total operating expenses                      |         |         | 127,768 |      |         |         | 103,810 |   |        |        | 52,262 | 
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|Operating loss                                                                         |                                                  |                                               | (23,319 | )       |         |      | (65,598 | )       |         |   | (7,096 | )     
|Other income, net                                                                      |                                                  |                                               | 1,828   |         |         |      | 1,711   |         |         |   | 30     |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       | Loss before income tax benefit                   |                                               |         | (21,491 | )       |      |         | (63,887 | )       |   |        | (7,066 | )     
|Income tax benefit                                                                     |                                                  |                                               | (7,181  | )       |         |      | (20,982 | )       |         |   | (1,697 | )     
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|                                                                                       | Net loss                                         |                                               | $       | (14,310 | )       |      | $       | (42,905 | )       |   | $      | (5,369 | )     
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|Basic and diluted net loss per common share                                            |                                                  | $                                             | (0.29   | )       |         | $    | (0.91   | )       |         | $ | (0.13  | )     
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       
|Weighted average shares used in computing basic
	and diluted net loss per common share |                                                  |                                               | 49,925  |         |         |      | 47,232  |         |         |   | 40,779 |       
|                                                                                       |                                                  |                                               |         |         |         |      |         |         |         |   |        |       

See accompanying notes to consolidated financial
statements.

37



---



##### 



Retek Inc.

Consolidated Statements of Cash
Flows

(in thousands)


|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |         |        |         |  
|--------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------- | ---------------------------------------------------- | ------- | ------- | ------- | - | ------- | ------ | ------- | - | ------- | ------ | ------- | -
|                                                          |                                                                                  |                        
|                                                          |                                                                                  | Year Ended December 31,
|                                                          |                                                                                  |                        
|                                                          |                                                                                  | 2001                    |                                                      | 2000    |         | 1999   
|                                                          |                                                                                  |                         |                                                      |         |         |        
|Cash flows from operating
	activities:                    |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Net loss                                                                         |                         | $                                                    | (14,310 | )       |         | $ | (42,905 | )      |         | $ | (5,369  | )     
|                                                          | Adjustments to reconcile net loss to net cash
	provided by operating activities: |                         |                                                      |         |         |         |   |         |        |         |   |         |       
|                                                          | Provision for doubtful accounts                                                  |                         |                                                      | 2,808   |         |         |   | 1,483   |        |         |   | 2,399   |       
|                                                          | Depreciation and amortization expense                                            |                         |                                                      | 28,555  |         |         |   | 13,640  |        |         |   | 4,505   |       
|                                                          | Amortization of stock-based compensation                                         |                         |                                                      | 5,344   |         |         |   | 10,929  |        |         |   | 1,908   |       
|                                                          | Acquired in-process research and development                                     |                         |                                                      |        |         |         |   | 4,000   |        |         |   | 1,480   |       
|                                                          | Deferred income tax benefit                                                      |                         |                                                      | (24,409 | )       |         |   | (31,599 | )      |         |   | (2,079  | )     
|                                                          | Tax benefit from stock option transactions                                       |                         |                                                      | 16,371  |         |         |   | 7,463   |        |         |   | 4,248   |       
|                                                          | Lease abandonment                                                                |                         |                                                      | 5,253   |         |         |   |        |        |         |   |        |       
|                                                          | Asset impairment                                                                 |                         |                                                      | 1,289   |         |         |   |        |        |         |   |        |       
|                                                          | Changes in assets and liabilities, excluding
	impact of acquisitions:            |                         |                                                      |         |         |         |   |         |        |         |   |         |       
|                                                          |                                                                                  | Accounts receivable     |                                                      |         | (16,554 | )       |   |         | (4,951 | )       |   |         | (4,987 | )      
|                                                          |                                                                                  | Other assets            |                                                      |         | 3,419   |         |   |         | (5,637 | )       |   |         | (7,272 | )      
|                                                          |                                                                                  | Accounts payable        |                                                      |         | (354    | )       |   |         | 4,474  |         |   |         | 2,633  |        
|                                                          |                                                                                  | Accrued liabilities     |                                                      |         | 2,471   |         |   |         | 2,992  |         |   |         | 44     |        
|                                                          |                                                                                  | Deferred revenue        |                                                      |         | 13,705  |         |   |         | 46,530 |         |   |         | 2,642  |        
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          |                                                                                  |                         | Net cash provided by operating activities            |         |         | 23,588  |   |         |        | 6,419   |   |         |        | 152     |  
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|Cash flows from investing
	activities:                    |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Cash purchased in business acquisition                                           |                         |                                                      |        |         |         |   | 166     |        |         |   | 235     |       
|                                                          | Cash paid for business acquisition                                               |                         |                                                      |        |         |         |   | (18,694 | )      |         |   | (5,333  | )     
|                                                          | Purchases of investments for sale                                                |                         |                                                      | (9,290  | )       |         |   | (20,717 | )      |         |   |        |       
|                                                          | Sales of investments                                                             |                         |                                                      | 14,612  |         |         |   |        |        |         |   |        |       
|                                                          | Acquisitions of property and equipment                                           |                         |                                                      | (18,638 | )       |         |   | (14,001 | )      |         |   | (5,741  | )     
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          |                                                                                  |                         | Net cash used in investing activities                |         |         | (13,316 | ) |         |        | (53,246 | ) |         |        | (10,839 | )
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|Cash flows from financing
	activities:                    |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Net proceeds from the issuance of common stock                                   |                         |                                                      | 28,676  |         |         |   | 11,246  |        |         |   | 84,899  |       
|                                                          | Repayment of debt                                                                |                         |                                                      | (217    | )       |         |   | (1,491  | )      |         |   |        |       
|                                                          | Borrowings from HNC Software Inc.                                                |                         |                                                      |        |         |         |   | 598     |        |         |   | 56,864  |       
|                                                          | Repayments to HNC Software Inc.                                                  |                         |                                                      |        |         |         |   | (15,399 | )      |         |   | (47,409 | )     
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          |                                                                                  |                         | Net cash provided by (used in) financing
	activities |         |         | 28,459  |   |         |        | (5,046  | ) |         |        | 94,354  |  
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Effect of exchange rate changes on cash                                          |                         |                                                      | 377     |         |         |   | (749    | )      |         |   | (402    | )     
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Net increase (decrease) in cash and cash
	equivalents                            |                         |                                                      | 39,108  |         |         |   | (52,622 | )      |         |   | 83,265  |       
|                                                          | Cash and cash equivalents at beginning of period                                 |                         |                                                      | 31,058  |         |         |   | 83,680  |        |         |   | 415     |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Cash and cash equivalents at end of period                                       |                         | $                                                    | 70,166  |         |         | $ | 31,058  |        |         | $ | 83,680  |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|Significant non-cash investing and financing
	activities: |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Business acquisition through issuance of Retek
	Inc. common stock                |                         | $                                                    |        |         |         | $ | 7,503   |        |         | $ |        |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Acquisition of property and equipment under
	capital leases                      |                         | $                                                    |        |         |         | $ | 10,200  |        |         | $ |        |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Business acquisition through issuance of
	convertible note                       |                         | $                                                    |        |         |         | $ |        |        |         | $ | 2,667   |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Minority investment through issuance of warrants                                 |                         | $                                                    | 12,505  |         |         | $ |        |        |         | $ |        |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Acquisition of intellectual property through
	issuance of common stock           |                         | $                                                    | 30,198  |         |         | $ |        |        |         |   |        |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|Supplemental cash flow disclosure:                        |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Interest paid                                                                    |                         | $                                                    | 17      |         |         | $ | 843     |        |         | $ |        |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        
|                                                          | Income taxes paid                                                                |                         | $                                                    | 870     |         |         | $ | 1,123   |        |         | $ | 176     |       
|                                                          |                                                                                  |                         |                                                      |         |         |         |   |         |        |         |   |        

See accompanying notes to consolidated financial
statements.

38



---



##### 



Retek Inc.

Consolidated Statements of Changes in
Stockholders Equity

and Comprehensive Loss


(in thousands)


|                                                                       |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------ | ------ | ------- |  | ----------- | --- | ------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ---- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                       |  |              |        |         |  |             |     | Accumulated   |  |               |         |               |  |              
|                                                                       |  | Common stock |        |         |  | Deferred    |     | other         |  |               |         | Total         |  |              
|                                                                       |  |              |        | Paid-in |  | stock-based |     | comprehensive |  | Retained      |         | stockholders |  | Comprehensive
|                                                                       |  | Shares       |        | Amount  |  | capital     |     | compensation  |  | income (loss) |         | earnings      |  | equity        |         | loss
|                                                                       |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |     
|Balance at December 31, 1998                                           |  |              | 1      |         |  |             |    |               |  |               | 26,854  |               |  |               |        |      |  |   | (188   | ) |  |   | 9,350   |   |  |   | 36,016  |   |  |   |         |  
|Tax benefit from HNC Software Inc. stock options                       |  |              |        |         |  |             |     |               |  |               | 4,248   |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 4,248   |   |  |   |         |  
|Issuance of common stock, net of issuance costs
	of $1.05              |  |              | 46,325 |         |  |             | 463 |               |  |               | 84,436  |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 84,899  |   |  |   |         |  
|Deferred stock-based compensation                                      |  |              |        |         |  |             |     |               |  |               | 21,886  |               |  |               | (21,886 | )    |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Amortization of stock-based compensation                               |  |              |        |         |  |             |     |               |  |               |         |               |  |               | 1,908   |      |  |   |        |   |  |   |         |   |  |   | 1,908   |   |  |   |         |  
|Conversion of note payable to common stock                             |  |              | 177    |         |  |             | 2   |               |  |               | 2,665   |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 2,667   |   |  |   |         |  
|Foreign currency translation adjustment                                |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   | (394   | ) |  |   |         |   |  |   | (394    | ) |  |   | (394    | )
|Net loss                                                               |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   | (5,369  | ) |  |   | (5,369  | ) |  |   | (5,369  | )
|                                                                       |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 1999                                           |  |              | 46,503 |         |  | $           | 465 |               |  | $             | 140,089 |               |  | $             | (19,978 | )    |  | $ | (582   | ) |  | $ | 3,981   |   |  | $ | 123,975 |   |  | $ | (5,763  | )
|                                                                       |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Tax benefit from HNC Software Inc. stock options                       |  |              |        |         |  |             |     |               |  |               | 7,463   |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 7,463   |   |  |   |         |  
|Common stock issuance costs                                            |  |              |        |         |  |             |     |               |  |               | (287    | )             |  |               |         |      |  |   |        |   |  |   |         |   |  |   | (287    | ) |  |   |         |  
|Common stock issued under Employee Stock Purchase
	Plan                |  |              | 612    |         |  |             | 6   |               |  |               | 7,939   |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 7,945   |   |  |   |         |  
|Common stock and stock options issued for
	acquisition of HighTouch    |  |              | 389    |         |  |             | 4   |               |  |               | 7,499   |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 7,503   |   |  |   |         |  
|Common stock issued                                                    |  |              | 300    |         |  |             | 3   |               |  |               | 10,197  |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 10,200  |   |  |   |         |  
|Common stock options exercised                                         |  |              | 359    |         |  |             | 4   |               |  |               | 3,584   |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 3,588   |   |  |   |         |  
|Equity adjustments relating to HNC spin-off                            |  |              |        |         |  |             |     |               |  |               | (3,248  | )             |  |               |         |      |  |   |        |   |  |   |         |   |  |   | (3,248  | ) |  |   |         |  
|Deferred stock-based compensation                                      |  |              |        |         |  |             |     |               |  |               | 656     |               |  |               | (656    | )    |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Amortization of stock-based compensation                               |  |              |        |         |  |             |     |               |  |               |         |               |  |               | 10,929  |      |  |   |        |   |  |   |         |   |  |   | 10,929  |   |  |   |         |  
|Unrealized gain on investments                                         |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   | 60     |   |  |   |         |   |  |   | 60      |   |  |   | 60      |  
|Foreign currency translation adjustment                                |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   | (628   | ) |  |   |         |   |  |   | (628    | ) |  |   | (628    | )
|Net loss                                                               |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   | (42,905 | ) |  |   | (42,905 | ) |  |   | (42,905 | )
|                                                                       |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                           |  |              | 48,163 |         |  | $           | 482 |               |  | $             | 173,892 |               |  | $             | (9,705  | )    |  | $ | (1,150 | ) |  | $ | (38,924 | ) |  | $ | 124,595 |   |  | $ | (43,473 | )
|                                                                       |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Tax benefit from stock options                                         |  |              |        |         |  |             |     |               |  |               | 16,371  |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 16,371  |   |  |   |         |  
|Common stock issued under Employee Stock Purchase
	Plan                |  |              | 388    |         |  |             | 4   |               |  |               | 5,323   |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 5,327   |   |  |   |         |  
|Common stock options exercised                                         |  |              | 2,212  |         |  |             | 22  |               |  |               | 23,347  |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 23,369  |   |  |   |         |  
|Acquisition of intellectual property through
	issuance of common stock |  |              | 976    |         |  |             | 10  |               |  |               | 30,188  |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 30,198  |   |  |   |         |  
|Deferred stock-based compensation                                      |  |              |        |         |  |             |     |               |  |               | 395     |               |  |               | (395    | )    |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Minority investment through issuance of warrants                       |  |              |        |         |  |             |     |               |  |               | 12,505  |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   | 12,505  |   |  |   |         |  
|Amortization of stock-based compensation                               |  |              |        |         |  |             |     |               |  |               |         |               |  |               | 5,344   |      |  |   |        |   |  |   |         |   |  |   | 5,344   |   |  |   |         |  
|Unrealized gain on investments                                         |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   | 55     |   |  |   |         |   |  |   | 55      |   |  |   | 55      |  
|Foreign currency translation adjustment                                |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   | 69     |   |  |   |         |   |  |   | 69      |   |  |   | 69      |  
|Net loss                                                               |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   | (14,310 | ) |  |   | (14,310 | ) |  |   | (14,310 | )
|                                                                       |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                           |  |              | 51,739 |         |  | $           | 518 |               |  | $             | 262,021 |               |  | $             | (4,756  | )    |  | $ | (1,026 | ) |  | $ | (53,234 | ) |  | $ | 203,523 |   |  | $ | (14,186 | )
|                                                                       |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |         |   |  |   |         |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

39



---



##### 



Retek Inc.

Notes to Consolidated Financial
Statements

(in thousands, except for per share
amounts)


Note 1  The Company and its
Significant Accounting Policies

The Company

Retek Inc. and its wholly owned subsidiaries,
Retek Information Systems, Inc., WebTrak Limited and HighTouch
Technologies, Inc. (we us or the
Company), develop application software that provides
a complete information infrastructure solution to the global
retail industry. Our offerings include traditional merchandising
capabilities such as inventory management and purchasing;
logistics capabilities including warehouse and distribution
management; enhanced supply chain solutions such as forecasting,
planning, and supply chain visibility; and customer relationship
and order management applications. We also provide
Internet-enabled business-to-business commerce applications that
offer collaborative capabilities enabling retailers and their
trading partners to interact in real-time on a wide variety of
tasks. Many of our products incorporate proprietary
neural-network predictive technology that enhances the
usefulness, accuracy, and adaptability of our applications
enabling better decision-making by retailers. We are
headquartered in Minneapolis, Minnesota.

On November 23, 1999, we completed our
initial public offering. Prior to completing our initial public
offering, we were a wholly owned subsidiary of HNC Software Inc.
(HNC), a business-to-business software company that
develops and markets predictive software solutions.

Separation from HNC Software Inc.

On October 2, 2000, HNC announced it had
completed its separation of Retek Inc. from HNC through a
distribution (the Distribution) of HNCs entire
holding of Retek shares, which consisted of 40 million shares of
common stock. HNC previously received a private letter ruling
from the Internal Revenue Service that HNCs pro rata
distribution of its shares of Retek common stock would be
tax-free to HNC and its stockholders for U.S. federal income tax
purposes. After the close of the Nasdaq National Market on
September 29, 2000, HNC stockholders who were stockholders
of record as of September 15, 2000 were distributed 1.243
shares of Retek common stock for each share of HNC stock held as
of the record date.

Basis of Presentation

Following HNCs November 1999
contribution of Retek Information Systems, Inc.s capital
stock to Retek Inc., the consolidated financial statements
include the accounts of Retek Inc. and its wholly owned
subsidiaries Retek Information Systems, Inc., HighTouch
Technologies, Inc. and WebTrak Limited. The accounts of Retek
Information Systems, Inc. include its wholly owned subsidiaries.

Prior to the November 1999 legal
restructuring, the financial statements reflect the combined
financial position, results of operations and cash flows of
Retek Inc. and Retek Information Systems, Inc. The combined
financial statements include the accounts of Retek Inc. for the
periods after its acquisition by HNC in March 1998 and the
accounts of Retek Information Systems, Inc. and its wholly owned
subsidiaries for all periods presented. The financial statements
have been prepared using HNCs historical basis in the
assets and liabilities and historical results of operations of
each of the entities, which comprise our business.

All significant intercompany transactions and
balances have been eliminated in all periods presented.

Financial Statement Preparation

The preparation of the consolidated financial
statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to
make estimates and

40



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates.

Cash Equivalents

Cash equivalents are highly liquid investments
and consist of investments in money market accounts and
commercial paper purchased with maturities of three months or
less.

Investments

Investments in debt securities that are not cash
equivalents have been designated as available for sale. Those
securities, which consist of various high rated government
securities and corporate commercial paper, are reported at fair
value, with net unrealized gains and losses included in
stockholders equity. The net unrealized gain on
investments was $55 at December 31, 2001 and $60 at
December 31, 2000. The debt securities mature in 2002
through 2005.

Property and Equipment

Property and equipment are recorded at cost. We
recognize depreciation and amortization expense using the
straight-line method over the estimated useful lives of the
assets of three to seven years. We amortize leasehold
improvements over the shorter of their estimated useful lives or
the remaining term of the related lease. Repair and maintenance
costs are charged to expense as incurred. Depreciation and
amortization expense of property and equipment was $15,246,
$6,359, and $2,299 for the years ended December 31, 2001,
2000 and 1999, respectively.

Capitalized Software

Development costs for software to be licensed or
sold that are incurred from the time technological feasibility
is established until the product is available for general
release to customers are capitalized and reported at the lower
of cost or net realizable value. Technological feasibility is
established after a working model has been completed. Through
December 31, 2001, no significant amounts were expended
subsequent to reaching technological feasibility.

Intangible Assets

Retek Logistics, Inc. was acquired by HNC in
March 1998 in exchange for 143 shares of HNC common stock.
In April 1999, HNC issued an additional 45 shares of HNC
common stock for the achievement of financial objectives during
calendar 1998, which was recorded as an addition to goodwill of
$1,476 in the consolidated financial statements in 1998. The
liability of all subsequent HNC shares issued was assumed by HNC
as a part of our separation agreement. The application of the
purchase method of accounting for the acquisition resulted in an
excess of cost over net assets acquired of approximately $5,781,
of which $4,031 was allocated to intangible assets and $1,750
was allocated to in-process research and development (see note
4).

On May 10, 2000, we acquired HighTouch
Technologies, Inc. (HighTouch) for a cash payment of
$18,694 including direct acquisition costs and 389 shares of our
common stock. The application of the purchase method of
accounting for the acquisition resulted in an excess of cost
over net assets acquired of approximately $30,416 of which
$26,416 was allocated to intangible assets and $4,000 was
allocated to in-process research and development (see
note 4).

41



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


In October 1999, we acquired WebTrak Limited
(WebTrak) for a cash payment of $5,333 and a $2,667
convertible note, which was subsequently converted into 178
shares of our common stock. The application of the purchase
method of accounting for the acquisition resulted in an excess
of cost over net assets acquired of approximately $8,131 of
which $6,651 was allocated to intangible assets and $1,480 was
allocated to in-process research and development (see
note 4).

In conjunction with these purchases, we recorded
various intangible assets. Intangible assets are comprised of
purchased software and other rights that are stated at lower of
cost or net realizable value. Intangible assets are amortized
using the straight-line method over the following estimated
useful lives:

|                          |  |  |                 | 
|------------------------- |  |  | --------------- | 
|Purchased software costs  |  |  | 36 to 42 months | 
|Assembled work force      |  |  | 3 years         | 
|Customer base             |  |  | 3 to 5 years    | 
|Noncompetition agreements |  |  | 3 to 5 years    | 
|Trademarks                |  |  | 5 years         | 
|Goodwill                  |  |  | 5 years         | 

Amortization expense of intangible assets was
$14,177, $7,280, and $2,206 for the years ended
December 31, 2001, 2000 and 1999, respectively.

Long-Lived Assets

When events or changes in circumstances warrant,
we investigate potential impairments of long-lived assets,
certain identifiable intangibles and associated goodwill. An
impairment loss would be recognized if the sum of the expected
future net cash flows were less than the carrying amount of the
asset. During the fiscal year ended December 31, 2001, we
recorded an impairment loss of $1.3 million related to the
write-off of certain computers and communications equipment (see
note 10).

Advertising

We expense advertising costs as incurred.
Advertising expense was approximately $1,440, $2,134, and $638
for the years ended December 31, 2001, 2000 and 1999,
respectively.

Revenue Recognition

We recognize software license revenue upon
meeting all of the following criteria: a license agreement or
contract is executed; software is delivered; the license fee is
fixed or determinable; collectibility of the proceeds is
assessed as being probable; and vendor specific objective
evidence exists to allocate revenue to the elements of the
arrangement. Vendor-specific objective evidence is based on the
price charged when an element is sold separately, or if not yet
sold separately, is established by authorized management.
Starting in the fourth quarter of 1999, we revised the terms of
the software licensing agreements for the majority of the
software products sold. Under these terms, we provide technical
advisory services after the delivery of our products to help our
customers exploit the full value and functionality of our
products. Revenue from the sale of software licenses under these
agreements is recognized over the period that the technical
advisory services are performed. For sales made through
distributors, resellers and original equipment manufacturers, we
recognize revenue at the time these partners report to us that
they have sold the software to the end user and all revenue
recognition criteria have been met. Service revenue includes
maintenance revenue, which is deferred and recognized ratably
over the maintenance period, and revenue from consulting and
training services, which is recognized as services are
performed. Consulting services are customarily billed at a fixed
daily rate plus out-of-pocket expenses.

42



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


Our revenue from contract development services is
generally recognized as the services are performed using the
percentage of completion method based on costs incurred to date
compared to total estimated costs at completion. Amounts
received under contracts in advance of performance are recorded
as deferred revenue and are generally recognized within one year
from receipt. Contract losses are recorded as a charge to income
in the period such losses are first identified. Unbilled
accounts receivable are stated at estimated realizable value.

Deferred revenue consists primarily of deferred
license and maintenance revenue.

Income Taxes

For periods prior to the Distribution, our
taxable income or losses were included in the consolidated tax
returns of HNC. For financial reporting purposes, we computed
income taxes on a stand-alone basis. Upon completion of the
Distribution, we became responsible for our income taxes and the
filing of our own income tax returns. Pursuant to a tax sharing
agreement with HNC for periods prior to the Distribution, we
were required to pay HNC an amount equal to the tax liability we
would have incurred on a separate return basis had we not joined
with HNC in filing a consolidated return. To the extent we
determine that we would have no tax liability on a separate
return basis, HNC would pay us an amount equal to the difference
between HNCs consolidated tax liability with us included
in its consolidated tax return and the consolidated tax
liability that would have been due had we not been included in
the consolidated tax return. Similar provisions are defined
under the tax sharing agreement for state tax returns, which are
filed on a group or unitary basis. Upon the Distribution, we
adjusted our income tax balances to reflect our tax attributes
on a stand-alone basis from balances related to the tax sharing
agreement with HNC resulting in a reduction of paid-in capital
of $3,248.

Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled. Income tax expense (benefit) is generally comprised
of the tax payable (receivable) for the period and the change in
deferred income tax assets and liabilities during the period.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.

Foreign Currency Translation

The consolidated financial statements of our
international operations are translated into U.S. dollars using
period-end exchange rates for assets and liabilities and average
exchange rates during the period for revenues and expenses.
Cumulative translation gains and losses are excluded from the
consolidated results of operations and are recorded as a
separate component of stockholders equity. Gains and
losses resulting from foreign currency transactions
(transactions denominated in a currency other than the
entitys local currency) are included in the consolidated
statement of income and are not material.

Diversification of Credit Risk

Our financial instruments that are subject to
concentrations of credit risk consist primarily of cash
equivalents and accounts receivable, which are generally not
collateralized. Our policy is to place our cash and cash
equivalents with high credit quality financial institutions in
order to limit the amount of our credit exposure. Our cash and
cash equivalent balances at December 31, 2001, are
deposited with five financial institutions. Cash and cash
equivalents of $69.9 million exceed the insurance
limitation of the United States Federal Deposit Insurance
Corporation. Our software license and installation agreements

43



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


and commercial development contracts are
primarily with large customers in the retail industries. We
maintain allowances for potential credit losses.

Disclosures about Fair Value of Financial
Instruments

The carrying amounts of cash equivalents,
accounts receivable, accounts payable and accrued liabilities
approximate fair value because of the short-term maturities of
these financial instruments.

Comprehensive Loss

We report comprehensive loss and its components,
including foreign currency items, in addition to net loss in our
consolidated financial statements. Comprehensive loss is defined
as the change in equity (net assets) of a business
enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners.

New Accounting Pronouncements

In June 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 141,
Business Combinations, which addresses accounting and financial
reporting for business combinations. This statement was
effective for business combinations completed after
June 30, 2001 and had no impact on our financial statements.

In June 2001, the FASB issued SFAS
No. 142, Goodwill and Other Intangible Assets, which
addresses accounting and financial reporting for goodwill and
intangible assets. Under this new statement, goodwill and
intangible assets with indefinite lives are no longer amortized,
but are subject to impairment testing on at least an annual
basis. This statement is effective in its entirety for us on
January 1, 2002. As of December 31, 2001, the net book
value of our goodwill was $13.5 million, and goodwill
amortization expense for 2001 was $4.4 million 2001 and we would
have recorded approximately $4.4 million of amortization during
2002.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of and supersedes SFAS
No. 121 and APB Opinion No. 30, Reporting the
Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions. SFAS
No. 144 is effective for fiscal years beginning after
December 15, 2001. We do not expect the adoption of SFAS
No. 144 to have a material impact on our financial position
and results of operations.

In January 2002, the Emerging Issues Task Force
(EITF) issued EITF No. 01-14, Income Statement
Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred (formerly
EITF Abstracts, Topic No. D-103). This EITF requires
that reimbursements received for out-of-pocket expenses incurred
should be characterized as revenue in the income statement as
opposed to a reduction of expenses incurred. These out-of-pocket
expenses may include airfare, mileage, hotel stays and
out-of-town meals that the customer will reimburse the service
provider. The EITF is effective for financial reporting periods
beginning after December 15, 2001. We do not expect the
adoption of EITF No. 01-14 to have a material impact on our
financial position and results of operations.

Net Loss Per Share

Basic net loss per share is calculated based only
on the weighted average common shares outstanding during the
period. Diluted earnings per share is computed on the basis of
the weighted average basic

44



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


shares outstanding plus the dilutive effect of
outstanding stock options using the treasury stock
method. For periods prior to our initial public offering, the
weighted average basic shares outstanding reflects the
September 1999 reincorporation of Retek, Inc. and the 40
for .001 stock split of Retek, Inc. common shares.

For the year ended December 31, 2001, the
calculation of diluted loss per share excludes the impact of the
potential exercise of 8,845 stock options and a warrant to
purchase 750 shares of our common stock because the effect would
be antidilutive.

Reclassifications

Certain prior period amounts have been
reclassified to conform with current period presentation.

Note 2  Composition of Certain
Financial Statement Captions

|                                     |          |              |        |        |  |   |        |        | 
|------------------------------------ | -------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                     |          |             
|                                     |          | December 31,
|                                     |          |             
|                                     |          | 2001         |        | 2000  
|                                     |          |              |        |       
|Accounts receivable, net:            |          |              |        |        |  |   |        |       
|                                     | Billed   |              | $      | 43,458 |  |   | $      | 28,863 | 
|                                     | Unbilled |              |        | 3,075  |  |   |        | 4,326  | 
|                                     |          |              |        |        |  |   |        |       
|                                     |          |              | 46,533 |        |  |   | 33,189 |       
|Less allowance for doubtful accounts |          |              | (5,124 | )      |  |   | (5,217 | )     
|                                     |          |              |        |        |  |   |        |       
|                                     |          | $            | 41,409 |        |  | $ | 27,972 |       
|                                     |          |              |        |        |  |   |        |       

The following is a rollforward of the activity
within the allowance for doubtful accounts:

|                               |  |              |        |      |  |      |       |   |  |   |       |  
|------------------------------ |  | ------------ | ------ | ---- |  | ---- | ----- | - |  | - | ----- | -
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2001         |        | 2000 |  | 1999
|                               |  |              |        |      |  |     
|Balance at beginning of period |  | $            | 5,216  |      |  | $    | 3,940 |   |  | $ | 1,571 |  
|Provisions                     |  |              | 2,808  |      |  |      | 1,483 |   |  |   | 2,399 |  
|Write-offs                     |  |              | (2,900 | )    |  |      | (207  | ) |  |   | (30   | )
|                               |  |              |        |      |  |      |       |   |  |   |       |  
|Balance at end of period       |  | $            | 5,124  |      |  | $    | 5,216 |   |  | $ | 3,940 |  
|                               |  |              |        |      |  |      |       |   |  |   |       |  

Unbilled accounts receivable represent revenue
recorded in excess of amounts billable pursuant to contract
provisions and generally become billable at contractually
specified dates or upon the attainment of milestones. Unbilled
amounts are expected to be collected within one year.

45



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


|                             |                                                |              |        |         |   |   |        |         |  
|---------------------------- | ---------------------------------------------- | ------------ | ------ | ------- | - | - | ------ | ------- | -
|                             |                                                |             
|                             |                                                | December 31,
|                             |                                                |             
|                             |                                                | 2001         |        | 2000   
|                             |                                                |              |        |        
|Other current assets:        |                                                |              |        |         |   |   |        |        
|                             | Other receivables                              |              | $      | 550     |   |   | $      | 955     |  
|                             | Prepaid expenses                               |              |        | 6,349   |   |   |        | 10,035  |  
|                             | VAT and other foreign tax receivable           |              |        | 762     |   |   |        | 200     |  
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                | $            | 7,661  |         |   | $ | 11,190 |        
|                             |                                                |              |        |         |   |   |        |        
|Property and equipment, net: |                                                |              |        |         |   |   |        |        
|                             | Computer equipment                             |              |        | 31,172  |   |   |        | 28,973  |  
|                             | Furniture and fixtures                         |              |        | 13,630  |   |   |        | 5,780   |  
|                             | Leasehold improvements                         |              |        | 5,050   |   |   |        | 2,032   |  
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                |              | 49,852 |         |   |   | 36,785 |        
|                             | Less accumulated depreciation and amortization |              |        | (20,211 | ) |   |        | (10,536 | )
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                | $            | 29,641 |         |   | $ | 26,249 |        
|                             |                                                |              |        |         |   |   |        |        
|Intangible assets, net:      |                                                |              |        |         |   |   |        |        
|                             | Purchased software costs                       |              | $      | 13,312  |   |   | $      | 13,312  |  
|                             | Goodwill                                       |              |        | 21,619  |   |   |        | 21,619  |  
|                             | Intellectual property                          |              |        | 30,198  |   |   |        |        |  
|                             | Other                                          |              |        | 16,855  |   |   |        | 4,735   |  
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                |              | 81,984 |         |   |   | 39,666 |        
|                             | Less accumulated amortization                  |              |        | (25,749 | ) |   |        | (11,572 | )
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                | $            | 56,235 |         |   | $ | 28,094 |        
|                             |                                                |              |        |         |   |   |        |        
|Accrued liabilities:         |                                                |              |        |         |   |   |        |        
|                             | Payroll and related benefits                   |              | $      | 8,365   |   |   | $      | 5,829   |  
|                             | Lease abandonment                              |              |        | 4,802   |   |   |        |        |  
|                             | Other                                          |              |        | 1,000   |   |   |        | 193     |  
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                | $            | 14,167 |         |   | $ | 6,022  |        
|                             |                                                |              |        |         |   |   |        |        

Note 3  Commitments

At December 31, 2001, we were obligated
through 2015 under non-cancelable operating leases for our
facilities and certain equipment as follows:

|           |  |                |        | 
|---------- |  | -------------- | ------ | 
|           |  | Future Minimum
|           |  | Lease Payments
|           |  |               
|2002       |  | $              | 6,840  | 
|2003       |  |                | 6,938  | 
|2004       |  |                | 6,657  | 
|2005       |  |                | 5,747  | 
|2006       |  |                | 5,575  | 
|Thereafter |  |                | 39,795 | 

46



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


Rent expense under operating leases for the years
ended December 31, 2001, 2000 and 1999 was approximately
$10,849, $3,650, and $1,340 respectively, net of sublease income
of $1,349, $1,052, and $1,040, for the years ended
December 31, 2001, 2000 and 1999, respectively.

We have licensing arrangements with third party
software providers under which we pay a royalty when third party
software is delivered to an end user. Each license arrangement
contains no minimum royalty payments and has a one-year term,
which renews automatically unless terminated by either party.
Royalty expense, included in cost of license and maintenance
revenues under these licensing arrangements for the years ended
December 31, 2001, 2000 and 1999 was approximately $1,918,
$2,398, and $3,313, respectively.

Note 4  Acquisitions

On May 10, 2000, we acquired HighTouch
Technologies, Inc. (HighTouch) for a cash payment of
$18,694 including direct acquisition costs and 389 shares of our
common stock. The application of the purchase method of
accounting for the acquisition resulted in an excess of cost
over net assets acquired of approximately $30,416 of which
$26,416 was allocated to intangible assets and $4,000 was
allocated to in-process research and development.

In connection with our acquisition of HighTouch,
acquired research and development of $4,000 was charged to
operations on the acquisition date. HighTouchs products
provide real-time transaction management and customer service
solutions that support multi-channel customer interactions.
HighTouch owns certain direct consumer management technologies
that we have incorporated into Retek CRM, our enterprise-level
customer interaction system. The classification of the
technology as complete or under development was made in
accordance with the guidelines of Statement of Financial
Accounting Standards No. 86, Statement of Financial
Standards No. 2 and Financial Accounting Standards Board
Interpretation No. 4. At the time of the acquisition,
HighTouch had three products under development including
Customer Order Management, which was subsequently completed by
Retek in July 2000, and Customer Direct Marketing and
Customer Loyalty and Retention, the core functionality of which
was incorporated into our Data Warehouse product in
September 2000.

The value of our common stock issued for the
acquisition completed during fiscal 2000 was determined by the
average price of our common stock shortly before and after the
announcement of the acquisitions. This transaction was accounted
for using the purchase accounting method and accordingly, the
net assets acquired were recorded at their estimated fair values
at the effective dates of the acquisition. The following table
presents the purchase price allocation of this acquisition.

|                                                              |  |   |        |  
|------------------------------------------------------------- |  | - | ------ | -
|Cash and fair value of our common stock issued                |  | $ | 25,503 |  
|Direct acquisition costs                                      |  |   | 223    |  
|Net liabilities assumed                                       |  |   | 3,246  |  
|                                                              |  |   |        |  
|Total purchase price                                          |  | $ | 28,972 |  
|                                                              |  |   |        |  
|Estimated fair value of tangible assets acquired              |  | $ | 417    |  
|Estimated fair value of identifiable intangible
	assets       |  |   | 7,220  |  
|In-process research and development                           |  |   | 4,000  |  
|Goodwill                                                      |  |   | 19,196 |  
|Deferred tax liabilities related to identifiable
	Intangibles |  |   | (1,861 | )
|                                                              |  |   |        |  
|                                                              |  | $ | 28,972 |  
|                                                              |  |   |        |  

47



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


The following table presents the consolidated
results of operations on an unaudited pro forma basis as if the
acquisition of HighTouch had taken place at the beginning of
each year.

|                                 |  |              |         |      |  |   |         |  
|-------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                 |  |             
|                                 |  | Year Ended  
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2000         |         | 1999
|                                 |  |              |         |     
|Total revenue                    |  | $            | 91,990  |      |  | $ | 70,894  |  
|Net loss                         |  |              | (55,228 | )    |  |   | (14,874 | )
|Basic and diluted loss per Share |  |              | (1.17   | )    |  |   | (0.36   | )

The unaudited pro forma results of operations are
for comparative purposes only and do not necessarily reflect the
results that would have occurred had the acquisition occurred at
the beginning of the periods presented or the results which may
occur in the future.

In connection with the acquisition of WebTrak,
Inc. (WebTrak) by us in October 1999, acquired in-process
research and development of $1,480 was charged to operations on
the acquisition date. WebTraks products may be classified
into two categories: WebTrak Core Products, which allow parties
along the supply chain of a product, to network around a common
product tracking database and Retail.com products, which
represent the next generation of supply chain applications,
retaining the functionality of the WebTrak core products but
hosted through a website. The classification of the technology
as complete or under development was made in accordance with the
guidelines of Statement of Financial Accounting Standards
No. 86, Statement of Financial Accounting Standards
No. 2 and Financial Accounting Standards Board
Interpretation No. 4. At the time of the acquisition,
WebTrak had a new software product under development, retail.com
design, which was completed during 2000.

Note 5  Strategic Alliance with
IBM

On September 5, 2000, we entered into a
strategic relationship with International Business Machines
Corporation (IBM). Pursuant to this relationship,
Retek and IBM agreed to jointly market, sell, and service a
comprehensive retail e-business solution consisting of Retek
applications and IBM software and hardware technologies. In
connection with entering into this relationship, we and IBM
entered into a Common Stock Purchase Agreement pursuant to which
we issued 300 shares of our common stock to IBM in exchange for
IBM entering into the relationship and providing to us, at no
cost, IBM hardware and software for use by us during the
initial term of the relationship. This arrangement has been
accounted for as a capital lease of the hardware and software.
Accordingly, the aggregate fair value of our common shares
issued of $10.2 million has been included in property and
equipment and is being amortized using the straight-line method
over the twenty-seven month term of this portion of the
arrangement.

The Common Stock Purchase Agreement also requires
us to issue shares of our common stock to IBM upon reaching
certain revenue targets related to our software applications
sold under the joint marketing and selling arrangements through
2003. Under the Stock Purchase Agreement, we will be obligated
to pay IBM $10 million and $15 million related to 2002 and 2003,
respectively, in shares of our common stock if annual revenue
targets, as stated in the Stock Purchase Agreement, are met. The
Common Stock Purchase Agreement provides for increases or
decreases of the amounts to be paid to IBM in the event these
revenue targets are exceeded or are partially met. The revenue
targets for the year ended December 31, 2001, were not met;
therefore, no amounts were paid to IBM under this agreement.

Note 6  Minority
Investments

On April 2, 2001, we signed a stock purchase
agreement, a warrant agreement, and a software development and
distribution agreement with Henderson Ventures, Inc.
(Henderson), a retail enterprise solution developer.
In connection with these agreements, we issued a warrant to
purchase 750 shares of our

48



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


common stock in exchange for an ownership
interest of approximately 7.7% of the outstanding common stock
of Henderson and a distribution agreement to resell the
developed software. Under the software development and
distribution agreement, we will pay royalties to Henderson for
any software sold by us that we developed in conjunction with
Henderson.

The warrant issued to Henderson is fully vested
with a term of five years and is exercisable at $18.625 per
share. The fair value of the warrant of $12.1 million was
calculated using the Black-Scholes valuation model using the
following assumptions: dividend yield of 0%, risk-free interest
rate of 5.83%, contractual life of five years and a volatility
of 137.27%. The fair value of the common stock of Henderson of
$0.4 million is accounted for under the cost method and is
included as a component of other assets. The value of the
development and distribution rights of $12.1 million is included
as a component of intangible assets and is being amortized using
the straight-line method over the five-year life of the
agreement.

On June 21, 2000, we signed a shareholders
agreement, a resellers agreement, a consulting services
agreement and a subscription agreement with Multiasia, Inc.
(MAI), for 7,960,000 shares or 19.9% of the shares
of MAI. MAI is a Business-to-Business and Business-to-Consumer
web based e-commerce company in the Peoples Republic of
China. In exchange for the common shares, MAI received the right
to certain of our software solutions and the right to sell our
software solutions to the e-business community in the Republic
of China. The value of the shares received of $4.0 million
is accounted for under the cost method and is included as a
component of other assets and deferred revenue. Under the
resellers agreement we are entitled to receive royalties from
MAI for the sale of our software.

Note 7  Strategic Alliance with
Accenture

On May 16, 2001, we established a strategic
relationship with Accenture LLP (Accenture) pursuant
to which Accenture will become a development partner for our
predictive applications. In connection with entering into this
relationship, we issued 976 shares of our common stock valued at
$30.2 million to Proquire LLC (Proquire), an
affiliate of Accenture, in exchange for the license from
Proquire to us of certain intellectual property that will enable
us to enhance our suite of retail-specific software. The value
of our common shares issued for the specified intellectual
property of Accenture is included as a component of intangible
assets and is being amortized using the straight-line method
over the five-year life of the agreement.

The agreement with Accenture also requires us to
issue to Accenture warrants to purchase our common stock upon
our achievement of certain revenue milestones in fiscal years
2002, 2003, 2004, and 2005. The maximum number of warrants to be
issued in each fiscal year is limited to 2% of the number of
shares of our common stock then outstanding. For any amounts
earned by Accenture in excess of 2% of our common stock then
outstanding, we may elect to pay in cash, rather than issue
additional warrants.

Note 8  Sale of Future Account
Receivable

During the years ended December 31, 2001 and
1999, we did not sell any interest in future receivable
balances. During the year ended December 31, 2000, we sold
our interest in $27.6 million of future accounts receivable
due to us under contracts with various customers. These balances
were sold to a financial institution. The amounts received for
these future accounts receivable balances are included in
deferred revenue as of December 31, 2000. As of
December 31, 2000, $16.8 million had been collected
and all remaining balances were collected in fiscal year 2001.

Note 9  Loss on Abandonment of
Leased Space

We have certain lease obligations for our former
corporate headquarters office space, which run through fiscal
year 2004 and lease obligations for other leased space, which
run through 2003. In the

49



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


fourth quarter of 2001, we moved to our new
corporate headquarters and completely vacated the premises
covered by the former lease agreements. In the third quarter of
2001, upon the termination of discussions with a potential
sublessor, we determined that it was unlikely that we would be
able to sublease the old office space during the remaining lease
periods. Accordingly, we recorded a $5.3 million loss on
abandonment of leased space representing the present value of
the future lease payments.

Note 10  Asset Write-Offs

We regularly examine our long-lived assets,
certain identifiable intangible assets and associated goodwill
for possible impairment. An impairment loss would be recognized
if the sum of the expected future gross cash flows were less
than the carry amount of the asset. During the third quarter of
2001, we recorded an impairment loss related to computer and
communications equipment. In addition, we accelerated the
amortization of leasehold improvements related to the leased
space to be abandoned (See Note 9) such that the assets
would be fully depreciated upon our move to the new corporate
headquarters in the fourth quarter of 2001. Accordingly, we
recorded an impairment charge of $1.3 million and accelerated
amortization relating to leasehold improvements of $2.1 million.

Note 11  Notes Payable and Line of
Credit

On July 25, 2000, we entered into a line of
credit agreement with a financial institution to provide a line
of credit of $7.5 million. The line of credit bears interest on
borrowings at a rate of prime plus 2% and expires on
July 25, 2002. As of December 31, 2001, we had no
balances outstanding under the line of credit. The line of
credit agreement contains covenants limiting capital
expenditures and operating lease expenditures. For the year
ended December 31, 2001, we obtained a waiver from the
financial institution for a covenant violation for exceeding
capital expenditure limits due to the move to our new corporate
headquarters. We were in compliance with all other covenants and
restrictions under the line of credit agreement as of
December 31, 2001. The line of credit is collateralized by
funds on account at the financial institution.

As of December 31, 2002, we had standby
letters of credit totaling $5.1 million, and there were no
balances drawn against those letters of credit.

In addition we had notes payable outstanding as
of December 31, 2001 as follows:

|                                                                                 |  |   |     |  
|-------------------------------------------------------------------------------- |  | - | --- | -
|Note payable  interest at 7.0% due in
	monthly installments of $8 to March 2005 |  | $ | 236 |  
|Less current maturities                                                          |  |   | (73 | )
|                                                                                 |  |   |     |  
|Long-term portion                                                                |  | $ | 163 |  
|                                                                                 |  |   |     |  

Note 12  Income Taxes

Income before income tax benefit was taxed under
the following jurisdictions:

|         |  |                         |         |      |  |      |         |   |  |   |        |  
|-------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2001                    |         | 2000 |  | 1999
|         |  |                         |         |      |  |     
|Domestic |  | $                       | (23,282 | )    |  | $    | (65,600 | ) |  | $ | (7,851 | )
|Foreign  |  |                         | 1,791   |      |  |      | 1,713   |   |  |   | 785    |  
|         |  |                         |         |      |  |      |         |   |  |   |        |  
|         |  | $                       | (21,491 | )    |  | $    | (63,887 | ) |  | $ | (7,066 | )
|         |  |                         |         |      |  |      |         |   |  |   |        |  

50



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


The income tax benefit is summarized as follows:

|          |         |                         |        |        |   |      |         |         |   |   |        |        |  
|--------- | ------- | ----------------------- | ------ | ------ | - | ---- | ------- | ------- | - | - | ------ | ------ | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2001                    |        | 2000   |   | 1999
|          |         |                         |        |        |   |     
|Current:  |         |                         |        |        |   |      |         |         |   |   |        |       
|          | Federal |                         | $      |       |   |      | $       |        |   |   | $      | 62     |  
|          | State   |                         |        |       |   |      |         | 63      |   |   |        | 70     |  
|          | Foreign |                         |        | 779    |   |      |         | 601     |   |   |        | 250    |  
|Deferred: |         |                         |        |        |   |      |         |         |   |   |        |       
|          | Federal |                         |        | (5,377 | ) |      |         | (15,915 | ) |   |        | (1,609 | )
|          | State   |                         |        | (2,583 | ) |      |         | (5,731  | ) |   |        | (497   | )
|          | Foreign |                         |        |       |   |      |         |        |   |   |        | 27     |  
|          |         |                         |        |        |   |      |         |         |   |   |        |       
|          |         | $                       | (7,181 | )      |   | $    | (20,982 | )       |   | $ | (1,697 | )     
|          |         |                         |        |        |   |      |         |         |   |   |        |       

Deferred tax assets are summarized as follows:

|                                              |                        |              |        |        |  |   |        |        | 
|--------------------------------------------- | ---------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                              |                        |             
|                                              |                        | December 31,
|                                              |                        |             
|                                              |                        | 2001         |        | 2000  
|                                              |                        |              |        |       
|Net operating loss carryforwards              |                        | $            | 39,575 |        |  | $ | 20,626 |       
|Taxable pooling-of-interests basis difference |                        |              | 12,462 |        |  |   | 13,708 |       
|Tax credit carryforwards                      |                        |              | 3,538  |        |  |   | 2,288  |       
|Allowance for doubtful accounts               |                        |              | 1,793  |        |  |   | 2,283  |       
|Depreciation                                  |                        |              | (685   | )      |  |   | (2     | )     
|Intangible assets                             |                        |              | 3,106  |        |  |   | 1,575  |       
|Deferred revenue                              |                        |              | 13,056 |        |  |   | 6,834  |       
|Accrued liabilities and other                 |                        |              | 1,382  |        |  |   | 2,506  |       
|                                              |                        |              |        |        |  |   |        |       
|                                              | Net deferred tax asset |              | $      | 74,227 |  |   | $      | 49,818 | 
|                                              |                        |              |        |        |  |   |        |       

Significant management judgement is required in
determining whether any valuation allowance should be recorded
against our net deferred tax asset. The realization of our
deferred tax asset at December 31, 2001 is solely dependent
upon our ability to generate future taxable income. As of
December 31, 2001, we have not recorded a valuation
allowance, as we expect to generate future taxable income
sufficient to fully recover the deferred tax asset. In the event
we adjust our estimates of future taxable income, we may need to
establish a valuation allowance which could materially impact
our financial position and results of operations.

A reconciliation of the income tax benefit to the
amount computed by applying the statutory federal income tax
rate to income before income tax benefit is summarized as
follows:

|                                           |                                                                     |                         |        |        |   |      |         |        |   |   |        |      |  
|------------------------------------------ | ------------------------------------------------------------------- | ----------------------- | ------ | ------ | - | ---- | ------- | ------ | - | - | ------ | ---- | -
|                                           |                                                                     |                        
|                                           |                                                                     | Year Ended December 31,
|                                           |                                                                     |                        
|                                           |                                                                     | 2001                    |        | 2000   |   | 1999
|                                           |                                                                     |                         |        |        |   |     
|Amounts computed at statutory federal rate |                                                                     | $                       | (7,522 | )      |   | $    | (22,360 | )      |   | $ | (2,402 | )   
|                                           | State income taxes, net of federal benefit                          |                         |        | (1,204 | ) |      |         | (3,671 | ) |   |        | 16   |  
|                                           | Tax credit carryforwards generated                                  |                         |        | (1,250 | ) |      |         | (1,156 | ) |   |        | (208 | )
|                                           | Non-deductible goodwill and other non-deductible
	acquisition costs |                         |        | 1,599  |   |      |         | 2,665  |   |   |        | 378  |  
|                                           | Foreign income taxes                                                |                         |        |       |   |      |         |       |   |   |        | 10   |  
|                                           | Stock based compensation                                            |                         |        | 1,423  |   |      |         | 1,903  |   |   |        | 396  |  
|                                           | Other, net                                                          |                         |        | (227   | ) |      |         | 1,637  |   |   |        | 113  |  
|                                           |                                                                     |                         |        |        |   |      |         |        |   |   |        |     
|Income tax benefit                         |                                                                     | $                       | (7,181 | )      |   | $    | (20,982 | )      |   | $ | (1,697 | )   
|                                           |                                                                     |                         |        |        |   |      |         |        |   |   |        |     

51



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


At December 31, 2001, we had federal and
state net operating loss carryforwards of approximately $92,139.
Substantially all carryforwards expire in 2020.

We also had approximately $1,543 of federal
research and development credit carryforwards expiring at
various dates through 2016, $320 of state research and
development credit carryforwards expiring at various dates
through in 2016, and $807 of foreign tax credit carryforwards
which expire at various dates through 2006.

Note 13  Segment Information and
Major Customers

We operate in one reportable segment. Our
operations are primarily conducted in the United States, our
country of domicile. Geographic data, determined by references
to the location of our operations for the years ended
December 31, 2001, 2000 and 1999 are as follows:

|                            |                |               |   |         |         |      |   |        |        |  |   |        |        | 
|--------------------------- | -------------- | ------------- | - | ------- | ------- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                            |                |              
|                            |                | Year Ended   
|                            |                | December 31, 
|                            |                |              
|                            |                | 2001          |   | 2000    |         | 1999
|                            |                |               |   |         |         |     
|Revenue by geographic area: |                |               |   |         |         |      |   |        |        |  |   |       
|                            | United States  |               | $ | 118,476 |         |      | $ | 71,004 |        |  | $ | 37,917 |       
|                            | United Kingdom |               |   | 49,009  |         |      |   | 7,424  |        |  |   | 8,402  |       
|                            | Canada         |               |   | 1,673   |         |      |   | 2,093  |        |  |   | 4,295  |       
|                            | Germany        |               |   | 603     |         |      |   | 2,345  |        |  |   | 9,569  |       
|                            | Other          |               |   | 9,713   |         |      |   | 9,091  |        |  |   | 8,976  |       
|                            |                |               |   |         |         |      |   |        |        |  |   |       
|                            |                | Total revenue |   | $       | 179,474 |      |   | $      | 91,957 |  |   | $      | 69,159 | 
|                            |                |               |   |         |         |      |   |        |        |  |   |       

The following is long-lived asset information by
geographic area:

|                                      |               |                         |   |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------- | ------------- | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |               |                        
|                                      |               | December 31,           
|                                      |               |                        
|                                      |               | 2001                    |   | 2000   |        | 1999
|                                      |               |                         |   |        |        |     
|Long-lived assets by geographic area: |               |                         |   |        |        |      |   |        |        |  |   |       
|                                      | United States |                         | $ | 84,800 |        |      | $ | 54,016 |        |  | $ | 16,878 |       
|                                      | Foreign       |                         |   | 1,271  |        |      |   | 412    |        |  |   | 404    |       
|                                      |               |                         |   |        |        |      |   |        |        |  |   |       
|                                      |               | Total long-lived assets |   | $      | 86,071 |      |   | $      | 54,428 |  |   | $      | 17,282 | 
|                                      |               |                         |   |        |        |      |   |        |        |  |   |       

Our foreign sales represent revenues from export
sales, which are sales from the United States to foreign
countries, and international operations, which are sales by our
foreign operations. Export sales were $52,590, $12,408, and
$18,164 for the years ended December 31, 2001, 2000 and
1999, respectively.

Revenues to significant customers, those
representing 10% or more of total revenue for the respective
periods, are summarized as follows:

|         |            |                          |  |      |   |      |  |    |   |  |  |    |  
|-------- | ---------- | ------------------------ |  | ---- | - | ---- |  | -- | - |  |  | -- | -
|         |            |                         
|         |            | Year Ending December 31,
|         |            |                         
|         |            | 2001                     |  | 2000 |   | 1999
|         |            |                          |  |      |   |     
|Revenue: |            |                          |  |      |   |      |  |    |   |  |  |   
|         | Customer A |                          |  | 11   | % |      |  | 12 | % |  |  |   |  
|         | Customer B |                          |  | 22   | % |      |  |   |   |  |  |   |  
|         | Customer C |                          |  |     |   |      |  |   |   |  |  | 14 | %
|         | Customer D |                          |  |     |   |      |  |   |   |  |  | 11 | %

52



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


Note 14  Employee Benefit
Plans

Retek Inc. Sponsored Plans

During 1999, we adopted the 1999 Equity Incentive
Plan (the Incentive Plan), the 1999 Employee Stock
Purchase Plan (the Purchase Plan), the 1999 Director
Stock Option Plan (the Directors Plan) and the
Employee Stock Option Exchange Program (the Exchange
Program). During 2000, we adopted the HighTouch
Technologies, Inc. 1999 Stock Option Plan.

The Incentive Plan provides for the Compensation
Committee of the Board of Directors to award up to 9,000 shares
of our common stock in the form of nonqualified or incentive
stock options, stock appreciation rights, restricted stock or
stock bonuses. Nonqualified stock options may be awarded at a
price not less than 85% of the fair market value of the stock at
the date of the award. Incentive stock options must be awarded
at a price not less than 100% of the fair market value of the
stock at the date of the award or 110% of fair market value of
the stock at the date of the awards to more than 10%
stockholders. Options and stock appreciation rights granted
under the Incentive Plan may have a term of up to 10 years.
The Compensation Committee of the Board of Directors has the
discretion to award restricted stock and stock bonuses, as they
deem appropriate. Options vest over four years at the rate of
25% of the total grant after one year and then at a rate of
2.08% of the total grant per month over the remaining
36 months. However, we may, at our discretion, implement a
different vesting schedule with respect to any new stock option
grant. At December 31, 2001, 1,749 options were exercisable.

The Purchase Plan provides for the issuance of a
maximum of 700 shares of our common stock. Each purchase period,
eligible employees may designate between 2% and 15% of their
cash compensation, subject to certain limitations, to be
deducted from their pay for the purchase of common stock under
the Purchase Plan. The purchase price of the shares under the
Purchase Plan is equal to 85% of the lesser of the fair market
value per share, as defined by the Purchase Plan, on the first
day of the two-year offering period and the date of purchase.
Employee contributions to the plan were $5,327 during the year
ended December 31, 2001. In total, 388 shares were issued
to employees during the year ended December 31, 2001.

The HighTouch Technologies, Inc. 1999 Stock
Option Plan provides for the Compensation Committee of the Board
of Directors to award up to 2,000 shares of our common stock in
the form of nonqualified stock options. Options vest over four
years at the rate of 25% of the total grant after one year and
then at a rate of 2.08% of the total grant per month over the
remaining 36 months. However, we may, at our discretion,
implement a different vesting schedule with respect to any new
stock option grant. At December 31, 2001, 58 options were
exercisable.

The Directors Plan provides for the issuance of
up to 400 nonqualified stock options to our outside directors.
Under the provisions of the Directors Plan, options to purchase
25 shares of our common stock will be granted to outside
directors upon their becoming a member of the Board of Directors
and 7.5 additional options will be granted on each anniversary
of the initial grant, so long as they remain on the Board of
Directors. Options under the Directors Plan will be granted at
the fair value of the stock at the grant date and vest entirely
one year from the date of grant. At December 31, 2001, 78
shares were exercisable.

In 1999, we granted stock options to our
employees and directors, under the Equity Incentive Plan and the
Directors Plan, to purchase approximately 7,362 shares of our
common stock. Of the approximately 7,262 options granted to
employees, 6,239 were granted in connection with the exchange of
HNC stock options by our employees. These options were granted
at an exercise price of $10 per share. The difference between
the option price and market value at the date of the grant has
been recorded as additional paid-in capital with an offsetting
debit within stockholders equity to deferred stock-based

53



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


compensation. Due to the terms of the vesting,
compensation will be accelerated in the early years and resulted
in a compensation charge of $5,344 as of December 31, 2001.

Transactions relating to our employees and
directors under our Stock Option Plans during the years ended
December 31, 2001 and 2000 are summarized as follows:

|                                                                |                                           |                         |        |                |   |        |       |                |  |  |        |       |   |   |       |       | 
|--------------------------------------------------------------- | ----------------------------------------- | ----------------------- | ------ | -------------- | - | ------ | ----- | -------------- |  |  | ------ | ----- | - | - | ----- | ----- | 
|                                                                |                                           |                        
|                                                                |                                           | Year Ended December 31,
|                                                                |                                           |                        
|                                                                |                                           |                         |        |               
|                                                                |                                           | 2001                    |        | 2000          
|                                                                |                                           |                         |        |               
|                                                                |                                           |                         |        | Weighted       |   |        |       | Weighted      
|                                                                |                                           |                         |        | Average        |   |        |       | Average       
|                                                                |                                           | Shares                  |        | Exercise Price |   | Shares |       | Exercise Price
|                                                                |                                           |                         |        |                |   |        |       |               
|Outstanding at beginning of year                                |                                           |                         | 8,406  |                |   | $      | 13.60 |                |  |  | 7,411  |       |   | $ | 10.38 |      
|                                                                | Options granted at market value           |                         |        | 3,303          |   |        |       | 22.78          |  |  |        | 1,506 |   |   |       | 30.57 | 
|                                                                | Options granted at less than market value |                         |        | 25             |   |        |       | 1.00           |  |  |        | 178   |   |   |       | 10.98 | 
|                                                                | Options exercised                         |                         |        | (2,212         | ) |        |       | 10.56          |  |  |        | (359  | ) |   |       | 10.00 | 
|                                                                | Options canceled                          |                         |        | (677           | ) |        |       | 19.91          |  |  |        | (330  | ) |   |       | 18.99 | 
|                                                                |                                           |                         |        |                |   |        |       |                |  |  |        |       |   |   |       |      
|Outstanding at end of year                                      |                                           |                         | 8,845  |                |   |        | 17.27 |                |  |  | 8,406  |       |   |   | 13.62 |      
|                                                                |                                           |                         |        |                |   |        |       |                |  |  |        |       |   |   |       |      
|Options exercisable at end of year                              |                                           |                         | 1,885  |                |   |        |       |                |  |  | 1,812  |       |   |   |       |      
|Weighted average fair value of options Granted
	during the Year |                                           |                         | $17.27 |                |   |        |       |                |  |  | $24.86 |       |   |   |       |      

|                 |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 
|---------------- |  | ------------------- | ----- | ------------------- |  | -------------- | ---- | -------------- |  | -------------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                 |  |                     |       |                     |  |               
|                 |  | Options Exercisable |       |                    
|                 |  |                     |       | Options Outstanding
|                 |  |                     |       | Weighted            |  |                |      |               
|                 |  |                     |       | Average             |  |                |      | Number         |  |               
|                 |  | Number              |       | Remaining           |  | Weighted       |      | Outstanding at |  | Weighted      
|Range of         |  | Outstanding at      |       | Contractual         |  | Average        |      | December 31,   |  | Average       
|Exercise Prices  |  | December 31, 2001   |       | Life (in years)     |  | Exercise Price |      | 2001           |  | Exercise Price
|                 |  |                     |       |                     |  |                |      |                |  |               
|$ 1.00 to $10.00 |  |                     | 4,525 |                     |  |                | 7.84 |                |  | $              | 9.95  |  |  |  | 1,500 |  |  | $ | 10.00 | 
|11.00 to 17.88   |  |                     | 2,250 |                     |  |                | 9.08 |                |  |                | 16.01 |  |  |  | 115   |  |  |   | 16.25 | 
|17.93 to 36.17   |  |                     | 1,692 |                     |  |                | 9.23 |                |  |                | 30.55 |  |  |  | 126   |  |  |   | 27.07 | 
|36.55 to 72.00   |  |                     | 368   |                     |  |                | 8.53 |                |  |                | 52.45 |  |  |  | 140   |  |  |   | 55.24 | 
|72.69 to 72.69   |  |                     | 8     |                     |  |                | 8.20 |                |  |                | 72.69 |  |  |  | 3     |  |  |   | 72.69 | 
|74.13 to 74.13   |  |                     | 2     |                     |  |                | 7.92 |                |  |                | 74.13 |  |  |  | 1     |  |  |   | 74.13 | 
|                 |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 
|                 |  |                     | 8,845 |                     |  |                | 8.45 |                |  |                | 17.27 |  |  |  | 1,885 |  |  |   | 15.01 | 
|                 |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 

HNC Software Inc. Sponsored Plans

When the company was a part of HNC employees
participated in HNC Incentive Plans. During 1999 our employees
were given the opportunity to exchange their HNC options granted
through the HNC Incentive Plans for a grant of our stock options
through our Incentive Plan. During 1999, our employees exchanged
1,136 HNC stock options for the right to receive our stock
options.

54



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


Transactions relating to our employees under
HNCs stock option plan during the years ended
December 31, 2001, 2000 and 1999 are summarized as follows:

|                                                                |                            |                         |   |          |   |        |      |          |  |        |     |          |   |   |       |       |  |  |        |        |   |   |       |       | 
|--------------------------------------------------------------- | -------------------------- | ----------------------- | - | -------- | - | ------ | ---- | -------- |  | ------ | --- | -------- | - | - | ----- | ----- |  |  | ------ | ------ | - | - | ----- | ----- | 
|                                                                |                            |                        
|                                                                |                            | Year Ended December 31,
|                                                                |                            |                        
|                                                                |                            |                         |   |          |   |       
|                                                                |                            | 2001                    |   | 2000     |   | 1999  
|                                                                |                            |                         |   |          |   |       
|                                                                |                            |                         |   | Weighted |   |        |      | Weighted |  |        |     | Weighted
|                                                                |                            |                         |   | Average  |   |        |      | Average  |  |        |     | Average 
|                                                                |                            |                         |   | Exercise |   |        |      | Exercise |  |        |     | Exercise
|                                                                |                            | Shares                  |   | Price    |   | Shares |      | Price    |  | Shares |     | Price   
|                                                                |                            |                         |   |          |   |        |      |          |  |        |     |         
|Outstanding at beginning of year                                |                            |                         | 1 |          |   | $      | 7.33 |          |  |        | 340 |          |   | $ | 30.62 |       |  |  | 1,378  |        |   | $ | 31.81 |      
|                                                                | Options granted            |                         |   | 0        |   |        |      | 0.00     |  |        |     | 0        |   |   |       | 0.00  |  |  |        | 695    |   |   |       | 27.93 | 
|                                                                | Options exercised          |                         |   | 0        |   |        |      | 0.00     |  |        |     | (327     | ) |   |       | 30.56 |  |  |        | (408   | ) |   |       | 30.83 | 
|                                                                | Options canceled           |                         |   | (1       | ) |        |      | 7.33     |  |        |     | (12      | ) |   |       | 30.89 |  |  |        | (1,325 | ) |   |       | 31.44 | 
|                                                                |                            |                         |   |          |   |        |      |          |  |        |     |          |   |   |       |       |  |  |        |        |   |   |       |      
|                                                                | Outstanding at end of year |                         |   | 0        |   |        |      | 0.00     |  |        |     | 1        |   |   |       | 7.33  |  |  |        | 340    |   |   |       | 30.62 | 
|                                                                |                            |                         |   |          |   |        |      |          |  |        |     |          |   |   |       |       |  |  |        |        |   |   |       |      
|Options exercisable at end of year                              |                            |                         | 0 |          |   |        |      |          |  |        | 1   |          |   |   |       |       |  |  | 0      |        |   |   |       |      
|Weighted average fair value of options Granted
	During the year |                            |                         |   |          |   |        |      |          |  |        |     |          |   |   |       |       |  |  | $10.77 |        |   |   |       |      

Financial Accounting Standard No. 123
Information

We apply Accounting Principles Board Opinion
No. 25 and related Interpretations in accounting for our
stock-based compensation. Had compensation cost for our
stock-based compensation awards and HNC stock-based compensation
awards issued to our employees during 2001, 2000 and 1999 been
determined based on the fair value at the grant dates of awards
consistent with the method of Financial Accounting Standards
Board Statement No. 123 (FAS 123), our net
income and basic and diluted pro forma net loss per common share
would have been reduced to the pro forma amounts indicated below:

|                                             |             |                         |   |         |   |      |   |         |   |  |   |         |  
|-------------------------------------------- | ----------- | ----------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                             |             |                        
|                                             |             | Year Ended December 31,
|                                             |             |                        
|                                             |             | 2001                    |   | 2000    |   | 1999
|                                             |             |                         |   |         |   |     
|Net loss:                                    |             |                         |   |         |   |      |   |         |   |  |   |        
|                                             | As reported |                         | $ | (14,310 | ) |      | $ | (42,905 | ) |  | $ | (5,369  | )
|                                             | Pro forma   |                         |   | (59,640 | ) |      |   | (92,924 | ) |  |   | (14,391 | )
|Basic and diluted net loss per common share: |             |                         |   |         |   |      |   |         |   |  |   |        
|                                             | As reported |                         |   | (0.29   | ) |      |   | (0.91   | ) |  |   | (0.13   | )
|                                             | Pro forma   |                         |   | (1.19   | ) |      |   | (1.97   | ) |  |   | (0.35   | )

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for
grants during the years ended December 31, 2001, 2000 and
1999, respectively: dividend yield of 0.0% for all three years;
risk-free interest rates of 3.94%, 5.12%, and 5.47%; expected
volatilities of 106%, 130%, and 100%; and expected lives of
2.0 years past the vesting date for all three years. The
fair value of the employees purchase rights pursuant to
the Purchase Plan is estimated using the Black-Scholes model
with the following assumptions for 2001, 2000 and 1999,
respectively: dividend yield of 0.0% for all three years;
risk-free interest rates of 3.64%, 5.50%, and 4.98%; expected
volatilities of 106%, 130%, and 100%; and an expected life of
six months for all three years. The weighted average fair value
of those purchase rights granted in 2000 and 1999 for HNC stock
was $7.29, and $10.77, respectively. The weighted average fair
value of those purchase rights granted in 2001, 2000 and 1999
for our stock was $15.07, $8.33 and $7.62, respectively.

55



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


Note 15  Preferred
Stock

We have authorized 5,000 shares of $0.01 par
value preferred stock. The specific terms of any preferred stock
will be determined by our board of directors prior to issuance.

Note
16  Contingencies

Various claims arising in the ordinary course of
business, seeking monetary damages and other relief, are
pending. The amount of the liability, if any, from such claims
cannot be determined with certainty; however, in the opinion of
management, the ultimate liability for such claims will not have
a material adverse effect on our consolidated financial
position, results of operations or cash flows.

Note 17  Transactions with
HNC

As described in Note 1, the financial statements
include significant transactions with HNC for services such as
treasury, cash management, employee benefits, taxes, financial
reporting, legal, corporate marketing and general corporate
services prior to the Distribution. There were no charges
incurred during fiscal year 2001 due to our separation from HNC
on October 2, 2000. During fiscal year 2000, HNC charged
for these services through the date of our separation on
October 2, 2000. HNC charged us $598 and $1,232 for such
expenses during the years-ended December 31, 2000 and 1999,
respectively. These charges were principally included in sales
and marketing expenses and general and administrative expenses.
Management believes these allocations approximate the costs that
would have been incurred had we performed these functions as a
stand-alone entity.

Certain of our employees participated in the HNC
Stock Purchase Plan. Amounts included in the payable to HNC
Software Inc. related to the Purchase Plan were $0, $263, and
$887 as of December 31, 2001, 2000 and 1999, respectively.

Our employees also participated in an
HNC-sponsored 401(k) plan prior to the Distribution and then our
employees participated in a Retek Inc. sponsored 401(k) plan. We
matched employee contributions up to of 25% of the first 6%
employee contribution or 50% of the first sixteen hundred
dollars, which ever is greater for the first quarter 2000. We
then started to match 40% of the first 6% employee contribution
or 50% of the first sixteen hundred dollars, which ever is
greater for the second through fourth quarter 2000.
Contributions were $1,441, $676, and $293 for the years ended
December 31, 2001, 2000 and 1999, respectively.

The amount payable to HNC Software Inc. includes
allocations of expenses for all corporate services, income taxes
and other intercompany transactions, plus cash advances net of
repayments. The amount payable did not bear interest. The
average monthly balances due to HNC up to our separation on
October 2, 2000 for the years ended December 31, 2000
and 1999 were, $1,719 and $10,243, respectively.

The change in the amount payable to HNC includes
the following:

|                                |                              |      |      |      |  |      |         |        |  |   |         |       | 
|------------------------------- | ---------------------------- | ---- | ---- | ---- |  | ---- | ------- | ------ |  | - | ------- | ----- | 
|                                |                              | 2001 |      | 2000 |  | 1999
|                                |                              |      |      |      |  |     
|Balance at beginning of period  |                              | $    | 598  |      |  | $    | 15,399  |        |  | $ | 5,944   |      
|Cost allocations payable to HNC |                              |      | 0    |      |  |      | 598     |        |  |   | 5,408   |      
|Cash transfers from HNC         |                              |      | 0    |      |  |      | 0       |        |  |   | 51,456  |      
|Cash transfers to HNC           |                              |      | (598 | )    |  |      | (15,399 | )      |  |   | (47,409 | )    
|                                |                              |      |      |      |  |      |         |        |  |   |         |      
|                                | Net change during the period |      |      | 598  |  |      |         | 14,801 |  |   |         | 9,455 | 
|                                |                              |      |      |      |  |      |         |        |  |   |         |      
|Balance at end of period        |                              | $    | 0    |      |  | $    | 598     |        |  | $ | 15,399  |      
|                                |                              |      |      |      |  |      |         |        |  |   |         |      

56



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(in thousands, except for per share
amounts)


Note 18  Selected Quarterly
Financial Data (Unaudited)

|                                          |  |        |        |         |  |        |        |        |  |       |        |   |  |   |        |  |  |   |         |  
|----------------------------------------- |  | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ----- | ------ | - |  | - | ------ |  |  | - | ------- | -
|2001                                      |  | Mar 31 |        | June 30 |  | Sep 30 |        | Dec 31 |  | Total
|                                          |  |        |        |         |  |        |        |        |  |      
|Revenues                                  |  |        | 37,025 |         |  |        | 43,641 |        |  |       | 47,521 |   |  |   | 51,287 |  |  |   | 179,474 |  
|Gross profit                              |  |        | 20,446 |         |  |        | 25,324 |        |  |       | 26,721 |   |  |   | 31,958 |  |  |   | 104,449 |  
|Net (loss)/income                         |  |        | (6,821 | )       |  |        | (1,098 | )      |  |       | (6,855 | ) |  |   | 464    |  |  |   | (14,310 | )
|Basic and diluted (loss)/income per share |  | $      | (0.14  | )       |  | $      | (0.02  | )      |  | $     | (0.14  | ) |  | $ | 0.01   |  |  | $ | (0.29   | )

|                                 |  |        |         |         |  |        |         |        |  |       |        |   |  |   |        |   |  |   |         |  
|-------------------------------- |  | ------ | ------- | ------- |  | ------ | ------- | ------ |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|2000                             |  | Mar 31 |         | June 30 |  | Sep 30 |         | Dec 31 |  | Total
|                                 |  |        |         |         |  |        |         |        |  |      
|Revenues                         |  |        | 13,964  |         |  |        | 19,589  |        |  |       | 26,362 |   |  |   | 32,042 |   |  |   | 91,957  |  
|Gross profit                     |  |        | 3,267   |         |  |        | 7,077   |        |  |       | 11,330 |   |  |   | 16,538 |   |  |   | 38,212  |  
|Net loss                         |  |        | (11,286 | )       |  |        | (15,214 | )      |  |       | (9,507 | ) |  |   | (6,898 | ) |  |   | (42,905 | )
|Basic and diluted loss per share |  | $      | (0.24   | )       |  | $      | (0.32   | )      |  | $     | (0.20  | ) |  | $ | (0.14  | ) |  | $ | (0.91   | )

The summation of quarterly net loss per share may
not equate to the year-end calculation as quarterly calculations
are performed on a discrete basis.

57



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |           
| | ----------
| | Retek Inc.



| |     |                     
| | --- | --------------------
| | By: | /s/ STEVEN D. LADWIG

| |                        
| | -----------------------
| |                        
| | Steven D. Ladwig       
| | Chief Executive Officer

We, the undersigned directors and executive
officer of the Registrant, hereby severally constitute Steven D.
Ladwig and Gregory A. Effertz, and each of them singly, our true
and lawful attorneys with full power to them and each of them to
sign for us, and our names in the capacities indicated below,
any and all amendments to the Annual Report on Form 10-K
filed with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by
our said attorneys to any and all amendments to said Annual
Report on Form 10-K.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below on
March 28, 2002 by the following persons on behalf of the
Registrant and in the capacities indicated.

|                                         |  |                                                                                                                           
|---------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------
|Signature                                |  | Title (Capacity)                                                                                                          
|                                         |  |                                                                                                                           
|/s/ STEVEN D. LADWIGSteven D. Ladwig     |  | Chief Executive Officer, Director
	(PRINCIPAL EXECUTIVE OFFICER)                                                          
|/s/ GREGORY A. EFFERTZGregory A. Effertz |  | Vice President, Finance & Administration,
	Chief Financial Officer, Treasurer and Secretary
	(PRINCIPAL FINANCIAL OFFICER)
|/s/ JOHN BUCHANANJohn Buchanan           |  | Chairman of the Board of Directors                                                                                        
|/s/ N. ROSS BUCKENHAMN. Ross Buckenham   |  | Director                                                                                                                  
|/s/ WARD CAREYWard Carey                 |  | Director                                                                                                                  
|/s/ GLEN A. TERBEEKGlen A. Terbeek       |  | Director                                                                                                                  
|/s/ STEPHEN E. WATSONStephen E. Watson   |  | Director                                                                                                                  

58



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##### 



RETEK INC.

SCHEDULE II  Valuation and
Qualifying Accounts and Reserves

For the Years Ended December 31, 2001,
2000, and 1999


|                                                                |  |            |       |           |  |             |       |               |  |  |        |   |  |  |       | 
|--------------------------------------------------------------- |  | ---------- | ----- | --------- |  | ----------- | ----- | ------------- |  |  | ------ | - |  |  | ----- | 
|                                                                |  | Balance at |       |           |  |             |       |              
|                                                                |  | Beginning  |       | Costs and |  | Deductions/ |       | Balance at   
|                                                                |  | of Period  |       | expenses  |  | write-offs  |       | End of Period
|                                                                |  |            |       |           |  |             |       |              
|Year ended December 31, 2001 
	allowance for doubtful accounts |  |            | 5,216 |           |  |             | 2,808 |               |  |  | (2,900 | ) |  |  | 5,124 | 
|Year ended December 31, 2000 
	allowance for doubtful accounts |  |            | 3,940 |           |  |             | 1,483 |               |  |  | (207   | ) |  |  | 5,216 | 
|Year ended December 31, 1999 
	allowance for doubtful accounts |  |            | 1,571 |           |  |             | 2,399 |               |  |  | (30    | ) |  |  | 3,940 | 

59



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##### 



Index to Exhibits

|        |           |                     |  |                                                                                              
|------- | --------- | ------------------- |  | ---------------------------------------------------------------------------------------------
|Exhibit |           |                    
|Number  |           | Exhibit Description
|        |           |                    
|        | 2.1**     |                     |  | Agreement and Plan of Merger and Reorganization
	between Retek Logistics, Inc. and Registrant
|        | 2.2*      |                     |  | Separation Agreement                                                                         
|        | 2.3*      |                     |  | Technology License Agreement                                                                 
|        | 2.4*      |                     |  | Tax Sharing Agreement                                                                        
|        | 2.5*      |                     |  | Services Agreement                                                                           
|        | 2.6*      |                     |  | Corporate Rights Agreement                                                                   
|        | 2.7*      |                     |  | Stock Contribution Agreement                                                                 
|        | 3.1*      |                     |  | Amended and Restated Certificate of Incorporation
	of the Registrant                         
|        | 3.2*      |                     |  | Bylaws of the Registrant                                                                     
|        | 10.1+     |                     |  | Industry Solutions Initiative Master Agreement
	between Oracle Corporation and Retek         
|        | **        |                     |  | Information Systems, Inc.                                                                    
|        | 10.5**    |                     |  | Retek 1999 Equity Incentive Plan                                                             
|        | 10.6**    |                     |  | Retek 1999 Employee Stock Purchase Plan                                                      
|        | 10.7**    |                     |  | Retek 1999 Director Stock Option Plan                                                        
|        | 10.8**    |                     |  | Employment Agreement of Jeremy Thomas                                                        
|        | 10.9***   |                     |  | Lease Agreement between Ryan 900, LLC and Retek
	Inc.                                        
|        | 10.10***  |                     |  | First Amendment to Lease Agreement between Ryan
	900, LLC and Retek Inc.                     
|        | 10.11**** |                     |  | Employment Agreement of Steven D. Ladwig                                                     
|        | 21.1      |                     |  | Schedule of Subsidiaries                                                                     
|        | 23.1      |                     |  | Consent of PricewaterhouseCoopers LLP                                                        
|        | 24.1      |                     |  | Power of Attorney (contained on signature page)                                              




|   |                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|+  | Portions of this exhibit were granted
	confidential treatment by the Securities and Exchange
	Commission. Accordingly, portions thereof were omitted and filed
	separately.
|  
|*  | Filed as an exhibit to our 1999 Annual Report on
	Form 10-K filed with the Securities and Exchange Commission
	on March 15, 2000, and incorporated herein by reference.    
|  
|** | Filed as an exhibit to our Registration Statement
	on Form S-1 (Registration No. 333-86841), effective
	November 17, 1999, and incorporated herein by reference.           



|     |                                                                                                                                                                                                             
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|***  | Filed as an exhibit to our 2000 Annual Report on
	Form 10-K filed with the Securities and Exchange Commission
	on April 2, 2001, and incorporated herein by reference.                                      
|    
|**** | Filed as an exhibit to our Quarterly Report on
	Form 10-Q for the quarter ended June 30, 2001, filed
	with the Securities and Exchange Commission on August 14,
	2001, and incorporated herein by reference.

60