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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,
2002

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.

Indicate by a check mark whether the registrant
is an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of
1934).     Yes  x     No

The aggregate market value of common stock held
by non-affiliates of the Registrant was approximately
$211,305,385 as of March 7, 2003, based upon the closing
price of $4.28 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 7, 2003, the number of shares of
common stock outstanding was 53,176,881.

DOCUMENTS INCORPORATED BY
REFERENCE:Information
required by Part III of this document is incorporated by
reference to certain portions of our definitive Proxy Statement
(which will be filed within 120 days after
December 31, 2002) for its 2002 Annual Meeting of
Stockholders to be held on June 3, 2003.



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RETEK INC.

FORM 10-K

For the Fiscal Year Ended December 31,
2002


INDEX

|         |                                                                                                   |    |   
|-------- | ------------------------------------------------------------------------------------------------- | -- | --
|PART I   |                                                                                                   | 3 
|         | Item 1: Business                                                                                  |    | 3 
|         | Item 2: Property                                                                                  |    | 12
|         | Item 3: Legal Proceedings                                                                         |    | 13
|         | 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                           |    | 36
|         | Item 8: Financial Statements and
    Supplementary Data                                           |    | 36
|         | Item 9: Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure  |    | 37
|PART III |                                                                                                   | 38
|         | Item 10: Directors and Executive Officers of
    the Registrant                                   |    | 38
|         | Item 11: Executive Compensation                                                                   |    | 38
|         | Item 12: Security Ownership of Certain
    Beneficial Owners and Management                       |    | 38
|         | Item 13: Certain Relationships and Related
    Transactions                                       |    | 38
|         | Item 14: Controls and Procedures                                                                  |    | 38
|         | Item 15: Exhibits, Financial Statement
    Schedules and Reports on Form 8-K                      |    | 39

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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, intends, 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. There are a number of
factors that could cause our results to differ materially from
those indicated by such forward looking statements. These
factors are included those set forth in the section titled
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. We provide innovative
technology solutions that help retailers create, manage and
fulfill consumer demand. Our solutions and services have been
developed specifically to meet the needs of the retail industry.
We believe the processes and methodologies embedded in our
solutions reflect the best retail practices of our customers and
partners. By supporting core retail business processes, our
solutions help retailers improve the efficiency of their
operations and build stronger relationships with their customers.

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 to more than 200 retailers across a
variety of retail sectors.

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 developed and marketed 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. All of our filings with the Securities
and Exchange Commission (SEC) are available free of charge on or
through our web site as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. The information on our web site is not part of this Annual
Report on Form 10-K.

Retek is a trademark 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, our or
us used in this Annual Report on Form 10-K
refer to Retek Inc. and its consolidated subsidiaries.

Reteks Solution

Historically, large and mid-sized retailers have
relied upon custom-built systems, often developed internally, to
manage business transactions with trading partners and
customers. These legacy systems are typically built on 1970s
mainframe technology, are not Internet-enabled, and do not
permit collaboration among a retailers partners, suppliers
and other members of the supply chain. More recently, retailers
have begun to purchase packaged solutions designed specifically
for the retail industry. Many of these products lack the
scalability retailers require to manage the large amounts of
data their business generates. Some retailers have also adopted
enterprise resource planning systems. These complex systems can
be expensive to implement and maintain, typically lack the
scalability required by retailers, and do not have specific core
retail functionality.

Today, retailers face the additional challenge of
operating in a very competitive multi-channel environment. As
retailers expand their sales outlets to include the Internet,
catalog, kiosk and other distribution networks, the complexity
of managing inventory and meeting customer demands places
tremendous pressure on their business processes and IT
infrastructure. To meet consumer expectations, a retailer needs
to deliver the retailing experience on the customers
terms, which means having the right product, at the right time
and in the right place across the multi-channel touch points.
Retailers need strong forecasting, planning, allocation,
replenishment and merchandising functions to profitably achieve

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this goal. A comprehensive, integrated software
infrastructure that spans from supplier to consumer and gives
the retailer visibility, flexibility and control to meet demand,
is required for successful retailers to compete effectively.


We believe a market opportunity exists to provide
retailers with a software solution that is 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 several retail sectors, such as fashion, hard-lines,
mass merchandise or food and drug. In addition, the solution
should be highly scalable to process and analyze vast amounts of
product, store, customer and supply chain data unique to the
retail industry.

We have developed and deployed web-based software
solutions that enable retailers to manage the entire scope of
their operations. These operations include point-of-sale,
customer relationship management, merchandising, supply chain
management and planning, forecasting and optimization
operations. Key areas which differentiate our software solutions
include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Value
    Our modular architecture helps retailers meet return on
    investment (ROI) objectives by allowing them to implement the
    most critical and valuable applications first. This modular
    architecture decreases migration path risk for the replacement
    of legacy systems and increases the probability of an on-time,
    on-budget implementation project. 
|
| |  | Proven
    We are a leading provider of retail infrastructure software and
    services. We understand the complex needs of retailers and have
    designed our solutions specifically for the retail industry. We
    provide certain software products and services infrastructure
    for retailers with combined revenues of over $900 billion
    annually.                
|
| |  | Scalable
    Our solutions are engineered to provide scalability to
    efficiently handle large volumes of transactions and users.                                                                                                                                                                                                                                             
|
| |  | Innovative
    Our solutions include some of the most advanced technologies
    available to retailers. We invested over 160,000 development
    days on our last enterprise release, Retek 10,
    demonstrating our commitment to research and development.                                                                                                                   
|
| |  | Scientific
    To help retailers make smarter and better decisions, we embed
    predictive and optimization technology into many areas of our
    enterprise solutions, including planning, allocation and
    replenishment. Our research labs have dedicated professionals
    focused on applying complex scientific solutions to address the
    problems facing retailers.

Strategy

Our mission is to create value for retailers by
providing innovative technology solutions that help to create,
manage, and fulfill consumer demand. In pursuing this goal, we
intend to maintain and expand our status as a leading provider
of fully scalable web-based software solutions for the retail
industry. Key elements of our strategy include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Increase our market share of retail packaged
    applications and services.We believe
    we can continue to build and expand our position of leadership
    within the retail packaged software applications market as the
    retail industry increasingly turns to packaged software
    applications as an alternative to expensive in-house and custom
    developed applications.
|
| |  | Provide high customer satisfaction.The retail industry is strongly
    influenced by formal and informal references. We believe we have
    the opportunity to expand market share by providing high levels
    of customer satisfaction with our current customers, thereby
    fostering strong customer references to support sales activities.                                     
|
| |  | Provide deployed return on investment (deliver
    value to our customers).We believe
    that maximizing our customers deployed return on
    investment will help us compete in our market space and increase
    our market share.                                                                                                                                                 

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Become the preferred application and
    technology architecture for the retail industry on a global
    basis.By leveraging both our success
    within the Tier 1 retail market and a renewed focus on
    retails Mid-Market, we believe we are uniquely positioned
    to become the preferred application and technology architecture
    provider for retail software and associated services. We believe
    our strong market share within the core backbone of a
    retailers application architecture can be leveraged to
    develop a leading technology and best business practice standard.

Products

We develop and sell software solutions that
support virtually all of the operational activities of a typical
retailer. Our software solutions create value by applying
innovative technology to help our customers efficiently create,
manage and fulfill consumer demand. Our products can be deployed
individually to meet specific business needs, or as part of a
scalable and fully integrated, end-to-end solution. Our primary
software solutions consist of six integrated, but independently
deployable groups of products, which are accessed via an
Internet browser and can be hosted by a customer or by an
outside application service provider. The six product groups
are: Merchandise Optimization and Planning; Merchandise
Operations Management; Inventory Optimization and Planning;
Supply Chain Management; Integrated Store Operations; and
Enterprise Infrastructure.

Merchandise
Optimization and Planning

Our solutions utilize advanced technology to help
retailers make smarter decisions and to enable management by
exception. Retailers require an accurate forecast of future
consumer demand and the ability to apply sophisticated
mathematical models and optimization routines to determine what
products should be on the shelves of their stores, when those
products should be re-ordered, how products should be priced,
what should be marked down and when those markdowns should occur.

Key business functions covered within the area of
Merchandise Optimization and Planning include: merchandise and
channel planning, assortment planning, item planning, visual
space planning, promotional planning, markdown optimization,
price optimization, assortment to space optimization and
customer optimization.

Solutions supporting these business functions
include:



| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® TopPlanTM  Our
    solution provides highly flexible financial, product and
    location planning with the ability to fully reconcile and
    approve plans.                                                                                                                                                                                                                  
|
| | Retek® AssortTM  Our
    solution supports the planning of product assortments consistent
    with overall financial plans as well as space constraints. It
    gives retailers the ability to optimize the assortment and
    presentation of merchandise at an individual product and store
    level, resulting in improved service levels and lower overall
    inventory levels.
|
| | Retek® KeyPlanTM  Our
    solution provides item level planning capabilities to produce a
    bottom up plan in support of, and in conjunction with, an
    overall financial plan.                                                                                                                                                                                                  
|
| | Retek® Visual Space
    PlanningTM  Our solution provides space
    planning capabilities that enable a retailer to visualize
    merchandise assortments in a three dimensional environment and
    to optimize the use of space for the highest possible return on
    the inventory investment.                                                                                   
|
| | Retek® Customer Revenue
    OptimizationTM  Our solution provides a
    tool kit of analytical methods and algorithms that
    are used in conjunction with Reteks proprietary
    behavior profiling techniques to deliver insight on
    customer and product behavior.                                                                                                       

Merchandise
Operations Management

Our Merchandise Operations Management solutions
enable retailers to coordinate their operations and maintain a
single, comprehensive source of consistent and accurate data.
This coordination enables retailers

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to provide consumers with the right product, at
the right place and time, in the right quantities and for the
right price.


Key business functions covered within the area of
Merchandise Operations Management include merchandise
management, sales audit, rules based pricing, invoice matching
and collaborative design and source.

Solutions supporting these business functions
include:



| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Merchandising
    SystemTM  Our solution is a flexible,
    scalable, and proven foundation from which to execute a broad
    range of core merchandising activities, including inventory
    replenishment, purchasing and vendor management.
|
| | Retek® Sales AuditTM 
    Our solution is a data cleansing and loss prevention application
    that cleans the data coming from a retailers point-of-sale
    devices while also identifying suspicious transactions.                               
|
| | Retek® Invoice
    MatchingTM  Our solution accurately and
    efficiently automates the process of verifying products received
    against supplier invoices within the cost and quantity tolerance
    levels specified for each supplier.         
|
| | Retek® Price
    ManagementTM  Our solution provides a
    well-defined and efficient price change process that allows for
    aggregated permanent and clearance price change execution.                                                            
|
| | Retek® Trade
    ManagementTM  Our solution automates the
    international procurement process, linking partners in the
    supply chain and moving information as products move through the
    sourcing, buying and delivery processes.           
|
| | Retek® WebTrackTM 
    Our solution links retailers and their trading partners via the
    Internet to collaboratively manage the process of sourcing goods.                                                                                         
|
| | Retek® DesignTM  Our
    solution enables real-time visual collaboration to support new
    product development.                                                                                                                                     

Inventory
Optimization and Planning

Inventory management is a data intensive task in
the retail industry. A combination of large product assortments,
multiple store and warehouse locations, numerous vendors and
high sales volumes makes it very challenging for retailers to
accurately match supply with demand. Our Inventory Optimization
and Planning solutions enable retailers to unite their planning
functions with execution systems. These scalable applications
use optimization techniques to drive improvements in inventory
turns and profitability. Key business functions covered within
the area of Inventory Optimization and Planning include demand
forecasting, replenishment planning, allocation planning,
replenishment optimization, collaborative planning, forecasting
and replenishment and vendor managed inventory.

Solutions supporting these business functions
include:



| |                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Demand
    ForecastingTM  Our solution utilizes
    advanced scientific formulas to produce highly accurate
    forecasts used for supply chain planning, allocation and
    replenishment.                                                                                                                                                                
|
| | Retek® PromoteTM  Our
    solution provides promotional forecasting using advanced
    technology to plan, track and analyze the profitability of
    promotions or the effectiveness of specific promotional features
    and components.                                                                                                                        
|
| | Retek® Advanced Inventory
    PlanningTM  Our solution integrates with
    Retek Demand Forecasting to produce time-phased order plans that
    are synchronized with the complete supply chain and take into
    account real world constraints such as actual inventory,
    logistics, and available labor. This solution is scheduled for
    release in 2003.

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| |                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® AllocationTM 
    Our solution supports the process of allocating products to
    individual stores and manages multiple types of allocation,
    ensuring the right quantity of product in the right location at
    the right time to maximize sales, profits and customer
    satisfaction.                                             
|
| | Retek® Replenishment
    OptimizationTM  Our solution uses advanced
    forecasting and simulation techniques to determine the optimal
    parameters for a retailers supply chain. These parameters
    include how often an item should be ordered and whether it
    should be stocked in a warehouse or shipped directly from a
    supplier.
|
| | Retek® CollaborateTM 
    Our solution is web-based and collaborative and supports
    standard best practices for Collaborative Planning Forecasting
    and Replenishment (CPFR). This enables retailers to share
    information directly with suppliers regarding sales trends and
    inventory needs.                                       
|
| | Retek® Vendor Managed
    InventoryTM  Our solution is designed to
    drive product replenishment by SKU, by location, enabling
    vendors to play a more direct role in the management of their
    inventory in the supply chain.                                                                                                             

Supply
Chain Management

Retailers devote significant resources to
managing their supply chains. Advances in technology have
enabled retailers to take greater control of their supply
chains, resulting in improved service levels with lower
inventories and operating costs. Our Supply Chain Management
(SCM) solutions put retailers in control of their supply chains
by providing the transaction support necessary to move goods as
well as the tools necessary to properly manage, measure and
control the global movement of goods. Key business functions
covered within the area of Supply Chain Management include
import management, transportation, and warehouse and labor
management.

Our primary solution supporting these business
practices is:



| |                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Distribution
    ManagementTM  Our solution is a
    best-of-breed warehouse management system that plans, manages
    and optimizes distribution center operations while extending
    execution capabilities across the supply chain to trading
    partners.

Integrated Store Operations

Store operations represent the largest expense
that retailers incur. New technologies allow retailers to reduce
store operation costs and improve customer service. Our
Integrated Store Operations (ISO) solutions support these goals,
leveraging a common web-based, scalable and open architecture
that is operating system and hardware independent. Key business
functions covered within the area of Integrated Store Operations
include point of sale, store back office (inventory management)
and store labor management.

Solutions supporting these business practices
include:



| |                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek®
    Point-of-SaleTM  Our solution provides
    retailers a technologically advanced application that allows
    customers to complete a purchase anywhere in the store. The
    application provides rapid execution and greater personalization
    while enabling reduced operating costs and greater flexibility.                                                         
|
| | Retek® Labor
    ManagementTM  Our solution provides time
    and attendance and labor scheduling capabilities enabling
    retailers to manage complex scheduling requirements, to reduce
    fraud and to reduce the cost of labor in the stores.                                                                                                                                 
|
| | Retek® Store Inventory
    ManagementTM  Our solution provides
    instantaneous, real-time data communications between stores and
    the corporate office. This application supports store level
    activities such as item look-up, stock counts, and transfers,
    improving the accuracy of inventory information, improving
    in-store efficiency and improving sell-thru.

Additional companion products in ISO support
consumer interaction and selling efficiency.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® BrickstreamTM 
    Our solution allows retailers to monitor customer shopping
    behavior and deliver back to the retailer aggregate information
    about customer check-out wait times, customer shopping patterns,
    and customer interactions with promotions and displays.                                                                                                                                       
|
| | Retek® Customer Order
    ManagementTM  Our solution supports
    retailers that sell through catalogs and web sites by providing
    accurate inventory and customer order information. As a result,
    customers are presented with a consistent shopping experience
    and retailers are able to maintain a comprehensive view of the
    customer, while reducing the amount of inventory necessary to
    satisfy demand.
|
| | Retek® Data
    WarehouseTM  Our solution provides
    web-based performance analysis that is tailored for use by
    individual store managers.                                                                                                                                                                                                                                                                                

Enterprise Infrastructure

Supporting a retail enterprise is a substantial
task. To quickly respond to changing consumer demands, and to
effectively plan and manage their supply chains, retailers need
robust and scalable IT systems. Key applications and
characteristics of an effective Enterprise Infrastructure
include data warehousing, alerts and workflow, intuitive
application usability and integration.

Solutions supporting these key characteristics
include:



| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Data WarehouseTM
    Our solution is a robust and retail-specific data warehouse that
    delivers improved decision support through advanced analytics.                                                                                                                                                                                                
|
| | Retek® Active Retail
    IntelligenceTM  Our solution provides
    exception management that immediately identifies opportunities,
    recommends courses of action and automates routine tasks.                                                                                                                                                               
|
| | Retek® WorkbenchTM 
    Our solution provides a role based portal for intuitive
    application navigation and enhanced usability by end users.                                                                                                                                                                                                                
|
| | Retek® Integration
    SolutionTM  Our solution offers
    message-based integration and monitoring through the Retek
    Integration Bus (RIB) which enables all Retek solutions to
    communicate with each other as well as with other applications
    developed by the retailer or acquired from outside vendors
    utilizing industry standard formats.

Retek Professional Services

Retek Professional Services helps retailers and
their integration partners implement Retek solutions rapidly and
cost effectively. We offer a comprehensive range of services
designed to address a retailers business and technical
objectives, including consulting, training and custom solution
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.
|
| |  | Technical support or maintenance services consist
    primarily of customer support services provided after
    implementation of our solutions.                                                                                                          

We also provide strategic technical advisory
services after product delivery. Project management support is
designed to help our customers exploit the full value and
functionality of our products.

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. Courses
cover topics such as technical architecture, business use of the
merchandizing functionality and development standards and
methodology.

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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 sectors of
retailing, including fashion, department stores, catalog and
consumer direct, specialty retailers, mass merchandise retailers
and food, drug and convenience stores. During fiscal year 2002,
we had two customers who each 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 United States government.

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
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 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. Revenue generated from our direct sales
channel accounted for approximately 98%, 96%, and 93% of our
total revenue in 2002, 2001 and 2000, 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, 2002.
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, 2002, 2001 and
2000, 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 15 of this Annual Report on
Form 10-K beginning on page 39.

Research and Development

Our research and development group has been a
critical component of our overall success. As of
December 31, 2002, our research and development group was
comprised of 331 individuals in Atlanta, GA, Cincinnati, OH,
Rochester, MN, Minneapolis, MN, Houston, TX 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.

Our research and development group is organized
on a centralized basis. Our research and development group is
responsible for product development, product management
processes, implementation of development strategy and release
path, delivery and support of our software applications. The
research and development group also has resources organized
around specific product offerings.

The research and development group is also
responsible for overall quality assurance and testing processes,
documentation, application architecture and methodology.

The research and development group operates with
a 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

9



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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.


Speed to market is critical to our success. We
believe that we have effectively used build, buy, and partner
strategies 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
$47.2 million, $42.6 million and $42.8 million in
the fiscal years 2002, 2001, and 2000, respectively. We believe
that significant investments in research and development will be
required in the future to remain competitive.

Competition

The markets for our software solutions are
intensely competitive, constantly evolving and subject to rapid
technological change. We encounter competition in our products
and services from a number of different sources, including
in-house technical staffs, traditional enterprise resource
planning vendors and other vendors of retail specific solutions.
Of these vendors, our principal competitors include
i2 Technologies, JDA Software, Manhattan Associates,
Manugistics and SAP. We compete with a substantial number of
other companies focused on providing point solution software
applications for specific segments of the retail application
market. In addition, there are new market entrants that may
offer competitive products in the future. 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 our product solution suite is
better than those of our competitors in its performance,
features and reliability. In addition, we have in the past
introduced new solutions and enhancements to our existing
solutions in a timelier manner. 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.

We expect competition may increase as a result of
software industry consolidation. For example, a number of
enterprise software companies have acquired point solution
providers to expand their product offerings. Our competitors may
also package their products in ways that may discourage users
from purchasing our products. Current and potential competitors
may establish alliances among themselves or with third parties
or adopt aggressive pricing policies to gain market share. In
addition, new competitors could emerge and rapidly capture
market share.

Proprietary Rights and Licensing

Our success and ability to compete are in part
dependent upon 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

10



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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 the e*Gate enterprise
application integration software from SeeBeyond Corporation,
business intelligence software from MicroStrategy, Inc. and the
Accumate component from Lucent Technologies. These licenses are
non-exclusive, worldwide and royalty-based. The royalties we
paid SeeBeyond, MicroStrategy and Lucent under these licenses
were, in each case, less than 5% of our total revenue in each of
the 2002, 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 Accenture, 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 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.

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, 2002, we had 735 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 31, 2003, are set forth below:

|                   |  |     |    |          |  |                                                                                                       
|------------------ |  | --- | -- | -------- |  | ------------------------------------------------------------------------------------------------------
|Name               |  | Age |    | Position
|                   |  |     |    |         
|Steven D. Ladwig   |  |     | 45 |          |  | President and Chief Executive Officer                                                                 
|John L. Goedert    |  |     | 37 |          |  | Chief Operating Officer                                                                               
|Gregory A. Effertz |  |     | 40 |          |  | Senior Vice President, Finance &
    Administration, Chief Financial Officer, Treasurer, and Secretary
|Peter A. Espinosa  |  |     | 43 |          |  | Senior Vice President, Field Operations                                                               
|Duncan B. Angove   |  |     | 36 |          |  | Vice President, Strategy and Marketing                                                                
|John R. Gray       |  |     | 38 |          |  | Chief Technology Officer                                                                              
|James B. Murdy     |  |     | 40 |          |  | Controller                                                                                            

11



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Steven D. Ladwigjoined us in August 2001 and is
currently our president and 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.

John L. Goedertjoined us in June 1996 as senior vice
president, research and development and is currently our chief
operating officer. 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 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.

Peter A. Espinosajoined us in April 2002 as senior vice
president, field operations. From May 2001 to March 2002,
Mr. Espinosa was with Vignette Corporation, a content
management applications solutions provider, serving most
recently as Senior Vice President of Global Sales and
Operations. From December 1999 to May 2001, Mr. Espinosa
was Vice President and Chief Sales Officer for NetSales, Inc., a
provider of e-business solutions for supplier enablement. From
May 1999 to December 1999, he was Vice President of North
American Sales for Cambridge Technology Partners, a global
e-services subsidiary of Novell, Inc. From May 1998 to May 1999,
Mr. Espinosa was the Vice President of World-Wide Sales and
Marketing for Peritus Software Services, an independent software
development organization. Prior to his employment with Peritus
Software Services, Mr. Espinosa worked at IBM Corp. for
17 years in a variety of sales and marketing positions. His
most recent position at IBM Corp. was as Executive Assistant to
the Chairman of the Board of Directors and Chief Executive
Officer. Mr. Espinosa received his Bachelor of Arts degree
in Speech Communications and Political Science from Luther
College in Decorah, Iowa.

Duncan B. Angovejoined us in September 1997 and is
currently vice president, strategy and marketing. From 1994 to
1997, he served as a consultant with Andersen Consultings
Consumer Products Practice, specifically in retail and
distribution. Mr. Angove holds a BSC Economics degree from
the University College London.

John Grayjoined us
in April 2002 and is currently our chief technology officer.
From February 1999 to April 2002 was with Chelsea Market
Systems, LLC, serving most recently as Chief Architect and Vice
President of Research and Development. From 1998 to 1999 he was
a Java Architect with Sun Microsystems and from 1996 to 1998, he
served as a Consultant with Sprint Corporation. Mr. Gray
holds a Bachelor of Business Administration in Information
Systems from the University of North Texas.

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; Cincinnati, Ohio; Rochester, Minnesota;
Houston, Texas; Australia, France, Germany, Japan 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
future requirements.

12



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Item 3:     Legal
Proceedings



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Federal Litigation in the U.S. District Court
    for the Southern District of New York

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 current and former officers and directors, and
certain underwriters of our initial public offering
(IPO). 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,
which the Court approved and entered as an order on
March 1, 2002. On April 20, 2002, the plaintiffs filed
an amended complaint in which they elected to proceed with their
claims against us and the individual officers and directors only
under Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. The amended complaint alleges that the prospectus
filed in connection with the IPO was false or misleading in that
it failed to disclose: (i) that the underwriters allegedly
were paid excessive commissions by certain of the
underwriters customers in return for receiving shares in
the IPO 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 IPO. The complaint further alleges that the
underwriters offered to provide positive market analyst coverage
for the Company after the IPO, which had the effect of
manipulating the market for our stock. Plaintiffs contend that,
as a result of the omissions from the prospectus and alleged
market manipulation through the use of analysts, the price of
our common stock was artificially inflated between
November 18, 1999 and December 6, 2001, and that the
defendants are liable for unspecified damages to those persons
who purchased our common stock during that period.

On July 15, 2002, the Company and the
individual defendants, along with the rest of the issuers and
related officer and director defendants, filed a joint motion to
dismiss based on common issues. Opposition and reply papers were
filed. The Court rendered its decision on February 19,
2003, which granted dismissal in part of a claim against one of
the individual defendants and denied dismissal in all other
respects. The class action suits may now proceed to the
discovery phase. We intend to defend against these claims
vigorously. Securities class action litigation can result in
substantial costs and divert our managements attention and
resources, which may have a material adverse effect on our
business and results of operations.



| |                                                                                
| | -------------------------------------------------------------------------------
| | Federal Litigation in the U.S. District Court
    for the District of Minnesota

Between October 30, 2002 and
December 8, 2002, several purported shareholder class
action suits were filed in federal district court in Minnesota.
The Court has not yet certified any class. The complaints
allege, among other things, violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 against us and
certain of our current and former officers and directors.
Specifically, the complaints allege that, among other things,
between October 17, 2001 and July 8, 2002 (the
Class Period), defendants made false and
misleading statements and/or concealed material adverse facts
from the market in press releases, presentations and SEC
disclosures. The complaints claim that our Company and the
individual defendants misled the market with respect to, among
other things our alliance with IBM, our ability to develop
certain software, and our expectations regarding certain
customer sales. Plaintiffs further allege that defendants
manipulated financial statements and failed to disclose problems
with existing and potential customer deals, which led to the
Companys stock price being artificially inflated during
the Class Period. The plaintiffs seek compensatory damages
and other unspecified relief. The federal court in Minnesota
appointed a lead plaintiff and lead plaintiffs counsel on
February 14, 2003, and we anticipate that the lead
plaintiff will file a Consolidated Complaint. After such
Consolidated Complaint is filed, defendants will answer or
respond to these allegations.

We dispute plaintiffs allegations in the
federal class actions in Minnesota and believe that the
allegations are subject to a variety of meritorious defenses. We
intend to establish a vigorous defense.

13



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While there can be no assurance, and while the
outcome of federal class action litigation cannot be predicted
with certainty, our management currently believes that the
ultimate outcome of the federal class action litigation in
Minnesota is unlikely to have a material adverse affect on our
financial position, results of operations or cash flows. Despite
our belief that the federal class action complaints in Minnesota
are without merit, it is possible that the federal litigation in
Minnesota could be resolved adversely. Were the federal court in
Minnesota to issue a ruling or rulings unfavorable to us, such
ruling or rulings could have a material adverse impact on the
results of operations for the period in which the ruling occurs,
or in a period thereafter.




| |                                                              
| | -------------------------------------------------------------
| | State Derivative Litigation in Hennepin
    County, Minnesota

In addition to the above federal litigation, in
December 2002 two shareholder derivative lawsuits were filed in
state court in Hennepin County, Minnesota, against certain of
our current and former officers and directors, naming us as a
nominal defendant. Plaintiffs in both derivative cases have
agreed to coordinate their respective actions, and the process
of coordination is currently underway. The derivative suits
claim that certain of our officers and directors breached their
fiduciary duties to us and our stockholders by: (i) selling
shares of our common stock while in possession of material
adverse non-public information regarding our business and
prospects, and (ii) disseminating inaccurate information
regarding our business and prospects to the market and/or
failing to correct such inaccurate information. The derivative
complaints seek compensatory and other damages, restitution,
disgorgement, and other legal and equitable relief. As stated
above, the complaints are brought derivatively on our behalf,
and consequently do not seek relief from us. We however, have
entered into indemnification agreements in the ordinary course
of business with certain of the officer and director defendants
and may be obligated throughout the pendency of this action to
advance payment of legal fees and costs incurred by those
defendants pursuant to our obligations under the indemnification
agreements and/or applicable Delaware law.

While there can be no assurance, our management
currently believes that the ultimate outcome of the derivative
proceedings will not have a material adverse affect on our
financial position, results of operations, or cash flows.
However, we are unable to predict with certainty the results of
the derivative litigation.



| |                                                                    
| | -------------------------------------------------------------------
| | Legal Proceedings that Arise in the Ordinary
    Course of Business

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, 2002.

14



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##### 



PART II

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

Shares of our common stock are traded on the
Nasdaq National Market under the symbol RETK.

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

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|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 | 
|2002:          |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 35.00 |     |  | $ | 17.09 | 
|Second Quarter |  | $    | 28.51 |     |  | $ | 18.20 | 
|Third Quarter  |  | $    | 24.30 |     |  | $ | 2.99  | 
|Fourth Quarter |  | $    | 4.75  |     |  | $ | 1.50  | 

On March 7, 2003, the last reported sale
price for shares of our common stock on the Nasdaq National
Market was $4.28 per share.

There were approximately 192 holders of
record of our common stock as of March 7, 2003.

Equity Compensation Plan Information

|                                                               |       |                  |            |                   |  |                           |       |       |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ---------------- | ---------- | ----------------- |  | ------------------------- | ----- | ----- |  |  | --------- | --------- | 
|                                                               |       | Number of        |            |                   |  |                          
|                                                               |       | securities to be |            |                   |  |                          
|                                                               |       | issued upon      |            |                   |  |                          
|                                                               |       | exercise of      |            | Weighted-average  |  | Number of securities     
|                                                               |       | outstanding      |            | exercise price of |  | remaining available for  
|                                                               |       | options,         |            | outstanding       |  | future issuance under    
|                                                               |       | warrants and     |            | options, warrants |  | equity compensation plans
|                                                               |       | rights as of     |            | and rights as of  |  | (excluding securities    
|                                                               |       | December 31,     |            | December 31,      |  | reflected in column (a)) 
|                                                               |       | 2002             |            | 2002              |  | as of December 31, 2002  
|Plan Category                                                  |       | (a)              |            | (b)               |  | (c)                      
|                                                               |       |                  |            |                   |  |                          
|Equity compensation plans approved by security
    holders     |       |                  | 10,571,289 |                   |  | $                         | 18.45 |       |  |  | 4,161,877 |          
|Equity compensation plans not approved by
    security holders |       |                  |           |                   |  |                           |      |       |  |  |          |          
|                                                               | Total |                  |            | 10,571,289        |  |                           | $     | 18.45 |  |  |           | 4,161,877 | 

On February 5, 2003, our Board of Directors
approved a grant of 4,396,750 stock options to our employees.
This grant utilized most of our shares available for future
issuance as of that date. The recent trading prices for our
stock have reduced the value of stock options granted to
employees prior to 2003. We granted these options to employees
in February 2003 across all business functions and all
geographies to assist in the retention of personnel, which is
critical to our business.

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.

15



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##### 



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 15 and Managements
Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7.

|                                                         |  |                                       |          |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        | 
|-------------------------------------------------------- |  | ------------------------------------- | -------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | - |  | - | ------ | 
|                                                         |  |                                      
|                                                         |  | Year Ended December 31,              
|                                                         |  |                                      
|                                                         |  | 2002                                  |          | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                         |  |                                       |          |      |  |      |         |      |  |     
|                                                         |  |                                      
|                                                         |  | (in thousands, except per share data)
|Consolidated Statement of Income
    Data:               |  |                                       |          |      |  |      |         |      |  |      |         |   |  |   |        |   |  |   |        | 
|Total revenue                                            |  | $                                     | 191,832  |      |  | $    | 179,474 |      |  | $    | 91,957  |   |  | $ | 69,159 |   |  | $ | 55,033 | 
|Gross profit                                             |  |                                       | 107,299  |      |  |      | 104,449 |      |  |      | 38,212  |   |  |   | 45,166 |   |  |   | 41,181 | 
|Operating (loss) income                                  |  |                                       | (46,742  | )    |  |      | (23,319 | )    |  |      | (65,598 | ) |  |   | (7,096 | ) |  |   | 8,088  | 
|Net (loss) income                                        |  |                                       | (123,583 | )    |  |      | (14,310 | )    |  |      | (42,905 | ) |  |   | (5,369 | ) |  |   | 3,878  | 
|Basic and diluted net (loss) income per
    common share |  | $                                     | (2.35    | )    |  | $    | (0.29   | )    |  | $    | (0.91   | ) |  | $ | (0.13  | ) |  | $ | 0.10   | 
|Cash dividend declared per common share                  |  |                                       |         |      |  |      |        |      |  |      |        |   |  |   |       |   |  |   |       | 

|                                 |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|-------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                 |  |               
|                                 |  | December 31,  
|                                 |  |               
|                                 |  | 2002           |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                 |  |                |         |      |  |      |         |      |  |     
|                                 |  |               
|                                 |  | (in thousands)
|Consolidated Balance Sheet Data: |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|Cash and cash equivalents        |  | $              | 56,464  |      |  | $    | 70,166  |      |  | $    | 31,058  |  |  | $ | 83,680  |  |  | $ | 415    | 
|Working capital                  |  |                | 46,857  |      |  |      | 59,309  |      |  |      | 35,069  |  |  |   | 84,977  |  |  |   | 12,876 | 
|Total assets                     |  |                | 198,567 |      |  |      | 299,370 |      |  |      | 195,183 |  |  |   | 154,233 |  |  |   | 51,283 | 
|Payable to HNC Software Inc.     |  |                |        |      |  |      |        |      |  |      | 598     |  |  |   | 15,399  |  |  |   | 5,944  | 
|Debt obligations                 |  |                | 159     |      |  |      | 236     |      |  |      | 453     |  |  |   |        |  |  |   |       | 
|Total stockholders equity       |  |                | 101,448 |      |  |      | 203,523 |      |  |      | 124,595 |  |  |   | 123,975 |  |  |   | 36,016 | 

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 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
developed and marketed 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. 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
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

16



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##### 



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.

Significant Trends and Developments in our
Business

Economic Conditions in the Retail
Industry.Recently, we have faced new
challenges as the result of progressively weakening worldwide
economic conditions. We believe that these global economic
conditions have resulted in substantial reductions in
information technology spending by our customers and potential
customers, and have delayed the closing of some software license
transactions. The retail industry will continue to be negatively
impacted if current adverse economic conditions and fear of war
or terrorist attacks persist for an extended time period.
Weakened global economic conditions have in the past, and may in
the future, lengthen our selling cycles and negatively impact
our business, operating results and financial condition.

New Products and
Markets.Our customers have indicated
to us the importance of good information technology solutions at
the retail store level because store operations are the largest
component of operating expenses incurred by retailers. In 2002,
we acquired substantially all of the technology of Chelsea
Market Systems, LLC (Chelsea), which included a
point-of-sale software solution. With this acquisition, we
acquired a point-of-sale solution that, when combined with our
existing product suite, allows us to better address our
customers technology requirements in the store. Also, at
the end of the first quarter 2002, we introduced our Retek 10
solution, which is designed to make our products work together
more effectively, and therefore increase their value to
customers and potential customers.

We are continuing to focus on the
Tier 1 retail market, but in 2002, we also
increased our sales and marketing efforts in the
Tier 2 retail market. We have recently
experienced increased sales activity in the
Tier 2 market that we would expect to continue
to contribute to revenue in future periods. We believe that our
new store offerings, such as the point-of-sale offering, have
contributed to the increase in sales activity in the Tier 2
market.

Mix of Domestic and International
Business.Revenue attributable to
customers outside of North America accounted for approximately
36%, 33% and 20% of our total revenues in 2002, 2001 and 2000,
respectively. We believe that this increase in international
sales is a result of investments we have made in our sales and
marketing presence in Europe and Asia, as well as a growing
acceptance of packaged software solutions by retailers outside
of North America. In 2002, we created a new subsidiary in Japan,
Retek Japan KK, to bolster Reteks presence in the region.
Although we cannot be certain that this trend toward a larger
percentage of our sales being derived from international
customers will continue, we believe that our investments in
international sales and marketing strengthen our competitive
position in these markets.

Growth in our Customer
Base.Our customer base has grown from
over 150 retailers at the end of 2000 to over 200 retailers at
the end of 2002. We believe that the growth of our customer base
is primarily attributable to our increased market penetration
and the breadth of our solution suite. Our investments in

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research and development and acquisitions and
alliances have helped us bring these new software solutions to
the market. Most recently, our acquisition of substantially all
of the technology of Chelsea is an example of a new product
offering that has expanded our market opportunity, with the
offering of a point-of-sale solution based upon an easy-to-use
Java architecture. Although we also intend to expand the number
of solutions sold to existing customers, we expect our product
expansion and sales and marketing efforts to result in continued
growth in our customer base.


Cost Containment
Measures.In response to global
economic conditions in 2002 and the resulting impact upon our
business, we put into place cost containment measures during the
second half of 2002 to align our cost structure with anticipated
revenue and to optimize cash flow. We reduced our workforce,
reduced the cost of outside contractors, reduced travel expenses
and reduced the amount of leased space utilized (see
Note 9  Restructuring and other in our
consolidated financial statements included in Item 15 of
this Annual Report on Form 10-K).

Acquisitions and Strategic
Relationships



| |                
| | ---------------
| | WebTrak Limited

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.



| |                             
| | ----------------------------
| | HighTouch Technologies, Inc.

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 Customer Order Management, 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.

Multiasia,
Inc.

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 use certain of our software
solutions and the right to sell our software solutions to the
e-business community in the Republic of China. The estimated
value of the shares received of $4.0 million was initially
accounted for under the cost method and was included as a
component of other assets. The corresponding $4.0 million
value of the software solutions was recorded as a component of
deferred revenue. As a result of evaluating the value of our
investment in MAI, we determined that no significant future cash
flows are probable. Accordingly, we removed the cost method
investment and deferred revenue from our balance sheet during
the third quarter of 2002. The transaction with MAI had no
impact on our results of operations or cash flows in 2000, 2001
or 2002.

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IBM

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 was amortized using the straight-line method over
the twenty-seven month term of this portion of the arrangement.
Accumulated amortization for these assets was $10.2, $5.7 and
$1.1 million, respectively as of December 31, 2002,
2001 and 2000.

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
$15 million related to 2003 in shares of our common stock
if the 2003 annual revenue target, as stated in the Stock
Purchase Agreement, is met. The Stock Purchase Agreement
provides for increases or decreases of the amounts to be paid to
IBM in the event this revenue target is exceeded or is partially
met. The revenue targets for the years ended December 31,
2002 and 2001 were not met; therefore, no amounts were paid to
IBM under this agreement with respect to sales in 2002 and 2001.

Henderson Ventures, Inc.

In April 2001, we signed a stock purchase
agreement, a warrant agreement and a software development and
distribution agreement with Henderson Ventures, Inc.
(Henderson). In connection with these agreements, we
issued a warrant to purchase 750,000 shares of our common
stock, which were reserved for issuance, 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 are required to pay royalties to
Henderson for any software sold by us that we developed in
conjunction with Henderson. The fair value of the warrant of
$12.1 million at that time was calculated using the
Black-Scholes valuation model and $0.4 million was
considered to be the value of the Henderson common stock. 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%.

Because our relationship with Henderson has not
generated software sales for us to-date, the increasing
uncertainty about retailers future capital investments and
other factors, we determined that an evaluation of the
recoverability of the intangible asset related to Henderson was
appropriate. As a result, we determined that no significant
future cash flows are probable from our relationship with
Henderson and the net book value of the intangible asset related
to the software development and distribution agreement of
$8.7 million was impaired and was written off during the
third quarter of 2002. In addition, we concluded that our cost
method investment in Henderson of $0.4 million was impaired
and was written off in 2002 and is reflected as a component of
general and administrative expense. The write-off of
$8.7 million was a non-cash expense and is reflected in the
statement of operations as Impairment of intangible asset.

Accenture

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

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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 to enable us to enhance our suite
of retail-specific software. Our common stock that was issued to
Accenture was valued at the average closing price of our common
stock for the two days before, the day of, and the two days
following the announcement of the Accenture arrangement, or
$33.69 per share. The value of our common shares issued for the
specific 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. The revenue targets for the year ended
December 31, 2002, were not met; therefore, no warrants
were issued to Accenture under this agreement with respect to
sales in 2002.

On February 6, 2003, we entered into several
new long-term agreements with Accenture. Accenture will provide
us with a portion of our required development resources to make
custom modifications of our software and to develop software
that is funded by customers. Additionally, Accenture hired the
employees in our training, translation and documentation
departments and will provide resources to us in these areas as
an outsourcing partner. In order to obtain competitive rates, we
have agreed to utilize a certain minimum number of annual
development days of Accenture resources. We entered into these
agreements to manage the variability in the demand for services
and to enhance our ability to provide solutions to customers at
competitive rates.

Chelsea Market Systems,
LLC

On March 31, 2002, we acquired substantially
all of the technology of Chelsea Market Systems, LLC
(Chelsea) and assumed certain liabilities. The
entire $8.9 million purchase price has been allocated to
purchased software, an intangible asset. This purchased software
is being amortized using the straight-line method over
36 months.

Critical Accounting Policies and
Estimates

Our discussion and analysis of financial
condition and results of operations is 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.

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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. These periods of technical
advisory services generally range from 12 to 24 months, as
determined by each customers objectives. 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.

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 judgement is required in
determining whether any valuation allowance should be recorded
against our net deferred tax asset. During the three months
ended September 30, 2002, we determined that it was
appropriate to record a full valuation allowance for our
deferred tax assets. The establishment of a full deferred tax
valuation allowance was determined to be appropriate in light of
revenue decreases in the third quarter of 2002, our operating
losses for the three and nine months ended September 30,
2002, our expectation of a significant loss for the full year
2002 and the added uncertainty of the market in which we
operate. As of December 31, 2002, we have recorded a
valuation allowance against our deferred tax assets of
$95.3 million. Despite the full valuation allowance, the
income tax benefits related to these deferred tax assets will
remain available to offset future taxable income.

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

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allowances may be required. As of
December 31, 2002, we have an allowance for doubtful
accounts of $5.7 million.


Valuation of long-lived and
intangible assets and goodwill

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

When we determine that the carrying value of
intangibles and other long-lived assets 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. The aggregate value of our net property and
equipment and net intangible assets was $47.8 million as of
December 31, 2002.

In 2002, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, became effective and as a result, we
ceased to amortize approximately $13.8 million of goodwill.
We had recorded approximately $4.7 million of amortization
on these amounts during 2001 and would have recorded
approximately $4.6 million of amortization during 2002. In
lieu of amortization, we performed an initial impairment review
of our goodwill in 2002 and will review goodwill for impairment
on annual basis thereafter. Upon completion of our review we
determined that no goodwill impairment charge needed to be
recorded in 2002, however, there can be no assurances that
subsequent reviews will not result in material impairment
charges.

Accrued
Restructuring Costs

In the fourth quarter of 2002, we began
implementation of a restructuring plan intended to bring our
operating expenses in line with expected revenues due to
concerns with a weakening global economy and decreasing capital
expenditures by retailers. Actions taken included a reduction of
our workforce and a reduction in the amount of leased space.

The restructuring plan includes workforce
reductions of 265 employees across most business functions
and geographic regions and all employees were notified in 2002
of benefits to be received. We recorded a charge for severance
and related benefits of $2.6 million of which we have paid
$0.9 million. As of December 31, 2002, 139 of these
265 employees have been separated. The remainder will be
separated through the third quarter of 2003.

We also recorded a net loss on lease abandonment
of $17.0 million in the fourth quarter of 2002. This lease
abandonment loss consists of the payments to be made for the
remaining lease term of the abandoned space that aggregates
$31.1 million, net of estimated sublease income of
$14.1 million. The lease terms on the leased space to be
abandoned ranges from five to eleven years. Management has made
its best estimates of expected sublease income over the
remaining term of the abandoned leases. The estimated sublease
income amount is highly judgmental and includes assumptions
regarding the periods of sublease and the price per square foot
to paid by the sublessors. Our plan calls for the affected space
to be abandoned by us at various dates through the third quarter
of 2003. As required by the applicable accounting standards, we
will review these estimates each quarter and make adjustments,
as necessary, to reflect managements best estimates.

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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,            
|                                                                                                |                                                 |                         
|                                                                                                |                                                 | 2002                     |     | 2001 |     | 2000
|                                                                                                |                                                 |                          |     |      |     |     
|Revenue:                                                                                        |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                | License and maintenance                         |                          |     | 69   | %   |      |     | 73 | %   |  |     | 63 | %  
|                                                                                                | Services and other                              |                          |     | 31   |     |      |     | 27 |     |  |     | 37 |    
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                |                                                 | Total revenue            |     |      | 100 |      |     |    | 100 |  |     |    | 100 | 
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Cost of revenue:                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                | License and maintenance                         |                          |     | 21   |     |      |     | 22 |     |  |     | 29 |    
|                                                                                                | Services and other                              |                          |     | 23   |     |      |     | 20 |     |  |     | 29 |    
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                |                                                 | Total cost of revenue    |     |      | 44  |      |     |    | 42  |  |     |    | 58  | 
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Gross margin                                                                                    |                                                 |                          | 56  |      |     |      | 58  |    |     |  | 42  |   
|Operating expenses:                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                | Research and development                        |                          |     | 24   |     |      |     | 23 |     |  |     | 46 |    
|                                                                                                | Sales and marketing                             |                          |     | 27   |     |      |     | 30 |     |  |     | 45 |    
|                                                                                                | General and administrative                      |                          |     | 10   |     |      |     | 12 |     |  |     | 13 |    
|                                                                                                | Acquired in-process research and development    |                          |     | 0    |     |      |     | 0  |     |  |     | 4  |    
|                                                                                                | Acquisition related amortization of intangibles |                          |     | 5    |     |      |     | 6  |     |  |     | 5  |    
|                                                                                                | Impairment of intangible asset                  |                          |     | 4    |     |      |     |   |     |  |     |   |    
|                                                                                                | Restructuring expense                           |                          |     | 10   |     |      |     | 0  |     |  |     | 0  |    
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                |                                                 | Total operating expenses |     |      | 80  |      |     |    | 71  |  |     |    | 113 | 
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Operating loss                                                                                  |                                                 |                          | (24 | )    |     |      | (13 | )  |     |  | (71 | ) 
|Other income, net                                                                               |                                                 |                          | 1   |      |     |      | 1   |    |     |  | 2   |   
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Loss before income tax provision (benefit)                                                      |                                                 |                          | (23 | )    |     |      | (12 | )  |     |  | (69 | ) 
|Income tax provision (benefit)                                                                  |                                                 |                          | 41  |      |     |      | (4  | )  |     |  | (23 | ) 
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Net loss                                                                                        |                                                 |                          | (64 | )%   |     |      | (8  | )% |     |  | (46 | )%
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Cost of license and maintenance revenue, as a
    percentage of license and maintenance revenue |                                                 |                          | 30  | %    |     |      | 30  | %  |     |  | 47  | % 
|Cost of services and other revenue, as a
    percentage of services and other revenue           |                                                 |                          | 75  | %    |     |      | 75  | %  |     |  | 78  | % 

Years Ended December 31,
2002, 2001 and 2000

Revenue

Total revenue.Total
revenue increased 7% to $191.8 million in 2002 and 95% to
$179.5 million in 2001 from $92.0 million in 2000.

License and maintenance revenue.License and maintenance revenue
increased 1% to $132.6 million in 2002 and 128% to
$131.7 million in 2001 from $57.7 million in 2000. The
increase in 2002 in both dollar and percentage basis was less
than in 2001 due to a slow down in the U.S. and world economy
and the fact that our potential customers are more deliberately
evaluating solutions, which resulted in extended sales cycles.
The increase in 2001 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

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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 increased
$8.6 million and $8.7 million in 2002 and 2001,
respectively, due to a growing base of customers that have
installed our software solutions. Maintenance revenues increase
with the number of active licenses outstanding.


Services and other revenue.Services and other revenue increased
24% to $59.2 million in 2002 and 40% to $47.8 million
in 2001 from $34.2 million in 2000. The increase in
services revenue between these years was primarily a result of
our expanding customer base. In addition, the increase in 2002
and 2001 was due to a $13.0 and $11.1 million increase,
respectively, in consulting and custom development projects.

Costs and
Expenses

Non-cash charges.Certain non-cash expenses are
presented separately on our statement of operations as
components of cost of revenue, research and development, sales
and marketing and general administrative. These non-cash charges
consist of amortization of stock-based compensation and
amortization of purchased software. Cost of license and
maintenance revenue presents separately amortization of
purchased software. We believe that the presentation of these
charges separately on the face of the statement of operations
facilitates the understanding of the individual statement of
operations line items. 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 $3.1 million, $5.3 million and
$10.9 million for the years ended December 31, 2002,
2001 and 2000, respectively. Amortization of purchased software
results from our purchase of certain core technologies of Retek
Logistics, Inc., WebTrak Limited and HighTouch Technologies,
Inc. and the acquisition of substantially all of the technology
of Chelsea Market Systems, LLC. Amortization of intangible
assets is included in non-cash cost of revenues license and
maintenance and was $5.2 million, $3.3 million, and
$3.1 million, for the years ended December 31, 2002,
2001 and 2000, respectively.

Cost of
Revenue

Cost of license and maintenance revenue.Cost of license and maintenance
revenue includes salaries and related expenses, costs of our
customer support, third party software products that are
integrated into our products, fees paid to third party
consultant costs and an allocation of our facilities and
depreciation expense. Cost of license and maintenance revenue
increased 3% to $40.1 million in 2002 and 45% to
$39.0 million in 2001 from $27.0 million in 2000. The
increase in 2002 was due to a $3.3 million increase in
personnel and related costs, a $1.6 million increase in
third party purchased software and a $1.7 million increase
in amortization of stock-based compensation and purchased
software, which was offset by a $3.9 million decrease in
third party consultant costs, and in addition, 2001 contained
$1.7 million in asset impairment charges for which similar
charges did not occur in 2002. The absolute dollar increases
during 2001 is 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 and we had an asset impairment
charge of $1.7 million.

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 expenses. Cost of services and other
revenue increased 23% to $44.5 million in 2002 and 35% to
$36.0 million in 2001 from $26.8 million in 2000. The
increase in cost of services and other revenue during 2002 was
due to the additional personnel and related costs offset by a
decrease in third party consultant expense. The increase in 2001
was due to the additional personnel and consultants required to
service our growing customer base, offset by a decrease in
amortization of stock-based compensation for 2001. As a
percentage of services and other

24



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revenue, cost of services and other revenue was
75%, 75% and 78% in 2002, 2001 and 2000, 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
increased 11% to $47.2 million and decreased 1% to
$42.6 million in 2001 from $42.8 million in 2000. The
increase in 2002 was due to a $1.3 million increase in
personnel and related costs and $3.0 million in third party
consultant costs primarily due to the costs associated with
completing various components and enhancing the capabilities of
Retek 10, as well as an increase in facilities costs due to
our move to our new corporate facilities. These increases were
offset by a decrease in amortization of stock-based
compensation. The decrease in total research and development for
2001 is primarily due to a $2.7 million decrease in
amortization of stock-based compensation and a $0.7 million
decrease in third party consulting costs, which was offset by a
$3.3 million increase in occupancy allocation. We expect
the absolute dollar of expenditures in research and development
to decrease due to our restructuring plan that was initiated in
the fourth quarter 2002, primarily due to the decrease in the
number of employees and also due to a reduction in rates
negotiated with certain third party consultants.

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, our 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 decreased 3% to $51.5 million in 2002
and increased 30% to $53.4 million in 2001 from
$41.0 million in 2000. The decrease in 2002 was due to a
$3.7 million decrease in personnel and related expenses and
$1.3 million decrease in marketing programs. These
decreases were partially offset by an increase in expenses
related to the expansion of our sales presence in several
international locations including Korea, Hong Kong and Japan.
The increase in 2001 was due to a $13.1 million increase in
personnel and related costs, and a $1.6 million increase in
occupancy allocation which was partially offset by a
$2.1 million decrease in marketing and related expenses.
The increase in sales and marketing costs in 2001 were due to
the expansion of our sales and marketing functions necessary to
support the introduction of several new product offerings. We
expect the absolute dollar of expenditures in sales and
marketing to decrease due to our restructuring plan that was
initiated in the fourth quarter 2002, primarily due to the
decrease in the number of employees.

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 and depreciation expenses. General
and administrative expenses decreased 12% to $2.5 million
in 2002 and increased 78% to $21.0 million in 2001 from
$11.8 million in 2000. The decrease in 2002 was due to a
$1.6 million bad debt expense for a note receivable and
$1.2 million in accelerated depreciation for assets
abandoned under our restructuring plan. The increase in 2001 was
partially due to a $3.1 million increase in personnel and
related costs and a $4.8 million increase in occupancy
allocation. The increase in absolute dollars in general and
administrative expenses in 2001 was due to the additional
personnel required to support our growth. We expect the absolute
dollar of expenditures in general and administrative to decrease
due to our restructuring plan that was initiated in the fourth
quarter 2002, primarily due to the decrease in the number of
employees.

Impairment of intangible asset.The impairment of intangible assets
relates to the intangible asset from Henderson. Because our
relationship with Henderson has not generated software sales for
us to-date and because of the increasing uncertainty about
retailers future capital investments and other factors, we
determined that an evaluation of the recoverability of the
intangible asset related to Henderson was appropriate. As a
result, we determined that no significant future cash flows are
probable from our relationship with

25



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Henderson and the net book value of the
intangible asset related to the software development and
distribution agreement of $8.7 million was impaired and was
written off during the third quarter of 2002.


Acquired in-process research and development.In connection with our acquisition of
HighTouch Technologies, Inc. in May 2000, acquired in-process
research and development of $4.0 million was charged to
results of operation on the 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 our
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. Products classified as under
development subsequently achieved technological feasibility.

We used an independent appraisal firm to assist
in the valuation of the fair market value of the purchased
assets of HighTouch. 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. 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 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.

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.

26



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Restructuring
and other

In the fourth quarter of 2002, we began
implementation of a restructuring plan intended to bring our
operating expenses in line with expected revenues due to
concerns with a weakening global economy and decreasing capital
expenditures by retailers. Actions taken included a reduction of
our workforce and a reduction in the amount of leased space.

The restructuring plan includes workforce
reductions of 265 employees across most business functions
and geographic regions and all employees were notified in 2002
of benefits to be received. We recorded a charge for severance
and related benefits of $2.6 million of which we have paid
$0.9 million. As of December 31, 2002, 139 of these
265 employees have been separated. The remainder will be
separated through the third quarter of 2003.

We also recorded a net loss on lease abandonment
of $17.0 million in the fourth quarter of 2002. This lease
abandonment loss consists of the payments to be made for the
remaining lease term of the abandoned space that aggregates
$31.1 million, net of estimated sublease income of
$14.1 million. The lease terms on the leased space to be
abandoned ranges from five to eleven years. Management has made
its best estimates of expected sublease income over the
abandoned leases remaining term. The estimated sub lease income
amount is highly judgmental and includes assumptions regarding
the periods of sublease and the price per square foot to paid by
the sublessors. Our plan calls for the affected space to be
abandoned by us at various dates through the third quarter of
2003. As required by the applicable accounting standards, we
will review these estimates each quarter and make adjustments,
as necessary, to reflect managements best estimates.

The following table sets forth a summary of the
restructuring charges, payment made against those charges and
the remaining liabilities as of December 31, 2002.

|                                   |  |               |        |            |  |               |      |   |  |   |        | 
|---------------------------------- |  | ------------- | ------ | ---------- |  | ------------- | ---- | - |  | - | ------ | 
|                                   |  |               |        |            |  | Balance as of
|                                   |  | Restructuring |        |            |  | Dec. 31,     
|                                   |  | charges       |        | Cash Usage |  | 2002         
|                                   |  |               |        |            |  |              
|Lease obligations and terminations |  | $             | 17,019 |            |  | $             |     |   |  | $ | 17,019 | 
|Severance and related benefits     |  |               | 2,623  |            |  |               | (940 | ) |  |   | 1,683  | 
|                                   |  |               |        |            |  |               |      |   |  |   |        | 
|Total                              |  | $             | 19,642 |            |  | $             | (940 | ) |  | $ | 18,702 | 
|                                   |  |               |        |            |  |               |      |   |  |   |        | 

Related to the lease abandonment charge, we
recorded $1.2 million of accelerated depreciation on
abandoned fixed assets in the year ended December 31, 2002,
which is recorded as general and administrative expense. As a
result of these charges we estimate savings of $0.8 million
in depreciation expense in 2003.

Interest and other income, net.Interest and other income, net
increased to $2.1 million in 2002 from $1.8 million in
2001 and $1.7 million in 2000. The increase in other income
in 2002 and 2001 was due to an increase in interest income,
which was partially offset by interest expense related to notes
payable.

Income tax provision (benefit).The income tax provision was
$79.0 million in 2002 compared to an income tax benefit of
$7.2 million and $21.0 million in 2001 and 2000,
respectively. During the third quarter of 2002, we determined
that it was appropriate to record a full valuation allowance for
our deferred tax assets. The establishment of a full deferred
tax valuation allowance was determined to be appropriate in
light of the magnitude of our revenue decrease, our operating
losses, our expectation of significant loss for the full year
2002 and the added uncertainty of the market in which we
operate. This full valuation allowance resulted in an increase
to the income tax provision of $77.9 million for 2002.
Despite the full valuation allowance, the income tax benefits
related to these deferred tax assets will remain available to
offset future taxable income. We expect to record a full
valuation allowance on future tax benefits until we can sustain
an appropriate level of profitability and until such time, we
would not expect to recognize any significant tax benefits in
our future results of operations. Prior to 2002, the tax amounts
were based on managements estimates of the effective tax
rates to be incurred by us during those respective full years.

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Liquidity and Capital Resources

At December 31, 2002, our cash, cash
equivalents and investment balance was $85.5 million.

Net cash used by operating activities was
$2.3 million in 2002 and net cash provided by operating
activities was $23.6 million and $6.4 million in 2001
and 2000, respectively. Uses of cash in 2002 were due to an
operating loss adjusted to exclude non-cash charges and
increases in accounts receivable, and decreases in accrued
liabilities and deferred revenue.

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.

Net cash used in investing activities was
$27.3 million, $13.3 million and $53.2 million in
2002, 2001 and 2000, respectively. In 2002, uses of cash were
due to the acquisition of property and equipment, purchases of
investments available for sale, and cash paid for substantially
all of the technology of Chelsea. 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. The increase in
purchases of investments was due to our investing cash in higher
yielding investments. We purchased investments designed to
protect our capital investment. We purchase primarily short-term
investments that have a low risk of capital loss, such as
U.S. government securities, major corporation commercial
paper, money market securities and tax-exempt municipal
securities. 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.

Net cash provided by financing activities was
$13.1 million in 2002 and $28.5 million in 2001. Net
cash used by financing activities was $5.4 million in 2000.
Net cash provided by financing activities in 2002 and 2001 were
due to the issuance of common stock for employee stock option
exercises and stock plan purchases.

We believe that our current cash, cash
equivalents and investments will be sufficient to meet our
working capital and capital expenditure requirements for at
least the next 12 months. 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 U.S. 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.

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.

The following summarizes our contractual
obligations, including purchase commitments at December 31,
2002, and the effect such obligations are expected to have on
our liquidity and cash flow in future periods (dollars in
thousands).

28



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|                        |                                    |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |  |        |        | 
|----------------------- | ---------------------------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  |  | ------ | ------ | 
|                        |                                    |      |       |       |  |      |       |       |  |      |       | After
|Contractual Obligations |                                    | 2003 |       | 2004  |  | 2005 |       | 2006  |  | 2007 |       | 2006 
|                        |                                    |      |       |       |  |      |       |       |  |      |       |      
|Operating leases        |                                    | $    | 7,174 |       |  | $    | 6,854 |       |  | $    | 5,958 |       |  | $ | 5,575 |       |  | $ | 5,742 |       |  |  | 37,122 |       
|Notes payable           |                                    |      | 90    |       |  |      | 81    |       |  |      |      |       |  |   |      |       |  |   |      |       |  |  |       |       
|                        |                                    |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |  |        |       
|                        | Total contractual cash obligations |      | $     | 7,264 |  |      | $     | 6,935 |  |      | $     | 5,958 |  |   | $     | 5,575 |  |   | $     | 5,742 |  |  | $      | 37,122 | 
|                        |                                    |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |  |        |       

|                             |                                    |      |       |       |  |      |   |      |  |      |   |       |  |   |   |   |  |   |   |   |  |   |       |       | 
|---------------------------- | ---------------------------------- | ---- | ----- | ----- |  | ---- | - | ---- |  | ---- | - | ----- |  | - | - | - |  | - | - | - |  | - | ----- | ----- | 
|                             |                                    |      |       |       |  |      |   |      |  |      |   | After
|Other Commercial Commitments |                                    | 2003 |       | 2004  |  | 2005 |   | 2006 |  | 2007 |   | 2006 
|                             |                                    |      |       |       |  |      |   |      |  |      |   |      
|Standby letters of credit    |                                    | $    | 5,800 |       |  | $    |  |      |  | $    |  |       |  | $ |  |   |  | $ |  |   |  | $ | 1,881 |      
|                             |                                    |      |       |       |  |      |   |      |  |      |   |       |  |   |   |   |  |   |   |   |  |   |       |      
|                             | Total contractual cash obligations |      | $     | 5,800 |  |      | $ | 0    |  |      | $ | 0     |  |   | $ | 0 |  |   | $ | 0 |  |   | $     | 1,881 | 
|                             |                                    |      |       |       |  |      |   |      |  |      |   |       |  |   |   |   |  |   |   |   |  |   |       |      

As of December 31, 2002, 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 6 and 8 to the
consolidated financial statements.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Factors That May Impact Future Results of
    Operations and Market Price of our Common Stock

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. As
defined in the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, except for the historical
information contained herein, some of the matters discussed in
this Annual Report on Form 10-K contain forward looking
statements regarding future events that are subject to risks and
uncertainties. The following factors, among others, could cause
actual results to differ materially from those described by such
statements.

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
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;                                                       

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| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | general economic conditions which may affect our
    customers capital investment levels; and                           
|
| |  | our ability to reduce expense levels if our
    revenues decline and our ability to implement our restructuring
    plan.

We currently derive a significant portion of our
license revenue in each quarter from a small number of
relatively large orders, and we generally recognize revenue from
our licenses over the related technical advisory services
period. If we are unable to recognize revenue from one or more
substantial license sales for a particular fiscal quarter, our
operating results for that quarter would be seriously harmed and
our visibility for revenue deferred into future quarters would
be reduced. In addition, the license of our products typically
involves a substantial commitment of resources by our customers
or their consultants over an extended period of time. The time
required to complete an implementation may vary from customer to
customer and may be protracted due to unforeseen circumstances.
Because our revenues from implementation, maintenance and
training services are largely correlated with our license
revenue, a decline in license revenue would also cause a decline
in our services revenue in the same quarter and in subsequent
quarters. Because our sales cycle is long, we may have
difficulty predicting when we will recognize revenue. If our
quarterly revenue or operating results fall below expectations,
the price of our common stock could fall substantially and we
could become subject to additional securities class-action
litigation. Litigation, if instituted, could result in
substantial costs and a diversion of managements attention
and resources, which would materially adversely affect our
business, financial condition and results of operations.

Additionally, our reporting period operating
results would also be impacted if our customers did not purchase
technical advisory support with our software 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 vendor specific objective evidence exists to
allocate revenue to undelivered elements of the arrangement.
Using these criteria, rather than our current revenue
recognition policy with advisory services, could materially
impact period over period results in our consolidated financial
statements.

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 varies with our revenue.



| |                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IN THE FOURTH QUARTER 2002, WE RECORDED
    RESTRUCTURING CHARGES AND ENACTED CERTAIN COST REDUCTION
    MEASURES IN RESPONSE TO THE DOWNTURN IN OUR FINANCIAL RESULTS.
    IF OUR RESTRUCTURING PLANS AND OUR COST REDUCTION MEASURES FAIL
    TO ACHIEVE THE DESIRED RESULTS OR RESULT IN UNANTICIPATED
    NEGATIVE CONSEQUENCES, WE MAY SUFFER MATERIAL HARM TO OUR
    BUSINESS.

In response to the recent downturn in our
financial performance, we implemented restructuring plans and
cost reduction measures to reduce our cost structure, which
included workforce and facilities reductions. Our cost reduction
measures may yield unanticipated consequences, such as attrition
beyond our planned reduction in workforce, reduced employee
morale and decreased productivity, and may result in incidental
employment related litigation. The workforce reductions impacted
employees directly responsible for sales and research and
development, which may affect our ability to close revenue
transactions with our customers and potential customers and may
affect our ability to finish development efforts on a timely
basis. Further, sales force reductions will require an increase
in sales resource productivity in order for us to achieve
revenue projections. The failure to retain and effectively
manage our

30



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remaining employees could increase our costs,
hurt our development efforts and impact the quality of our
customer service and products. Failure to achieve the desired
results of our strategic initiatives or sufficiently reduce our
workforce would harm our business, results of operations and
financial condition.




| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IF OUR CURRENT PRODUCTS ARE NOT CONTINUED TO BE
    ACCEPTED OR WE DO NOT RESPOND ADEQUATELY TO OUR INDUSTRYS
    RAPID PACE OF CHANGE, SALES OF OUR PRODUCTS MAY DECLINE.

Our business depends on the successful customer
acceptance of our products and we expect that we will continue
to depend on revenue from existing, new and enhanced versions of
our products. In addition, our business would be harmed if our
target customers do not adopt and/or expand their use of our
products. In addition, potential customers are more deliberately
evaluating solutions, which resulted in extended sales cycles in
2002. 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.

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.                                                                                                                                                     

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. Our software
products perform or directly affect mission-critical functions
across many different functional and geographic areas of the
enterprise. Implementation of our software solutions can be a
lengthy process.

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 may be 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. Significant issues
implementing our solutions could result in client
dissatisfaction and could therefore cause delays or prevent us
from collecting fees from our customers and could damage our
ability to attract new customers.

31



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##### 



WE HAVE BEEN NAMED A DEFENDANT IN SECURITIES
CLASS ACTION LITIGATION AND DERIVATIVE ACTIONS AND WE MAY IN THE
FUTURE BE NAMED IN ADDITIONAL LITIGATION, WHICH MAY RESULT IN
SUBSTANTIAL COSTS AND DIVERT MANAGEMENTS ATTENTION AND
RESOURCES.

As described in Part I 
Item 3: Legal Proceedings, a number of shareholder class
action suits have been filed naming the Company and/or certain
of our current and former officers and directors as
co-defendants. Two additional related derivative action suits
have been filed on our behalf naming certain of our officers and
directors. We believe these claims are subject to a variety of
meritorious defenses, which we intend to vigorously pursue.
However, it is possible that the litigation could be resolved
adversely, could result in substantial costs and could divert
managements attention and resources, which could seriously
harm our business.

More generally, securities class-action
litigation has often been brought against a company following
declines in the market price of its securities. This risk is
greater for technology companies, which have experienced
greater-than-average stock price declines in recent years and,
as a result, have been subject to, on average, a greater number
of securities class action claims than companies in other
industries. While we maintain director and officer insurance,
the amount of insurance coverage may not be sufficient for any
such claim and the continued availability of such insurance
cannot be assured. We may in the future be the target of this
kind of litigation and such litigation could also result in
substantial costs and divert managements attention and
resources.

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
significantly upon our ability to attract, integrate, motivate
and retain skilled sales, research and development, marketing
and management personnel. Competition for skilled personnel is
intense and the software industry is characterized by a high
level of employee mobility and aggressive recruiting of skilled
personnel. There can be no assurance that we will be successful
in attracting, retaining and motivating the personnel required
to grow and operate profitably. Failure to attract, retain and
motivate qualified personnel would adversely affect our business.

The recent trading levels of our stock have
decreased the value of our stock options granted to employees
under our stock option plans. As a result of these factors, our
remaining personnel may seek alternate employment, such as with
larger, more established companies or companies that they
perceive as having less volatile stock prices. Continuity of
personnel can be a very important factor in sales and
implementation of our software and completion of our product
development efforts. Attrition beyond our planned reduction in
workforce could have a material adverse effect on our business,
operating results, financial condition and cash flows.

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 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, development 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

32



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##### 



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.

A SUBSTANTIAL PORTION OF OUR REVENUE IS DERIVED
FROM THE RETAIL INDUSTRY.

We have in the past derived substantially all of
our revenues from the license of our software products and the
delivery of related service to retail customers. Our future
growth and profitability is dependent upon increased sales to
retailers. Recent world wide economic conditions and competitive
pressures in the retail industry could negatively impact demand
for our products and services. Such competitive pressures and
softness of economic conditions could cause retail customers and
potential customers to delay, cancel or reduce their information
technology budgets and their spending on our software products
and services.

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,
SeeBeyond, Sun, IBM, Accenture 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, 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 our 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.

33



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##### 



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 and expose us to claims by our
customers.

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 and longer
    accounts receivable payment cycles;                                     
|
| |  | changes in a specific countrys or
    regions political, legal or economic conditions,
    particularly in emerging markets;
|
| |  | trade protection measures and import or export
    licensing requirements;                                                    
|
| |  | potentially negative consequences from changes in
    tax laws or other localization legal requirements;                      
|
| |  | cost of and difficulty in staffing and managing
    widespread operations and foreign language skill limitations;             
|
| |  | international variations in technology standards;                                                                             
|
| |  | differing levels of protection of intellectual
    property; and                                                              
|
| |  | unexpected changes in regulatory requirements.                                                                                

CONTINUED TERRORIST ATTACKS OR WAR COULD LEAD TO
FURTHER ECONOMIC INSTABILITY WHICH COULD HARM OUR BUSINESS.

Terrorist attacks, such as the attacks that
occurred in New York, Pennsylvania and Washington, D.C., on
September 11, 2001, and current and future war risks may
adversely affect our business, results of operation, financial
condition or future growth. The United States has made strong
overtures of going to war with Iraq. Terrorist attacks and
potential war in the Middle East may lead to additional armed
hostilities or to further acts of terrorism and civil
disturbance in the United States or elsewhere, which may further
contribute to economic instability and could adversely affect
economic conditions, particularly in the retail industry.

34



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##### 



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.

Recent Accounting Pronouncements

On January 1, 2002, we adopted SFAS
No. 142, Goodwill and Other Intangible Assets, in
its entirety. This statement addresses accounting and financial
reporting for goodwill and intangible assets. Under the 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. Other than goodwill, we have no
intangible assets with indefinite lives. Adoption of this
statement resulted in no goodwill impairment losses and had no
impact on our financial position as of January 1, 2002. In
addition, the remaining useful lives of amortizable intangible
assets were reviewed and deemed appropriate. The following
information reflects our results of operations as they would
have appeared had we not recorded goodwill amortization expense
and its related tax effects during 2001 and 2000 (dollars in
thousands, except per share amounts).

|                      |                                                |      |          |       |   |      |         |       |   |   |         |       |  
|--------------------- | ---------------------------------------------- | ---- | -------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                      |                                                | 2002 |          | 2001  |   | 2000
|                      |                                                |      |          |       |   |     
|Net loss, as reported |                                                | $    | (123,583 | )     |   | $    | (14,310 | )     |   | $ | (42,905 | )    
|                      | Add: Goodwill amortization expense, net of tax |      |          |      |   |      |         | 4,667 |   |   |         | 3,379 |  
|                      |                                                |      |          |       |   |      |         |       |   |   |         |      
|Pro forma net loss    |                                                | $    | (123,583 | )     |   | $    | (9,643  | )     |   | $ | (39,526 | )    
|Loss per share:       |                                                |      |          |       |   |      |         |       |   |   |         |      
|                      | Basic and diluted  as reported                |      | $        | (2.35 | ) |      | $       | (0.29 | ) |   | $       | (0.91 | )
|                      | Basic and diluted  pro forma                  |      |          | (2.35 | ) |      |         | (0.19 | ) |   |         | (0.84 | )

In June 2002, the FASB issued SFAS No. 146,
Accounting for Exit or Disposal Activities. SFAS 146
addresses significant issues regarding the recognition,
measurement, and reporting of costs that are associated with
exit and disposal activities, including restructuring activities
that are currently accounted for under EITF No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity(including
Certain Costs Incurred in a Restructuring). The scope of
SFAS 146 also includes costs related to terminating a
contract that is not a capital lease and termination benefits
that employees who are involuntarily terminated receive under
the terms of a one-time benefit arrangement that is not an
ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS 146 is effective for
exit or disposal activities that are initiated after
December 31, 2002. The provisions of EITF No. 94-3
shall continue to apply for an exit activity initiated under an
exit plan that met the criteria of EITF No. 94-3 prior to
the adoption of SFAS 146. Adopting the provisions of
SFAS 146 will change, on a prospective basis, the timing of
when restructuring charges are recorded from a commitment date
approach to when the liability is incurred.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on
the disclosures required in financial statements concerning
obligations under certain guarantees. It also clarifies the
requirements related to the recognition of liabilities by a
guarantor at the inception of certain guarantees. We adopted the
disclosure requirements of this interpretation on
December 31, 2002. The recognition provisions of the
interpretation are applicable only to guarantees issued or
modified after December 31, 2002.

35



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##### 



In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This
statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based compensation, as outlined in SFAS No. 123,
Accounting for Stock-Based Compensation. This statement
also amends the financial statement disclosure requirements
relating to stock-based compensation. We currently have no plans
to adopt the fair value method of accounting for stock-based
compensation.



|         |                                                               
|-------- | --------------------------------------------------------------
|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, 2002 was
$85.5 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, 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 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
as of December 31, 2002 are at a fixed interest rate.

|                      |  |                        |     |      |  |       |     |            |  |   |     |  |  |   |     | 
|--------------------- |  | ---------------------- | --- | ---- |  | ----- | --- | ---------- |  | - | --- |  |  | - | --- | 
|                      |  |                       
|                      |  | Expected Maturity Date
|                      |  |                       
|                      |  | 2003                   |     | 2004 |  | Total |     | Fair Value
|                      |  |                        |     |      |  |       |     |           
|                      |  |                       
|                      |  | (US$ in thousands)    
|Liabilities:          |  |                        |     |      |  |       |     |            |  |   |     |  |  |   |     | 
|Long Term Debt        |  | $                      | 90  |      |  | $     | 81  |            |  | $ | 171 |  |  | $ | 159 | 
|Average Interest Rate |  |                        | 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 25%, 28%, and 9% of our total sales
were denominated in currencies other than the U.S. dollar
in 2002, 2001 and 2000, 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, 2002 we had
substantially written off all of the value associated with our
equity investments.



|        |                                                
|------- | -----------------------------------------------
|Item 8: | Financial Statements and Supplementary
    Data

The financial statements required pursuant to
this item are included in Item 15 of this Annual Report on
Form 10-K and are presented beginning on page 41.

36



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##### 





|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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.

37



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##### 



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 which
will be filed with the Securities and Exchange Commission within
120 days after December 31, 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 which
will be filed with the Securities and Exchange Commission within
120 days after December 31, 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 which
will be filed with the Securities and Exchange Commission within
120 days after December 31, 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 which
will be filed with the Securities and Exchange Commission within
120 days after December 31, 2002, under the caption
Certain Transactions.



|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Within the 90 days prior to the
date of this report, we carried out an evaluation, under the
supervision and with the participation of the Companys
management, including the Companys Chief Executive Officer
and the Companys Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures, as such
term is defined in Rules 13a-14 and 15d-14 promulgated
under the Securities and Exchange Act of 1934, as amended. Based
upon that evaluation, the Companys Chief Executive Officer
and the Companys Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company
(including its consolidated subsidiaries) that is required to be
included in our periodic SEC filings.

(b) There have been no significant changes
in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of
such evaluation. There were no significant deficiencies or
material weaknesses identified in the evaluation and therefore,
no corrective actions were taken.

38



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##### 





|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | 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                                                                                                              |  |        | 40 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                                               |  |        | 41 | 
|Consolidated Statements of Operations as of
    December 31, 2002, 2001 and 2000                                                               |  |        | 42 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000                                                 |  |        | 43 | 
|Consolidated Statements of Changes in
    Stockholders Equity and Comprehensive Loss for the years
    ended December 31, 2002, 2001 and 2000 |  |        | 44 | 
|Notes to Consolidated Financial Statements                                                                                                     |  |        | 45 | 

2. Financial Statement Schedules. All
financial statement schedules 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.

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

On August 14, 2002 and November 15,
2002, we filed a current report on Form 8-K, reporting
under Item 9 that on August 14, 2002 and
November 15, 2002 we submitted to the SEC certifications of
Retek Inc.s Chief Executive Officer, Steven D. Ladwig, and
Chief Financial Officer, Gregory A. Effertz, pursuant to
18 U.S.C. 1350 adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.

On October 2, 2002, we filled a current
report on Form 8-K, reporting under Item 5 that we
issued a press release that announced certain management changes.

39



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##### 



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 15(a)(1) on page 39 present fairly, in all
material respects, the financial position of Retek Inc. (the
Company) and its subsidiaries at December 31, 2002 and
2001, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These
financial statements are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements 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.

As described in Note 1 to the consolidated
financial statements, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets on January 1, 2002.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota


January 17, 2003, except as to Note 19
for which the date is February 6, 2003


and Note 16 for which the date is
February 19, 2003


40



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##### 



Retek Inc.



Consolidated Balance Sheet

(in thousands, except per share
data)


|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |         |         | 
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                      |                                                                                                                                                                           |                           
|                                                      |                                                                                                                                                                           | December 31,              
|                                                      |                                                                                                                                                                           |                           
|                                                      |                                                                                                                                                                           | 2002                       |          | 2001   
|                                                      |                                                                                                                                                                           |                            |          |        
|ASSETS                                               
|Current assets:                                       |                                                                                                                                                                           |                            |          |         |         |   |         |        
|                                                      | Cash and cash equivalents                                                                                                                                                 |                            | $        | 56,464  |         |   | $       | 70,166  |        
|                                                      | Investments                                                                                                                                                               |                            |          | 29,045  |         |   |         | 13,408  |        
|                                                      | Accounts receivable, net                                                                                                                                                  |                            |          | 43,185  |         |   |         | 41,409  |        
|                                                      | Deferred income taxes                                                                                                                                                     |                            |          |        |         |   |         | 22,349  |        
|                                                      | Other current assets                                                                                                                                                      |                            |          | 8,011   |         |   |         | 7,661   |        
|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |        
|                                                      |                                                                                                                                                                           | Total current assets       |          |         | 136,705 |   |         |         | 154,993 | 
|Investments                                           |                                                                                                                                                                           |                            |         |         |         |   | 2,043   |        
|Deferred income taxes                                 |                                                                                                                                                                           |                            |         |         |         |   | 51,878  |        
|Property and equipment, net                           |                                                                                                                                                                           |                            | 19,513   |         |         |   | 29,641  |        
|Intangible assets, net                                |                                                                                                                                                                           |                            | 28,287   |         |         |   | 42,418  |        
|Goodwill                                              |                                                                                                                                                                           |                            | 13,817   |         |         |   | 13,817  |        
|Other assets                                          |                                                                                                                                                                           |                            | 245      |         |         |   | 4,580   |        
|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |        
|                                                      |                                                                                                                                                                           |                            | $        | 198,567 |         |   | $       | 299,370 |        
|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY             
|Current liabilities:                                  |                                                                                                                                                                           |                            |          |         |         |   |         |        
|                                                      | Accounts payable                                                                                                                                                          |                            | $        | 15,708  |         |   | $       | 10,735  |        
|                                                      | Accrued liabilities                                                                                                                                                       |                            |          | 13,345  |         |   |         | 14,167  |        
|                                                      | Accrued restructuring costs                                                                                                                                               |                            |          | 18,702  |         |   |         |        |        
|                                                      | Deferred revenue                                                                                                                                                          |                            |          | 42,012  |         |   |         | 70,709  |        
|                                                      | Note payable, current portion                                                                                                                                             |                            |          | 81      |         |   |         | 73      |        
|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |        
|                                                      |                                                                                                                                                                           | Total current liabilities  |          |         | 89,848  |   |         |         | 95,684  | 
|Note payable, net of current portion                  |                                                                                                                                                                           |                            | 78       |         |         |   | 163     |        
|Deferred revenue, net of current portion              |                                                                                                                                                                           |                            | 7,193    |         |         |   |        |        
|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |        
|                                                      |                                                                                                                                                                           | Total liabilities          |          |         | 97,119  |   |         |         | 95,847  | 
|Commitments and Contingencies (Notes 3, 9
    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, 53,177 shares and 51,739 shares
    issued and outstanding at December 31, 2002 and 2001,
    respectively |                            |          | 532     |         |   |         | 518     |        
|Paid-in capital                                       |                                                                                                                                                                           |                            | 278,680  |         |         |   | 262,021 |        
|Deferred stock-based compensation                     |                                                                                                                                                                           |                            | (1,451   | )       |         |   | (4,756  | )      
|Accumulated other comprehensive income (loss)         |                                                                                                                                                                           |                            | 504      |         |         |   | (1,026  | )      
|Accumulated deficit                                   |                                                                                                                                                                           |                            | (176,817 | )       |         |   | (53,234 | )      
|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |        
|                                                      |                                                                                                                                                                           | Total stockholders equity |          |         | 101,448 |   |         |         | 203,523 | 
|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |        
|Total liabilities and stockholders equity            |                                                                                                                                                                           | $                          | 198,567  |         |         | $ | 299,370 |        
|                                                      |                                                                                                                                                                           |                            |          |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

41



---



##### 



Retek Inc.



Consolidated Statements of
Operations

(in thousands, except per share
data)


|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |         |         | 
|----------------------------------------------------------------------------------------- | ----------------------------------------------- | --------------------------------------------- | ------- | -------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                          |                                                 |                                              
|                                                                                          |                                                 | Year Ended December 31,                      
|                                                                                          |                                                 |                                              
|                                                                                          |                                                 | 2002                                          |         | 2001     |         | 2000
|                                                                                          |                                                 |                                               |         |          |         |     
|Revenue:                                                                                  |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          | License and maintenance                         |                                               | $       | 132,607  |         |      | $       | 131,682 |         |   | $       | 57,729  |        
|                                                                                          | Services and other                              |                                               |         | 59,225   |         |      |         | 47,792  |         |   |         | 34,228  |        
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Total revenue                                 |         |          | 191,832 |      |         |         | 179,474 |   |         |         | 91,957  | 
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|Cost of revenue:                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          | License and maintenance                         |                                               |         | 34,673   |         |      |         | 35,277  |         |   |         | 23,323  |        
|                                                                                          | Non-cash stock-based compensation amortization  |                                               |         | 205      |         |      |         | 386     |         |   |         | 584     |        
|                                                                                          | Non-cash purchased software amortization        |                                               |         | 5,188    |         |      |         | 3,338   |         |   |         | 3,080   |        
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Total cost of license and maintenance revenue |         |          | 40,066  |      |         |         | 39,001  |   |         |         | 26,987  | 
|                                                                                          | Services and other                              |                                               |         | 43,852   |         |      |         | 34,978  |         |   |         | 24,889  |        
|                                                                                          | Non-cash stock-based compensation amortization  |                                               |         | 615      |         |      |         | 1,046   |         |   |         | 1,869   |        
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Total cost of services and other revenue      |         |          | 44,467  |      |         |         | 36,024  |   |         |         | 26,758  | 
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Total cost of revenue                         |         |          | 84,533  |      |         |         | 75,025  |   |         |         | 53,745  | 
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Gross profit                                  |         |          | 107,299 |      |         |         | 104,449 |   |         |         | 38,212  | 
|Operating expenses:                                                                       |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          | Research and development                        |                                               |         | 45,782   |         |      |         | 40,261  |         |   |         | 37,784  |        
|                                                                                          | Non-cash stock-based compensation amortization  |                                               |         | 1,415    |         |      |         | 2,289   |         |   |         | 4,989   |        
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Total research and development expense        |         |          | 47,197  |      |         |         | 42,550  |   |         |         | 42,773  | 
|                                                                                          | Sales and marketing                             |                                               |         | 50,939   |         |      |         | 52,337  |         |   |         | 38,561  |        
|                                                                                          | Non-cash stock-based compensation amortization  |                                               |         | 568      |         |      |         | 1,025   |         |   |         | 2,469   |        
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Total sales and marketing expense             |         |          | 51,507  |      |         |         | 53,362  |   |         |         | 41,030  | 
|                                                                                          | General and administrative                      |                                               |         | 17,922   |         |      |         | 20,420  |         |   |         | 10,788  |        
|                                                                                          | Non-cash stock-based compensation amortization  |                                               |         | 338      |         |      |         | 597     |         |   |         | 1,018   |        
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Total general and administrative expense      |         |          | 18,260  |      |         |         | 21,017  |   |         |         | 11,806  | 
|                                                                                          | Acquired in-process research and development    |                                               |         |         |         |      |         |        |         |   |         | 4,000   |        
|                                                                                          | Acquisition related amortization of intangibles |                                               |         | 8,749    |         |      |         | 10,839  |         |   |         | 4,201   |        
|                                                                                          | Impairment of intangible asset                  |                                               |         | 8,686    |         |      |         |        |         |   |         |        |        
|                                                                                          | Restructuring expense                           |                                               |         | 19,642   |         |      |         |        |         |   |         |        |        
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          |                                                 | Total operating expenses                      |         |          | 154,041 |      |         |         | 127,768 |   |         |         | 103,810 | 
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|Operating loss                                                                            |                                                 |                                               | (46,742 | )        |         |      | (23,319 | )       |         |   | (65,598 | )      
|Interest income                                                                           |                                                 |                                               | 1,898   |          |         |      | 2,354   |         |         |   | 3,029   |        
|Interest expense                                                                          |                                                 |                                               | (41     | )        |         |      | (94     | )       |         |   | (868    | )      
|Other income (expense), net                                                               |                                                 |                                               | 257     |          |         |      | (432    | )       |         |   | (450    | )      
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          | Loss before income tax provision (benefit)      |                                               |         | (44,628  | )       |      |         | (21,491 | )       |   |         | (63,887 | )      
|Income tax provision (benefit)                                                            |                                                 |                                               | 78,955  |          |         |      | (7,181  | )       |         |   | (20,982 | )      
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|                                                                                          | Net loss                                        |                                               |         | (123,583 | )       |      | $       | (14,310 | )       |   | $       | (42,905 | )      
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|Basic and diluted net loss per common share                                               |                                                 | $                                             | (2.35   | )        |         | $    | (0.29   | )       |         | $ | (0.91   | )      
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        
|Weighted average shares used in computing basic
    and diluted net loss per common share |                                                 |                                               | 52,483  |          |         |      | 49,925  |         |         |   | 47,232  |        
|                                                                                          |                                                 |                                               |         |          |         |      |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

42



---



##### 



Retek Inc.

Consolidated Statements of Cash
Flows

(in thousands)


|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |         |        |         |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------- | ----------------------- | ------------------------------------------------------- | -------- | ------- | ------- | - | -------- | ------- | ------- | - | ------- | ------ | ------- | -
|                                                             |                                                                                                           |                        
|                                                             |                                                                                                           | Year Ended December 31,
|                                                             |                                                                                                           |                        
|                                                             |                                                                                                           | 2002                    |                                                         | 2001     |         | 2000   
|                                                             |                                                                                                           |                         |                                                         |          |         |        
|Cash flows from operating
    activities:                    |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | Net loss                                                                                                  |                         | $                                                       | (123,583 | )       |         | $ | (14,310  | )       |         | $ | (42,905 | )     
|                                                             | Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities:             |                         |                                                         |          |         |         |   |          |         |         |   |         |       
|                                                             | Deferred income tax provision (benefit)                                                                   |                         |                                                         | 74,227   |         |         |   | (24,409  | )       |         |   | (31,599 | )     
|                                                             | Depreciation and amortization expense                                                                     |                         |                                                         | 29,252   |         |         |   | 28,555   |         |         |   | 13,640  |       
|                                                             | Amortization of stock-based compensation                                                                  |                         |                                                         | 3,141    |         |         |   | 5,344    |         |         |   | 10,929  |       
|                                                             | Provision for doubtful accounts                                                                           |                         |                                                         | 2,500    |         |         |   | 2,808    |         |         |   | 1,483   |       
|                                                             | Write-off of note receivable                                                                              |                         |                                                         | 1,579    |         |         |   |         |         |         |   |        |       
|                                                             | Impairment of intangible asset                                                                            |                         |                                                         | 8,686    |         |         |   |         |         |         |   |        |       
|                                                             | Impairment of equipment                                                                                   |                         |                                                         |         |         |         |   | 1,289    |         |         |   |        |       
|                                                             | Tax benefit from stock option transactions                                                                |                         |                                                         | 3,702    |         |         |   | 16,371   |         |         |   | 7,463   |       
|                                                             | Acquired in-process research and development                                                              |                         |                                                         |         |         |         |   |         |         |         |   | 4,000   |       
|                                                             | Lease abandonment                                                                                         |                         |                                                         |         |         |         |   | 5,253    |         |         |   |        |       
|                                                             | Restructuring expense                                                                                     |                         |                                                         | 19,642   |         |         |   |         |         |         |   |        |       
|                                                             | Changes in assets and liabilities, excluding
    impact of acquisitions:                                  |                         |                                                         |          |         |         |   |          |         |         |   |         |       
|                                                             |                                                                                                           | Accounts receivable     |                                                         |          | (5,508  | )       |   |          | (16,554 | )       |   |         | (4,951 | )      
|                                                             |                                                                                                           | Other assets            |                                                         |          | (1,460  | )       |   |          | 3,419   |         |   |         | (5,637 | )      
|                                                             |                                                                                                           | Accounts payable        |                                                         |          | 4,970   |         |   |          | (354    | )       |   |         | 4,474  |        
|                                                             |                                                                                                           | Accrued liabilities     |                                                         |          | (1,941  | )       |   |          | 2,471   |         |   |         | 2,992  |        
|                                                             |                                                                                                           | Deferred revenue        |                                                         |          | (17,524 | )       |   |          | 13,705  |         |   |         | 46,530 |        
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             |                                                                                                           |                         | Net cash (used in) provided by operating
    activities |          |         | (2,317  | ) |          |         | 23,588  |   |         |        | 6,419   |  
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|Cash flows from investing
    activities:                    |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | Cash purchased in business acquisition                                                                    |                         |                                                         |         |         |         |   |         |         |         |   | 166     |       
|                                                             | Cash paid for business acquisition                                                                        |                         |                                                         |         |         |         |   |         |         |         |   | (18,694 | )     
|                                                             | Acquisition of intangible asset                                                                           |                         |                                                         | (8,890   | )       |         |   |         |         |         |   |        |       
|                                                             | Purchases of investments for sale                                                                         |                         |                                                         | (195,664 | )       |         |   | (235,165 | )       |         |   | (31,717 | )     
|                                                             | Sales of investments for sale                                                                             |                         |                                                         | 182,026  |         |         |   | 240,487  |         |         |   | 11,000  |       
|                                                             | Acquisitions of property and equipment                                                                    |                         |                                                         | (4,751   | )       |         |   | (18,638  | )       |         |   | (14,001 | )     
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             |                                                                                                           |                         | Net cash used in investing activities                   |          |         | (27,279 | ) |          |         | (13,316 | ) |         |        | (53,246 | )
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|Cash flows from financing
    activities:                    |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | Net proceeds from the issuance of common stock                                                            |                         |                                                         | 13,135   |         |         |   | 28,676   |         |         |   | 11,246  |       
|                                                             | Repayment of debt                                                                                         |                         |                                                         | (77      | )       |         |   | (217     | )       |         |   | (1,491  | )     
|                                                             | Borrowings from HNC Software Inc.                                                                         |                         |                                                         |         |         |         |   |         |         |         |   | 598     |       
|                                                             | Repayments to HNC Software Inc.                                                                           |                         |                                                         |         |         |         |   |         |         |         |   | (15,399 | )     
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             |                                                                                                           |                         | Net cash provided by (used in) financing
    activities |          |         | 13,058  |   |          |         | 28,459  |   |         |        | (5,046  | )
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | Effect of exchange rate changes on cash                                                                   |                         |                                                         | 2,836    |         |         |   | 377      |         |         |   | (749    | )     
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | Net (decrease) increase in cash and cash
    equivalents                                                  |                         |                                                         | (13,702  | )       |         |   | 39,108   |         |         |   | (52,622 | )     
|                                                             | Cash and cash equivalents at beginning of period                                                          |                         |                                                         | 70,166   |         |         |   | 31,058   |         |         |   | 83,680  |       
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | Cash and cash equivalents at end of period                                                                |                         | $                                                       | 56,464   |         |         | $ | 70,166   |         |         | $ | 31,058  |       
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|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  |       
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | Cost method of investment in exchange for
    software products in 2000 and removal of investment in 2002 |                         | $                                                       | (4,000   | )       |         | $ |         |         |         | $ | 4,000   |       
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | 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                                                                                             |                         | $                                                       | 14       |         |         | $ | 17       |         |         | $ | 843     |       
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        
|                                                             | Income taxes paid                                                                                         |                         | $                                                       | 929      |         |         | $ | 870      |         |         | $ | 1,123   |       
|                                                             |                                                                                                           |                         |                                                         |          |         |         |   |          |         |         |   |        

See accompanying notes to consolidated financial
statements.

43



---



##### 



Retek Inc.



Consolidated Statements of Changes in
Stockholders Equity


and Comprehensive Loss


(in thousands)


|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------- |  | ------------ | ------ | ------- |  | ----------- | --- | ------------- |  | ------------- | ------- | ------------- |  | ------------- | ------- | ---- |  | - | ------ | - |  | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                                                          |  |              |        |         |  |             |     | Accumulated   |  | Retained      |         |               |  |              
|                                                                          |  | Common stock |        |         |  | Deferred    |     | other         |  | earnings      |         | Total         |  |              
|                                                                          |  |              |        | Paid-in |  | stock-based |     | comprehensive |  | (accumulated  |         | stockholders |  | Comprehensive
|                                                                          |  | Shares       |        | Amount  |  | capital     |     | compensation  |  | income (loss) |         | deficit)      |  | equity        |         | loss
|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |     
|Balance at December 31, 1999                                              |  |              | 46,503 |         |  | $           | 465 |               |  | $             | 140,089 |               |  | $             | (19,978 | )    |  | $ | (582   | ) |  | $ | 3,981    |   |  | $ | 123,975  |   |  |   |          |  
|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  | )
|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|Tax benefit from stock options                                            |  |              |        |         |  |             |     |               |  |               | 3,702   |               |  |               |         |      |  |   |        |   |  |   |          |   |  |   | 3,702    |   |  |   |          |  
|Common stock issued under Employee Stock Purchase
    Plan                |  |              | 666    |         |  |             | 6   |               |  |               | 4,289   |               |  |               |         |      |  |   |        |   |  |   |          |   |  |   | 4,295    |   |  |   |          |  
|Common stock options exercised                                            |  |              | 772    |         |  |             | 8   |               |  |               | 8,832   |               |  |               |         |      |  |   |        |   |  |   |          |   |  |   | 8,840    |   |  |   |          |  
|Amortization of stock-based compensation                                  |  |              |        |         |  |             |     |               |  |               |         |               |  |               | 3,141   |      |  |   |        |   |  |   |          |   |  |   | 3,141    |   |  |   |          |  
|Deferred stock-based compensation                                         |  |              |        |         |  |             |     |               |  |               | (164    | )             |  |               | 164     |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|Unrealized gain on investments                                            |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   | 11     |   |  |   |          |   |  |   | 11       |   |  |   | 11       |  
|Foreign currency translation adjustment                                   |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   | 1,519  |   |  |   |          |   |  |   | 1,519    |   |  |   | 1,519    |  
|Net loss                                                                  |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   | (123,583 | ) |  |   | (123,583 | ) |  |   | (123,583 | )
|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2002                                              |  |              | 53,177 |         |  | $           | 532 |               |  | $             | 278,680 |               |  | $             | (1,451  | )    |  | $ | 504    |   |  | $ | (176,817 | ) |  | $ | 101,448  |   |  | $ | (122,053 | )
|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |         |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  

See accompanying notes to consolidated financial
statements.

44



---



##### 



Retek Inc.



Notes to Consolidated Financial
Statements


(unless otherwise noted, in thousands, except
for share and per share amounts)


Note 1  The Company and its
Significant Accounting Policies

The Company

Retek Inc. and its subsidiaries develop
application software that provides a complete information
infrastructure solution to the global retail industry. Our
offerings include Merchandise Optimization and Planning, which
automates decision making processes and enables management by
exception; Merchandise Operations Management, which enables
retailers to coordinate their operations and maintain a single
source of data, Inventory Optimization and Planning, which
enables retailers to combine their planning functions with their
execution systems; Supply Chain Management, which enables
retailers to take greater control of and manage their inventory
supply chains; Integrated Store Operations, which help retailers
reduce store operation costs and improve customer service; and
Enterprise Infrastructure, which includes functions such as data
warehousing, alerts and work flow, intuitive application
usability and integration. 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. Our wholly owned
subsidiaries include Retek Information Systems, Inc., Retek
International, Inc. and HighTouch Technologies, Inc.
(we us or the Company).

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

The consolidated financial statements include the
accounts of Retek Inc. and all majority owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated.

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 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.

45



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


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, corporate commercial paper and other investments
with high credit quality are reported at fair value, with net
unrealized gains and losses included in stockholders
equity. The net unrealized gain on investments was $11, $55 and
$60 at December 31, 2002, 2001 and 2000, respectively. The
debt securities mature in 2003 through 2006.

The Companys debt and marketable equity
securities were as follows:

|                                    |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|----------------------------------- |  | ---- | ------ | ---------- |  | ---------- | ------ | ---------- |  | - | -- |  |  | - | -- | -
|                                    |  |      |        | Aggregate  |  | Unrealized |        | Unrealized
|                                    |  | Cost |        | Fair Value |  | gains      |        | losses    
|                                    |  |      |        |            |  |            |        |           
|As of December 31, 2002:            |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|Commercial paper                    |  | $    | 11,588 |            |  | $          | 11,591 |            |  | $ | 3  |  |  | $ |   |  
|Government agencies                 |  |      | 7,167  |            |  |            | 7,171  |            |  |   | 4  |  |  |   |   |  
|State and local municipalities debt |  |      | 2,525  |            |  |            | 2,530  |            |  |   | 5  |  |  |   |   |  
|Corporate debt                      |  |      | 7,754  |            |  |            | 7,753  |            |  |   |   |  |  |   | (1 | )
|                                    |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|                                    |  | $    | 29,034 |            |  | $          | 29,045 |            |  | $ | 12 |  |  | $ | (1 | )
|As of December 31, 2001:            |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|Commercial paper                    |  | $    | 1,000  |            |  | $          | 1,000  |            |  | $ |   |  |  | $ |   |  
|Government agencies                 |  |      | 12,399 |            |  |            | 12,408 |            |  |   | 9  |  |  |   |   |  
|State and local municipalities debt |  |      |       |            |  |            |       |            |  |   |   |  |  |   |   |  
|Corporate debt                      |  |      | 1,997  |            |  |            | 2,043  |            |  |   | 46 |  |  |   |   |  
|                                    |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|                                    |  | $    | 15,396 |            |  | $          | 15,451 |            |  | $ | 55 |  |  | $ |   |  

Accounts receivable

Accounts receivable are initially recorded at
fair value upon the sale of software licenses or services to
customers. They are stated net of allowances for uncollectible
accounts, which represent estimated losses resulting from the
inability of customers to make the required payments. When
determining the allowances for uncollectible accounts we take
several factors into consideration including the overall
composition of accounts receivable aging, our prior history of
accounts receivable write-offs, the type of customer and our
day-to-day knowledge of specific customers. Changes in the
allowances for uncollectible accounts are recorded as bad debt
expense and are included in general and administrative expense
in our consolidated statements of operations.

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 $14,943,
$15,246, and $6,359 for the years ended December 31, 2002,
2001 and 2000, respectively.

Research and Development

Expenditures for software research and
development are expensed as incurred. Such costs are required to
be expensed until the point that technological feasibility of
the software is established. Technological

46



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


feasibility is determined after a working model
has been completed. The Companys software research and
development costs primarily relate to software development
during the period prior to technological feasibility and are
charged to operations as incurred.

Intangible Assets

Intangible assets, which consist principally of
purchased software and intellectual property rights, are stated
at historical cost. Amortization expense is generally determined
on the straight-line basis over periods ranging from three to
five years, with a weighted-average life of 4.2 years as of
December 31, 2002.

Goodwill

Goodwill, which represents the excess of purchase
price over fair value of net assets acquired, was being
amortized on the straight-line basis over five years. On
January 1, 2002, we adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets. Under this new statement, we no
longer amortize goodwill, but instead test goodwill for
impairment on at least an annual basis.

Impairment of Long-Lived Assets and
Intangibles

We evaluate the recoverability of long-lived
assets and identifiable intangibles not held for sale whenever
events or changes in circumstances indicate that an assets
carrying amount may not be recoverable. Such circumstances could
include, but are not limited to, (1) a significant decrease
in the market value of an asset, (2) a significant adverse
change in the extent or manner in which an asset is used or in
its physical condition, or (3) an accumulation of costs
significantly in excess of the amount originally expected for
the acquisition or construction of an asset. We measure the
carrying amount of the asset against the estimated undiscounted
future cash flows associated with it. Should the sum of the
expected future net cash flows be less than the carrying value
of the asset being evaluated, an impairment loss would be
recognized. The impairment loss would be calculated as the
amount by which the carrying value of the asset exceeds the fair
value of the asset. The fair value is measured based on quoted
market prices, if available. If quoted market prices are not
available, the estimate of fair value is based on various
valuation techniques, including the discounted value of
estimated future cash flows. During the fiscal year ended
December 31, 2002, we recorded an impairment loss of
$8.7 million related to an intangible asset (see
Note 7). 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).

The evaluation of asset impairment requires us to
make assumptions about future cash flows over the life of the
asset being evaluated. These assumptions require significant
judgment and actual results may differ from assumed and
estimated amounts.

Impairment of Goodwill

In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, which we adopted in
its entirety on January 1, 2002, we evaluate the carrying
value of goodwill during the fourth quarter of each year and
between annual evaluations if events occur or circumstances
change that would more likely than not reduce the fair value of
the reporting unit below its carrying amount. Such circumstances
could include, but are not limited to, (1) a significant
adverse change in legal factors or in business climate,
(2) unanticipated competition, or (3) an adverse
action or assessment by a regulator. When evaluating whether
goodwill is impaired, we compare the fair value of the reporting
unit to which the goodwill is assigned to its carrying amount,
including goodwill. If the carrying amount of a reporting unit
exceeds its

47



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


fair value, then the amount of the impairment
loss must be measured. The impairment loss would be calculated
by comparing the implied fair value of reporting unit goodwill
to its carrying amount. In calculating the implied fair value of
goodwill, the fair value of the reporting unit is allocated to
all of the other assets and liabilities of that unit based on
their fair values. The excess of the fair value of a reporting
unit over the amount assigned to its other assets and
liabilities is the implied fair value of goodwill. An impairment
loss would be recognized when the carrying amount of goodwill
exceeds its implied fair value. Our evaluation of goodwill
completed during 2002 in accordance with SFAS No. 142
resulted in no impairment losses. We also recorded no goodwill
impairment losses during 2001 or 2000 prior to adopting SFAS
No. 142.

Advertising

We expense advertising costs as incurred.
Advertising expense was approximately $657, $1,440, and $2,134
for the years ended December 31, 2002, 2001 and 2000,
respectively.

Stock-based Compensation

In accordance with SFAS No. 123,
Accounting for Stock-Based Compensation, we have elected
to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees,
and related interpretations (APB Opinion No. 25).
Accordingly, compensation cost for stock options granted to
employees is measured as the excess, if any, of the fair value
of our common stock at the date of the grant over the amount an
employee must pay to acquire the stock. We account for
stock-based compensation to non-employees using the fair value
method prescribed by SFAS No. 123. Additionally, under our
current employee stock purchase plan, eligible employees are
able to purchase Retek common stock at 85% of the lower of its
fair market value at the beginning or end of each six-month
purchase period. No compensation expense is recognized for the
difference between the employees purchase price and the
fair value of the stock. We have implemented the disclosure
provisions of SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure.

The table below illustrates the effect on net
loss and loss per share if the fair value of options granted and
purchases under our employee stock purchase plan had been
recognized as compensation expense in accordance with provisions
of SFAS No. 123. See Note 14 for additional
information regarding employee stock plans.

|                                                                                                            |                                 |      |          |       |   |      |         |       |   |   |         |       |  
|----------------------------------------------------------------------------------------------------------- | ------------------------------- | ---- | -------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                            |                                 | 2002 |          | 2001  |   | 2000
|                                                                                                            |                                 |      |          |       |   |     
|Net loss, as reported                                                                                       |                                 | $    | (123,583 | )     |   | $    | (14,310 | )     |   | $ | (42,905 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                            |                                 |      | 3,141    |       |   |      | 5,344   |       |   |   | 10,929  |      
|Deduct: Total stock-based compensation expense
    determined under fair value based method for all rewards |                                 |      | (50,319  | )     |   |      | (50,674 | )     |   |   | (60,948 | )    
|                                                                                                            |                                 |      |          |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                          |                                 | $    | (170,761 | )     |   | $    | (59,640 | )     |   | $ | (92,924 | )    
|Loss per share:                                                                                             |                                 |      |          |       |   |      |         |       |   |   |         |      
|                                                                                                            | Basic and diluted  as reported |      | $        | (2.35 | ) |      | $       | (0.29 | ) |   | $       | (0.91 | )
|                                                                                                            | Basic and diluted  pro forma   |      |          | (3.25 | ) |      |         | (1.19 | ) |   |         | (1.97 | )

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

48



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


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.
These periods of technical advisory services generally range
from 12 to 24 months, as determined by each customers
objectives. 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.

Deferred revenue consists primarily of deferred
license and maintenance revenue.

Income Taxes

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.

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.

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

49



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


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, 2002, are
deposited with five financial institutions. Cash and cash
equivalents of $56.0 million exceed the insurance
limitation of the United States Federal Deposit Insurance
Corporation. Our software license and installation agreements
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

On January 1, 2002, we adopted SFAS
No. 142, Goodwill and Other Intangible Assets, in
its entirety. This statement addresses accounting and financial
reporting for goodwill and intangible assets. Under the 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. Other than goodwill, we have no
intangible assets with indefinite lives. Adoption of this
statement resulted in no goodwill impairment losses and had no
impact on our financial position as of January 1, 2002. In
addition, the remaining useful lives of amortizable intangible
assets were reviewed and deemed appropriate. The following
information reflects our results of operations as they would
have appeared had we not recorded goodwill amortization expense
and its related tax effects during 2001 and 2000.

|                      |                                                |      |          |       |   |      |         |       |   |   |         |       |  
|--------------------- | ---------------------------------------------- | ---- | -------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                      |                                                | 2002 |          | 2001  |   | 2000
|                      |                                                |      |          |       |   |     
|Net loss, as reported |                                                | $    | (123,583 | )     |   | $    | (14,310 | )     |   | $ | (42,905 | )    
|                      | Add: Goodwill amortization expense, net of tax |      |          |      |   |      |         | 4,667 |   |   |         | 3,379 |  
|                      |                                                |      |          |       |   |      |         |       |   |   |         |      
|Pro forma net loss    |                                                | $    | (123,583 | )     |   | $    | (9,643  | )     |   | $ | (39,526 | )    
|Loss per share:       |                                                |      |          |       |   |      |         |       |   |   |         |      
|                      | Basic and diluted  as reported                |      | $        | (2.35 | ) |      | $       | (0.29 | ) |   | $       | (0.91 | )
|                      | Basic and diluted  pro forma                  |      |          | (2.35 | ) |      |         | (0.19 | ) |   |         | (0.84 | )

In June 2002, the FASB issued SFAS No. 146,
Accounting for Exit or Disposal Activities. SFAS 146
addresses significant issues regarding the recognition,
measurement, and reporting of costs that are

50



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


associated with exit and disposal activities,
including restructuring activities that are currently accounted
for under EITF No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
Activity(including Certain Costs Incurred in a
Restructuring). The scope of SFAS 146 also includes costs
related to termination of a contract that is not a capital lease
and termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. SFAS 146 will be
effective for exit or disposal activities that are initiated
after December 31, 2002. The provisions of EITF
No. 94-3 shall continue to apply for an exit activity
initiated under an exit plan that met the criteria of EITF
No. 94-3 prior to the adoption of SFAS 146. Adopting
the provisions of SFAS 146 will change, on a prospective
basis, the timing of when restructuring charges are recorded
from a commitment date approach to when the liability is
incurred.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. This interpretation elaborates on
the disclosures required in financial statements concerning
obligations under certain guarantees. It also clarifies the
requirements related to the recognition of liabilities by a
guarantor at the inception of certain guarantees. We adopted the
disclosure requirements of this interpretation on
December 31, 2002. The recognition provisions of the
interpretation are applicable only to guarantees issued or
modified after December 31, 2002.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. This
statement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based compensation, as outlined in SFAS No. 123,
Accounting for Stock-Based Compensation. This statement
also amends the financial statement disclosure requirements
relating to stock-based compensation. We currently have no plans
to adopt the fair value method of accounting for stock-based
compensation.

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 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, 2002, the
calculation of diluted loss per share excludes the impact of the
potential exercise of 9,821,289 stock options and a warrant to
purchase 750,000 shares of our common stock because the effect
would be antidilutive.

51



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


Reclassifications

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

Note 2  Composition of Certain
Financial Statement Captions

|                                     |          |              |        |        |  |   |        |        | 
|------------------------------------ | -------- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                     |          |             
|                                     |          | December 31,
|                                     |          |             
|                                     |          | 2002         |        | 2001  
|                                     |          |              |        |       
|Accounts receivable, net:            |          |              |        |        |  |   |        |       
|                                     | Billed   |              | $      | 43,906 |  |   | $      | 43,458 | 
|                                     | Unbilled |              |        | 4,954  |  |   |        | 3,075  | 
|                                     |          |              |        |        |  |   |        |       
|                                     |          |              | 48,860 |        |  |   | 46,533 |       
|Less allowance for doubtful accounts |          |              | (5,675 | )      |  |   | (5,124 | )     
|                                     |          |              |        |        |  |   |        |       
|                                     |          | $            | 43,185 |        |  | $ | 41,409 |       
|                                     |          |              |        |        |  |   |        |       

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.

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

|                               |  |              |        |      |  |      |        |   |  |   |       |  
|------------------------------ |  | ------------ | ------ | ---- |  | ---- | ------ | - |  | - | ----- | -
|                               |  |             
|                               |  | December 31,
|                               |  |             
|                               |  | 2002         |        | 2001 |  | 2000
|                               |  |              |        |      |  |     
|Balance at beginning of period |  | $            | 5,124  |      |  | $    | 5,216  |   |  | $ | 3,940 |  
|Provisions                     |  |              | 2,500  |      |  |      | 2,808  |   |  |   | 1,483 |  
|Write-offs                     |  |              | (1,949 | )    |  |      | (2,900 | ) |  |   | (207  | )
|                               |  |              |        |      |  |      |        |   |  |   |       |  
|Balance at end of period       |  | $            | 5,675  |      |  | $    | 5,124  |   |  | $ | 5,216 |  
|                               |  |              |        |      |  |      |        |   |  |   |       |  

|                             |                                                |              |        |         |   |   |        |         |  
|---------------------------- | ---------------------------------------------- | ------------ | ------ | ------- | - | - | ------ | ------- | -
|                             |                                                |             
|                             |                                                | December 31,
|                             |                                                |             
|                             |                                                | 2002         |        | 2001   
|                             |                                                |              |        |        
|Other current assets:        |                                                |              |        |         |   |   |        |        
|                             | Other receivables                              |              | $      | 1,734   |   |   | $      | 550     |  
|                             | Prepaid expenses                               |              |        | 6,277   |   |   |        | 6,349   |  
|                             | VAT and other foreign tax receivable           |              |        |        |   |   |        | 762     |  
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                | $            | 8,011  |         |   | $ | 7,661  |        
|                             |                                                |              |        |         |   |   |        |        
|Property and equipment, net: |                                                |              |        |         |   |   |        |        
|                             | Computer equipment                             |              | $      | 23,245  |   |   | $      | 31,172  |  
|                             | Furniture and fixtures                         |              |        | 12,283  |   |   |        | 13,630  |  
|                             | Leasehold improvements                         |              |        | 4,377   |   |   |        | 5,050   |  
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                |              | 39,905 |         |   |   | 49,852 |        
|                             | Less accumulated depreciation and amortization |              |        | (20,392 | ) |   |        | (20,211 | )
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                | $            | 19,513 |         |   | $ | 29,641 |        
|                             |                                                |              |        |         |   |   |        |        

Computer equipment includes $10.2 million of
assets held under capital leases as of December 31, 2001,
and 2000. Accumulated amortization of these assets was
$6.0 million and $1.5 million as of December 31,
2001 and 2000, respectively.

52



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


Intangible assetswere comprised of the following at
December 31:

|                      |       |                   |        |              |        |          |         |          |         |              |        |          |        |   |        |       |        |   |        |        |         |   |        |       |        | 
|--------------------- | ----- | ----------------- | ------ | ------------ | ------ | -------- | ------- | -------- | ------- | ------------ | ------ | -------- | ------ | - | ------ | ----- | ------ | - | ------ | ------ | ------- | - | ------ | ----- | ------ | 
|                      |       |                   |        |             
|                      |       | 2002              |        | 2001        
|                      |       |                   |        |             
|                      |       | Gross             |        |              |        | Net      |         | Gross    |         |              |        | Net     
|                      |       | Carrying          |        | Accumulated  |        | Carrying |         | Carrying |         | Accumulated  |        | Carrying
|                      |       | Amount            |        | Amortization |        | Amount   |         | Amount   |         | Amortization |        | Amount  
|                      |       |                   |        |              |        |          |         |          |         |              |        |         
|Purchased software    |       | $                 | 22,175 |              |        | $        | (15,237 | )        |         | $            | 6,938  |          |        | $ | 13,312 |       |        | $ | (9,806 | )      |         | $ | 3,506  |      
|Intellectual property |       |                   | 30,198 |              |        |          | (9,562  | )        |         |              | 20,636 |          |        |   | 30,198 |       |        |   | (3,523 | )      |         |   | 26,675 |      
|Distribution rights   |       |                   |       |              |        |          |        |          |         |              |       |          |        |   | 12,120 |       |        |   | (1,618 | )      |         |   | 10,502 |      
|                      | Other |                   |        | 3,775        |        |          |         | (3,062   | )       |              |        | 713      |        |   |        | 3,775 |        |   |        | (2,040 | )       |   |        | 1,735 |       
|                      |       |                   |        |              |        |          |         |          |         |              |        |          |        |   |        |       |        |   |        |        |         |   |        |      
|                      |       | Intangible assets |        | $            | 56,148 |          |         | $        | (27,861 | )            |        | $        | 28,287 |   |        | $     | 59,405 |   |        | $      | (16,987 | ) |        | $     | 42,418 | 
|                      |       |                   |        |              |        |          |         |          |         |              |        |          |        |   |        |       |        |   |        |        |         |   |        |      

Total amortization of intangibles was $14,308 in
2002, $9,510 in 2001 and $3,952 in 2000. Based on the
intangibles in service as of December 31, 2002, estimated
amortization expense for each of the next five years ending
December 31 is as follows:

|     |  |   |        | 
|---- |  | - | ------ | 
|2003 |  | $ | 10,022 | 
|2004 |  |   | 9,212  | 
|2005 |  |   | 6,778  | 
|2006 |  |   | 2,516  | 

The following intangible assets were acquired
during the years indicated:

|                      |  |        |       |              |  |        |         |              |  |        |        |              |  |  |         |  |  |   |       |  |  |  |         | 
|--------------------- |  | ------ | ----- | ------------ |  | ------ | ------- | ------------ |  | ------ | ------ | ------------ |  |  | ------- |  |  | - | ----- |  |  |  | ------- | 
|                      |  |        |       |              |  |       
|                      |  | 2002   |       | 2001         |  | 2000  
|                      |  |        |       |              |  |       
|                      |  |        |       | Weighted-    |  |        |         | Weighted-    |  |        |        | Weighted-   
|                      |  |        |       | Average      |  |        |         | Average      |  |        |        | Average     
|                      |  |        |       | Amortization |  |        |         | Amortization |  |        |        | Amortization
|                      |  | Amount |       | Period       |  | Amount |         | Period       |  | Amount |        | Period      
|                      |  |        |       |              |  |        |         |              |  |        |        |             
|Purchased software    |  | $      | 8,863 |              |  |        | 3 years |              |  | $      |       |              |  |  |        |  |  | $ | 4,800 |  |  |  | 3 years | 
|Intellectual property |  |        |      |              |  |        |        |              |  |        | 30,198 |              |  |  | 5 years |  |  |   |      |  |  |  |        | 
|Distribution rights   |  |        |      |              |  |        |        |              |  |        | 12,120 |              |  |  | 5 years |  |  |   |      |  |  |  |        | 
|Other                 |  |        |      |              |  |        |        |              |  |        |       |              |  |  |        |  |  |   | 1,900 |  |  |  | 3 years | 
|                      |  |        |       |              |  |        |         |              |  |        |        |              |  |  |         |  |  |   |       |  |  |  |         | 
|Intangible assets     |  | $      | 8,863 |              |  |        | 3 years |              |  | $      | 42,318 |              |  |  | 5 years |  |  | $ | 6,700 |  |  |  | 3 years | 

Goodwill
Changes in the carrying amount of goodwill for the years ended
December 31 were as follows:

|                                     |                          |   |        |        |  
|------------------------------------ | ------------------------ | - | ------ | ------ | -
|Balance, December 31, 1999.          |                          | $ | 2,147  |       
|                                     | Goodwill acquired        |   |        | 19,716 |  
|                                     | Amortization of goodwill |   |        | (3,379 | )
|                                     |                          |   |        |       
|Balance, December 31, 2000.          |                          |   | 18,484 |       
|                                     | Amortization of goodwill |   |        | (4,667 | )
|                                     |                          |   |        |       
|Balance, December 31, 2001 and 2002. |                          | $ | 13,817 |       
|                                     |                          |   |        |       

53



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


|                                              |                                          |              |        |        |  |   |        |        |  
|--------------------------------------------- | ---------------------------------------- | ------------ | ------ | ------ |  | - | ------ | ------ | -
|                                              |                                          |             
|                                              |                                          | December 31,
|                                              |                                          |             
|                                              |                                          | 2002         |        | 2001  
|                                              |                                          |              |        |       
|Accrued liabilities:                          |                                          |              |        |        |  |   |        |       
|                                              | Payroll and related benefits             |              | $      | 7,987  |  |   | $      | 8,365  |  
|                                              | Other                                    |              |        | 5,358  |  |   |        | 5,802  |  
|                                              |                                          |              |        |        |  |   |        |       
|                                              |                                          | $            | 13,345 |        |  | $ | 14,167 |       
|                                              |                                          |              |        |        |  |   |        |       
|Deferred revenue:                             |                                          |              |        |        |  |   |        |       
|                                              | Maintenance                              |              | $      | 20,273 |  |   | $      | 52,956 |  
|                                              | License                                  |              |        | 24,433 |  |   |        | 16,136 |  
|                                              | Service                                  |              |        | 4,499  |  |   |        | 1,617  |  
|                                              |                                          |              |        |        |  |   |        |       
|                                              |                                          | $            | 49,205 |        |  | $ | 70,709 |       
|                                              |                                          |              |        |        |  |   |        |       
|Accumulated other comprehensive income (loss) |                                          |              |        |        |  |   |        |       
|                                              | Foreign currency translation             |              | $      | 493    |  |   | $      | (1,026 | )
|                                              | Unrealized gain on marketable securities |              |        | 11     |  |   |        | 55     |  
|                                              | Other                                    |              |        |       |  |   |        | (55    | )
|                                              |                                          |              |        |        |  |   |        |       
|                                              |                                          |              | $      | 504    |  |   | $      | (1,026 | )
|                                              |                                          |              |        |        |  |   |        |       

Note 3  Commitments

We rent office space and certain office equipment
under operating leases. We have certain lease obligations for
our current corporate headquarters, which runs through 2014, our
former corporate headquarters, which run through 2004 and other
lease obligations, which run through 2003.

At December 31, 2002, we were obligated
through 2015 under non-cancelable operating leases for our
facilities and certain equipment as follows:

|           |  |                |        | 
|---------- |  | -------------- | ------ | 
|           |  | Future Minimum
|           |  | Lease Payments
|           |  |               
|2003       |  | $              | 7,174  | 
|2004       |  |                | 6,854  | 
|2005       |  |                | 5,958  | 
|2006       |  |                | 5,575  | 
|2007       |  |                | 5,742  | 
|Thereafter |  |                | 37,122 | 

Rent expense under operating leases for the years
ended December 31, 2002, 2001 and 2000 was approximately
$9,109, $10,849, and $3,650 respectively, net of sublease income
of $1,313, $1,349, and $1,052 for the corresponding periods,
respectively.

In connection with our restructuring plan (See
Note 9) we plan to abandon certain of these leased
properties, including a portion of our current corporate
headquarters and are seeking subleases for this space.

In the 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, included in general and
administrative expenses. At December 31,

54



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


2002, the Company had an accrual of approximately
$3.1 million to cover the remaining obligation on the
underlying lease.

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, 2002, 2001 and 2000 was approximately $3,188,
$1,918, and $2,398, respectively.

The Company includes an indemnification in its
software licensing agreements that indemnifies the licensee
against liability and damages arising from any claims of patent,
copyright or trade secret infringement by the Companys
software.

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
389,057 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 owned 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 SFAS No. 86, SFAS
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 |  
|                                                                 |  |   |        |  

55



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


Note 5  Acquisition of Intangible
Asset

On March 31, 2002, we acquired substantially
all of the technology of Chelsea Market Systems, LLC
(Chelsea) and assumed certain liabilities. The
entire $8.9 million purchase price has been allocated to
purchased software, an intangible asset. This purchased software
is being amortized using the straight-line method over 36 months.

Note 6  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 300,000 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. 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 was 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 $15 million in shares of our common stock if
2003 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, 2002
and 2001 were not met; therefore, no amounts were paid to IBM
under this agreement with respect to sales in 2002 and 2001.

Note 7  Minority
Investments

Henderson Ventures, Inc.

In April 2001, we signed a stock purchase
agreement, a warrant agreement and a software development and
distribution agreement with Henderson Ventures, Inc.
(Henderson). In connection with these agreements, we
issued a warrant to purchase 750,000 shares of our common
stock, which were reserved for issuance, 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 are required to pay royalties to
Henderson for any software sold by us that we developed in
conjunction with Henderson. The fair value of the warrant of
$12.1 million at that time was calculated using the
Black-Scholes valuation model and $0.4 million was
considered to be the value of the Henderson common stock. 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%.

Because our relationship with Henderson has not
generated software sales for us to-date, the increasing
uncertainty about retailers future capital investments and
other factors, we determined that an evaluation of the
recoverability of the intangible asset related to Henderson was
appropriate. As a result, we determined that no significant
future cash flows are probable from our relationship with
Henderson and the net book value of the intangible asset related
to the software development and distribution agreement

56



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


of $8.7 million was impaired and was written
off during the third quarter of 2002. In addition, we concluded
that our cost method investment in Henderson of
$0.4 million was impaired and was written off in 2002 and
is reflected as a component of general and administrative
expense. The write-off of $8.7 million was a non-cash
expense and is reflected in the statement of operations as
Impairment of intangible assets.

Multiasia, Inc.

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 use certain of our software
solutions and the right to sell our software solutions to the
e-business community in the Republic of China. The estimated
value of the shares received of $4.0 million was initially
accounted for under the cost method and was included as a
component of other assets. The corresponding $4.0 million
value of the software solutions was recorded as a component of
deferred revenue. As a result of evaluating the value of our
investment in MAI, we determined that no significant future cash
flows are probable. Accordingly, we removed the cost method
investment and deferred revenue from our balance sheet during
the third quarter of 2002. The transaction with MAI had no
impact on our results of operations or cash flows in 2000, 2001
or 2002.

Note 8  Strategic Alliance
with Accenture

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 to enable us to enhance our suite of retail-specific
software. Our common stock that was issued to Accenture was
valued at the average closing price of our common stock for the
two days before, the day of, and the two days following the
announcement of the Accenture arrangement, or $33.69 per share.
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 for each fiscal
year through 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. The revenue targets for the year ended
December 31, 2002, were not met; therefore, no warrants
were issued to Accenture under this agreement with respect to
sales in 2002.

See Note 19, Subsequent Events, for a
description of agreements entered into between Retek and
Accenture after December 31, 2002.

Note 9  Restructuring and
other

In the fourth quarter of 2002, we began
implementation of a restructuring plan intended to bring our
operating expenses in line with expected revenues due to
concerns with a weakening global economy and decreasing capital
expenditures by retailers. Actions taken included a reduction of
our workforce and a reduction in the amount of leased space.

57



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


The restructuring plan includes workforce
reductions of 265 employees across most business functions and
geographic regions and all employees were notified in 2002 of
benefits to be received. We recorded a charge for severance and
related benefits of $2.6 million of which we have paid $0.9
million. As of December 31, 2002, 139 of these 265
employees have been separated. The remainder will be separated
through the third quarter of 2003.

We also recorded a net loss on lease abandonment
of $17.0 million in the fourth quarter of 2002. This lease
abandonment loss consists of the payments to be made for the
remaining lease term of the abandoned space that aggregates
$31.1 million, net of estimated sublease income of
$14.1 million. The lease terms on the leased space to be
abandoned ranges from five to eleven years. Management has made
its best estimates of expected sublease income over the
remaining term of the abandoned leases. The estimated sublease
income amount is highly judgmental and includes assumptions
regarding the periods of sublease and the price per square foot
to paid by the sublessors. Our plan calls for the affected space
to be abandoned by us at various dates through the third quarter
of 2003. As required by the applicable accounting standards, we
will review these estimates each quarter and make adjustments,
as necessary, to reflect managements best estimates.

The following table sets forth a summary of the
restructuring charges, payment made against those charges and
the remaining liabilities as of December 31, 2002.

|                                   |  |               |        |       |  |               |      |   |  |   |        | 
|---------------------------------- |  | ------------- | ------ | ----- |  | ------------- | ---- | - |  | - | ------ | 
|                                   |  | Restructuring |        | Cash  |  | Balance as of
|                                   |  | charges       |        | usage |  | Dec 31, 2002 
|                                   |  |               |        |       |  |              
|Lease obligations and terminations |  | $             | 17,019 |       |  | $             |     |   |  | $ | 17,019 | 
|Severance and related benefits     |  |               | 2,623  |       |  |               | (940 | ) |  |   | 1,683  | 
|                                   |  |               |        |       |  |               |      |   |  |   |        | 
|Total                              |  | $             | 19,642 |       |  | $             | (940 | ) |  | $ | 18,702 | 
|                                   |  |               |        |       |  |               |      |   |  |   |        | 

Related to the lease abandonment charge, we
recorded $1.2 million of accelerated depreciation on
abandoned fixed assets in the year ended December 31, 2002,
which is recorded as general and administrative expense.

Note 10  Accelerated amortization and
equipment impairment

During the third quarter of 2001, we recorded an
impairment loss of $1.3 million 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 3) 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 accelerated amortization relating to these leasehold
improvements of $2.1 million in 2001, which is included in
general and administrative expense.

Note 11  Notes Payable and Line of
Credit

On June 7, 2002, we entered into a line of
credit agreement with a financial institution to provide a line
of credit of $15.0 million. The line of credit bears
interest on borrowings at a rate equal to prime rate in effect
from time to time or at a fixed rate per annum calculated as
LIBOR plus 2% and the agreement expires on June 1, 2004. As
of December 31, 2002, we had no balances outstanding under
the line of credit, which is collateralized by funds on account
at the financial institution.

As of December 31, 2002 and 2001, we had
standby letters of credit totaling $7.7 million, and
$5.1 million, respectively, and there were no balances
drawn against those letters of credit.

58



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


In addition we had notes payable outstanding as
of December 31, 2002 as follows:

|                                                                                        |  |   |     |  
|--------------------------------------------------------------------------------------- |  | - | --- | -
|Note payable  interest at 7.0% due in
    monthly installments of $8 to November 2004. |  | $ | 159 |  
|Less current maturities                                                                 |  |   | (81 | )
|                                                                                        |  |   |     |  
|Long-term portion                                                                       |  | $ | 78  |  
|                                                                                        |  |   |     |  

Note 12  Income Taxes

Loss before income tax provision
(benefit) was taxed under the following jurisdictions:

|         |  |                         |         |      |  |      |         |   |  |   |         |  
|-------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2002                    |         | 2001 |  | 2000
|         |  |                         |         |      |  |     
|Domestic |  | $                       | (45,453 | )    |  | $    | (23,282 | ) |  | $ | (65,600 | )
|Foreign  |  |                         | 825     |      |  |      | 1,791   |   |  |   | 1,713   |  
|         |  |                         |         |      |  |      |         |   |  |   |         |  
|         |  | $                       | (44,628 | )    |  | $    | (21,491 | ) |  | $ | (63,887 | )
|         |  |                         |         |      |  |      |         |   |  |   |         |  

The income tax expense (benefit) is
summarized as follows:

|          |         |                         |        |        |  |      |        |        |   |   |         |         |  
|--------- | ------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ | - | - | ------- | ------- | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2002                    |        | 2001   |  | 2000
|          |         |                         |        |        |  |     
|Current:  |         |                         |        |        |  |      |        |        |   |   |         |        
|          | Federal |                         | $      |       |  |      | $      |       |   |   | $       |        |  
|          | State   |                         |        |       |  |      |        |       |   |   |         | 63      |  
|          | Foreign |                         |        | 1,026  |  |      |        | 779    |   |   |         | 601     |  
|Deferred: |         |                         |        |        |  |      |        |        |   |   |         |        
|          | Federal |                         |        | 66,933 |  |      |        | (5,377 | ) |   |         | (15,915 | )
|          | State   |                         |        | 10,996 |  |      |        | (2,583 | ) |   |         | (5,731  | )
|          | Foreign |                         |        |       |  |      |        |       |   |   |         |        |  
|          |         |                         |        |        |  |      |        |        |   |   |         |        
|          |         | $                       | 78,955 |        |  | $    | (7,181 | )      |   | $ | (20,982 | )      
|          |         |                         |        |        |  |      |        |        |   |   |         |        

59



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


Deferred tax assets are summarized as follows:

|                                              |                        |              |         |      |  |   |        |        | 
|--------------------------------------------- | ---------------------- | ------------ | ------- | ---- |  | - | ------ | ------ | 
|                                              |                        |             
|                                              |                        | December 31,
|                                              |                        |             
|                                              |                        | 2002         |         | 2001
|                                              |                        |              |         |     
|Net operating loss carryforwards              |                        | $            | 61,769  |      |  | $ | 39,575 |       
|Taxable pooling-of-interests basis difference |                        |              | 11,216  |      |  |   | 12,462 |       
|Tax credit carryforwards                      |                        |              | 6,224   |      |  |   | 3,538  |       
|Allowance for doubtful accounts               |                        |              | 2,270   |      |  |   | 1,793  |       
|Depreciation                                  |                        |              | (573    | )    |  |   | (685   | )     
|Intangible assets                             |                        |              | 2,227   |      |  |   | 3,106  |       
|Deferred revenue                              |                        |              | 7,229   |      |  |   | 13,056 |       
|Accrued restructuring                         |                        |              | 7,620   |      |  |   |       |       
|Accrued liabilities and other                 |                        |              | (2,689  | )    |  |   | 1,382  |       
|                                              |                        |              |         |      |  |   |        |       
|Total deferred tax assets                     |                        |              | 95,293  |      |  |   | 74,227 |       
|Valuation allowance                           |                        |              | (95,293 | )    |  |   |       |       
|                                              | Net deferred tax asset |              | $       |     |  |   | $      | 74,227 | 
|                                              |                        |              |         |      |  |   |        |       

Significant management judgement is required in
determining whether any valuation allowance should be recorded
against our net deferred tax asset. During the three months
ended September 30, 2002, we determined that it was
appropriate to record a full valuation allowance for our
deferred tax assets. The establishment of a full deferred tax
valuation allowance was determined to be appropriate in light of
the magnitude of the revenue decreases in the third quarter of
2002, our operating losses for the three and nine months ended
September 30, 2002, our expectation of a significant loss
for the full year 2002 and the added uncertainty of the market
in which we operate. Despite the full valuation allowance, the
income tax benefits related to these deferred tax assets will
remain available to offset future taxable income.

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,
|                                           |                                                                        |                        
|                                           |                                                                        | 2002                    |         | 2001   |   | 2000
|                                           |                                                                        |                         |         |        |   |     
|Amounts computed at statutory federal rate |                                                                        |                         | (15,620 | )      |   | $    | (7,522 | )      |   | $ | (22,360 | )     
|                                           | State income taxes, net of federal benefit                             |                         |         | (2,526 | ) |      |        | (1,204 | ) |   |         | (3,671 | )
|                                           | Tax credit carryforwards generated                                     |                         |         | (2,686 | ) |      |        | (1,250 | ) |   |         | (1,156 | )
|                                           | Non-deductible goodwill and other non-deductible
    acquisition costs |                         |         |       |   |      |        | 1,599  |   |   |         | 2,665  |  
|                                           | Foreign income taxes                                                   |                         |         | 1,026  |   |      |        |       |   |   |         |       |  
|                                           | Stock based compensation                                               |                         |         | 701    |   |      |        | 1,423  |   |   |         | 1,903  |  
|                                           | Other, net                                                             |                         |         | 2,767  |   |      |        | (227   | ) |   |         | 1,637  |  
|Valuation allowance                        |                                                                        |                         | 95,293  |        |   |      |       |        |   |   |        |       
|                                           |                                                                        |                         |         |        |   |      |        |        |   |   |         |       
|Income tax provision (benefit)             |                                                                        | $                       | 78,955  |        |   | $    | (7,181 | )      |   | $ | (20,982 | )     
|                                           |                                                                        |                         |         |        |   |      |        |        |   |   |         |       

At December 31, 2002, we had federal and
state net operating loss carryforwards of approximately
$193,728. Substantially all carryforwards expire in 2020.

We also had approximately $4,612 of federal
research and development credit carryforwards expiring at
various dates through 2022, $1,064 of state research and
development credit carryforwards expiring at

60



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


various dates through 2022, and $548 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, 2002, 2001 and 2000 are as follows:

|                            |                |                         |   |         |         |      |   |         |         |  |   |        |        | 
|--------------------------- | -------------- | ----------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                            |                |                        
|                            |                | Year Ended December 31,
|                            |                |                        
|                            |                | 2002                    |   | 2001    |         | 2000
|                            |                |                         |   |         |         |     
|Revenue by geographic area: |                |                         |   |         |         |      |   |         |         |  |   |       
|                            | United States  |                         | $ | 117,153 |         |      | $ | 118,476 |         |  | $ | 71,004 |       
|                            | United Kingdom |                         |   | 45,614  |         |      |   | 49,009  |         |  |   | 7,424  |       
|                            | Other          |                         |   | 29,065  |         |      |   | 11,989  |         |  |   | 13,529 |       
|                            |                |                         |   |         |         |      |   |         |         |  |   |       
|                            |                | Total revenue           |   | $       | 191,832 |      |   | $       | 179,474 |  |   | $      | 91,957 | 
|                            |                |                         |   |         |         |      |   |         |         |  |   |       

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

|                                      |               |                         |   |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------- | ------------- | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |               |                        
|                                      |               | December 31,           
|                                      |               |                        
|                                      |               | 2002                    |   | 2001   |        | 2000
|                                      |               |                         |   |        |        |     
|Long-lived assets by geographic area: |               |                         |   |        |        |      |   |        |        |  |   |       
|                                      | United States |                         | $ | 60,400 |        |      | $ | 84,800 |        |  | $ | 54,016 |       
|                                      | Foreign       |                         |   | 1,217  |        |      |   | 1,271  |        |  |   | 412    |       
|                                      |               |                         |   |        |        |      |   |        |        |  |   |       
|                                      |               | Total long-lived assets |   | $      | 61,617 |      |   | $      | 86,071 |  |   | $      | 54,428 | 
|                                      |               |                         |   |        |        |      |   |        |        |  |   |       

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 $60,947, $52,590 and
$12,408 for the years ended December 31, 2002, 2001 and
2000, respectively.

We had one customer, which is not included in the
table below, that represented 15% of accounts receivable at
December 31, 2002. There were no such significant customers
which represented greater than 10% of accounts receivable at
December 31, 2001.

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

|         |            |                          |  |      |   |      |  |    |   |  |  |    |  
|-------- | ---------- | ------------------------ |  | ---- | - | ---- |  | -- | - |  |  | -- | -
|         |            |                         
|         |            | Year Ending December 31,
|         |            |                         
|         |            | 2002                     |  | 2001 |   | 2000
|         |            |                          |  |      |   |     
|Revenue: |            |                          |  |      |   |      |  |    |   |  |  |   
|         | Customer A |                          |  |     |   |      |  | 11 | % |  |  | 12 | %
|         | Customer B |                          |  | 10   | % |      |  | 22 | % |  |  |   |  
|         | Customer C |                          |  | 12   | % |      |  |   |   |  |  |   |  

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)

61



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


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 9,000,000
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, 2002, 3,486,188 options were
exercisable.

The Purchase Plan provides for the issuance of a
maximum of 700,000 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 $4,293 during the year
ended December 31, 2002. In total, 665,677 shares were
issued to employees during the year ended December 31, 2002.

The HighTouch Technologies, Inc. 1999 Stock
Option Plan provides for the Compensation Committee of the Board
of Directors to award up to 2,000,000 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, 2002, 505,365 options
were exercisable.

The Directors Plan provides for the issuance of
up to 400,000 nonqualified stock options to our outside
directors. Under the provisions of the Directors Plan, options
to purchase 25,000 shares of our common stock will be granted to
outside directors upon their becoming a member of the Board of
Directors and 7,500 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, 2002, 125,000 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 7,362,000 shares of
our common stock. Of the approximately 7,262,000 options granted
to employees, 6,239,000 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 compensation. Due to the terms of the vesting,
compensation will be accelerated in the early years and resulted
in compensation charges of $3,141, $5,344 and $10,929 in the
years ending December 31, 2002, 2001 and 2000, respectively.

62



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


Transactions relating to our employees and
directors under our Stock Option Plans during the years ended
December 31, 2002 and 2001 are summarized as follows
(shares in thousands):

|                                                                   |                                           |              |       |                |   |        |       |                |  |        |       |                |   |   |       |       |  |   |       |       |   |   |       |       | 
|------------------------------------------------------------------ | ----------------------------------------- | ------------ | ----- | -------------- | - | ------ | ----- | -------------- |  | ------ | ----- | -------------- | - | - | ----- | ----- |  | - | ----- | ----- | - | - | ----- | ----- | 
|                                                                   |                                           |             
|                                                                   |                                           | December 31,
|                                                                   |                                           |             
|                                                                   |                                           |              |       |                |   |       
|                                                                   |                                           | 2002         |       | 2001           |   | 2000  
|                                                                   |                                           |              |       |                |   |       
|                                                                   |                                           |              |       | Weighted       |   |        |       | Weighted       |  |        |       | Weighted      
|                                                                   |                                           |              |       | Average        |   |        |       | Average        |  |        |       | Average       
|                                                                   |                                           | Shares       |       | Exercise Price |   | Shares |       | Exercise Price |  | Shares |       | Exercise Price
|                                                                   |                                           |              |       |                |   |        |       |                |  |        |       |               
|Outstanding at beginning of year                                   |                                           |              | 8,845 |                |   | $      | 17.27 |                |  |        | 8,406 |                |   | $ | 13.60 |       |  |   | 7,411 |       |   | $ | 10.38 |      
|                                                                   | Options granted at market value           |              |       | 2,751          |   |        |       | 21.01          |  |        |       | 3,303          |   |   |       | 22.78 |  |   |       | 1,506 |   |   |       | 30.57 | 
|                                                                   | Options granted at less than market value |              |       | 0              |   |        |       | 0.00           |  |        |       | 25             |   |   |       | 1.00  |  |   |       | 178   |   |   |       | 10.98 | 
|                                                                   | Options exercised                         |              |       | (772           | ) |        |       | 11.44          |  |        |       | (2,212         | ) |   |       | 10.56 |  |   |       | (359  | ) |   |       | 10.00 | 
|                                                                   | Options canceled                          |              |       | (1,003         | ) |        |       | 20.60          |  |        |       | (677           | ) |   |       | 19.91 |  |   |       | (330  | ) |   |       | 18.99 | 
|                                                                   |                                           |              |       |                |   |        |       |                |  |        |       |                |   |   |       |       |  |   |       |       |   |   |       |      
|Outstanding at end of year                                         |                                           |              | 9,821 |                |   |        | 18.44 |                |  |        | 8,845 |                |   |   | 17.27 |       |  |   | 8,406 |       |   |   | 13.62 |      
|                                                                   |                                           |              |       |                |   |        |       |                |  |        |       |                |   |   |       |       |  |   |       |       |   |   |       |      
|Options exercisable at end of year                                 |                                           |              | 4,116 |                |   |        |       |                |  |        | 1,885 |                |   |   |       |       |  |   | 1,812 |       |   |   |       |      
|Weighted average fair value of options granted
    during the year |                                           | $            | 19.19 |                |   |        |       |                |  | $      | 17.27 |                |   |   |       |       |  | $ | 24.86 |       |   |   |       |      

|                 |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 
|---------------- |  | ------------------- | ----- | ------------------- |  | -------------- | ---- | -------------- |  | -------------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                 |  |                     |       |                     |  |               
|                 |  | Options Outstanding |       |                    
|                 |  |                     |       | Options Exercisable
|                 |  |                     |       | Weighted            |  |                |      |               
|                 |  |                     |       | Average             |  |                |      | Number         |  |               
|                 |  | Number              |       | Remaining           |  | Weighted       |      | Outstanding at |  | Weighted      
|Range of         |  | Outstanding at      |       | Contractual         |  | Average        |      | December 31,   |  | Average       
|Exercise Prices  |  | December 31, 2002   |       | Life (in years)     |  | Exercise Price |      | 2002           |  | Exercise Price
|                 |  |                     |       |                     |  |                |      |                |  |               
|$ 1.00 to $4.54. |  |                     | 232   |                     |  |                | 9.65 |                |  | $              | 2.98  |  |  |  | 25    |  |  | $ | 1.00  | 
|4.69 to 10.00.   |  |                     | 3,765 |                     |  |                | 6.95 |                |  |                | 9.82  |  |  |  | 2,408 |  |  |   | 10.00 | 
|11.00 to 17.88.  |  |                     | 2,007 |                     |  |                | 8.17 |                |  |                | 15.91 |  |  |  | 828   |  |  |   | 16.32 | 
|17.93 to 25.50.  |  |                     | 2,156 |                     |  |                | 8.94 |                |  |                | 23.14 |  |  |  | 186   |  |  |   | 20.86 | 
|25.69 to 72.00.  |  |                     | 1,651 |                     |  |                | 8.28 |                |  |                | 36.86 |  |  |  | 663   |  |  |   | 40.33 | 
|72.69 to 74.13.  |  |                     | 10    |                     |  |                | 7.14 |                |  |                | 72.98 |  |  |  | 6     |  |  |   | 73.07 | 
|                 |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 
|                 |  |                     | 9,821 |                     |  |                | 7.93 |                |  |                | 18.44 |  |  |  | 4,116 |  |  |   | 16.68 | 
|                 |  |                     |       |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 

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
1,136,000 HNC stock options for the right to receive our stock
options.

63



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


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

|                                                                   |                            |                         |   |                |   |        |      |                |  |  |     |      |   |   |       |       | 
|------------------------------------------------------------------ | -------------------------- | ----------------------- | - | -------------- | - | ------ | ---- | -------------- |  |  | --- | ---- | - | - | ----- | ----- | 
|                                                                   |                            |                        
|                                                                   |                            | Year Ended December 31,
|                                                                   |                            |                        
|                                                                   |                            |                         |   |               
|                                                                   |                            | 2001                    |   | 2000          
|                                                                   |                            |                         |   |               
|                                                                   |                            |                         |   | Weighted       |   |        |      | Weighted      
|                                                                   |                            |                         |   | Average        |   |        |      | Average       
|                                                                   |                            | Shares                  |   | Exercise Price |   | Shares |      | Exercise Price
|                                                                   |                            |                         |   |                |   |        |      |               
|Outstanding at beginning of year                                   |                            |                         | 1 |                |   | $      | 7.33 |                |  |  | 340 |      |   | $ | 30.62 |      
|                                                                   | Options granted            |                         |   | 0              |   |        |      | 0.00           |  |  |     | 0    |   |   |       | 0.00  | 
|                                                                   | Options exercised          |                         |   | 0              |   |        |      | 0.00           |  |  |     | (327 | ) |   |       | 30.56 | 
|                                                                   | Options canceled           |                         |   | (1             | ) |        |      | 7.33           |  |  |     | (12  | ) |   |       | 30.89 | 
|                                                                   |                            |                         |   |                |   |        |      |                |  |  |     |      |   |   |       |      
|                                                                   | Outstanding at end of year |                         |   | 0              |   |        |      | 0.00           |  |  |     | 1    |   |   |       | 7.33  | 
|                                                                   |                            |                         |   |                |   |        |      |                |  |  |     |      |   |   |       |      
|Options exercisable at end of year                                 |                            |                         | 0 |                |   |        |      |                |  |  | 1   |      |   |   |       |      
|Weighted average fair value of options granted
    during the year |                            |                         |   |                |   |        |      |                |  |  |     |      |   |   |       |      

Financial Accounting Standard No. 123
Information

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, 2002, 2001 and
2000, respectively: dividend yield of 0.0% for all three years;
risk-free interest rates of 2.64%, 3.94%, and 5.12%; expected
volatilities of 165%, 106%, and 130%; 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 2002, 2001 and 2000,
respectively: dividend yield of 0.0% for all three years;
risk-free interest rates of 1.72%, 3.64%, and 5.50%; expected
volatilities of 165%, 106%, and 130%; and an expected life of
six months for all three years. The weighted average fair value
of those purchase rights granted in 2000 for HNC stock was
$7.29. The weighted average fair value of those purchase rights
granted in 2002, 2001 and 2000 for our stock was $12.76, $15.07
and $8.33, respectively.

Note 15  Preferred Stock

We have authorized 5,000,000 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

Federal Litigation in the U.S. District Court
for the Southern District of New York

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 current and former officers and directors, and
certain underwriters of our initial public offering
(IPO). 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,
which the Court approved and entered as an order on
March 1, 2002. On April 20, 2002, the plaintiffs filed
an amended complaint in which they elected to proceed with their
claims against us and the individual officers and directors only

64



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##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. The amended complaint alleges
that the prospectus filed in connection with the IPO was false
or misleading in that it failed to disclose: (i) that the
underwriters allegedly were paid excessive commissions by
certain of the underwriters customers in return for
receiving shares in the IPO 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 IPO. The complaint
further alleges that the underwriters offered to provide
positive market analyst coverage for the Company after the IPO,
which had the effect of manipulating the market for our stock.
Plaintiffs contend that, as a result of the omissions from the
prospectus and alleged market manipulation through the use of
analysts, the price of our common stock was artificially
inflated between November 18, 1999 and December 6,
2001, and that the defendants are liable for unspecified damages
to those persons who purchased our common stock during that
period.

On July 15, 2002, the Company and the
individual defendants, along with the rest of the issuers and
related officer and director defendants, filed a joint motion to
dismiss based on common issues. Opposition and reply papers were
filed. The Court rendered its decision on February 19,
2003, which granted dismissal in part of a claim against one of
the individual defendants and denied dismissal in all other
respects. The class action suits may now proceed to the
discovery phase. We intend to defend against these claims
vigorously. Securities class action litigation can result in
substantial costs and divert our managements attention and
resources, which may have a material adverse effect on our
business and results of operations.

Federal Litigation in the U.S. District Court
for the District of Minnesota

Between October 30, 2002 and
December 8, 2002, several purported shareholder class
action suits were filed in federal district court in Minnesota.
The Court has not yet certified any class. The complaints
allege, among other things, violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 against us and
certain of our current and former officers and directors.
Specifically, the complaints allege that, among other things,
between October 17, 2001 and July 8, 2002 (the
Class Period), defendants made false and
misleading statements and/or concealed material adverse facts
from the market in press releases, presentations and SEC
disclosures. The complaints claim that our Company and the
individual defendants misled the market with respect to, among
other things our alliance with IBM, our ability to develop
certain software, and our expectations regarding certain
customer sales. Plaintiffs further allege that defendants
manipulated financial statements and failed to disclose problems
with existing and potential customer deals, which led to the
Companys stock price being artificially inflated during
the Class Period. The plaintiffs seek compensatory damages
and other unspecified relief. The federal court in Minnesota
appointed a lead plaintiff and lead plaintiffs counsel on
February 14, 2003, and we anticipate that the lead plaintiff
will file a Consolidated Complaint. After such Consolidated
Complaint is filed, defendants will answer or respond to these
allegations.

We dispute plaintiffs allegations in the
federal class actions in Minnesota and believe that the
allegations are subject to a variety of meritorious defenses. We
intend to establish a vigorous defense. While there can be no
assurance, and while the outcome of federal class action
litigation cannot be predicted with certainty, our management
currently believes that the ultimate outcome of the federal
class action litigation in Minnesota is unlikely to have a
material adverse affect on our financial position, results of
operations or cash flows. Despite our belief that the federal
class action complaints in Minnesota are without merit, it is
possible that the federal litigation in Minnesota could be
resolved adversely. Were the federal court in Minnesota to issue
a ruling or rulings unfavorable to us, such ruling or rulings
could have a material adverse impact on the results of
operations for the period in which the ruling occurs, or in a
period thereafter.

65



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


State Derivative Litigation in Hennepin
County, Minnesota

In addition to the above federal litigation, in
December 2002 two shareholder derivative lawsuits were filed in
state court in Hennepin County, Minnesota, against certain of
our current and former officers and directors, naming us as a
nominal defendant. Plaintiffs in both derivative cases have
agreed to coordinate their respective actions, and the process
of coordination is currently underway. The derivative suits
claim that certain of our officers and directors breached their
fiduciary duties to us and our stockholders by: (i) selling
shares of our common stock while in possession of material
adverse non-public information regarding our business and
prospects, and (ii) disseminating inaccurate information
regarding our business and prospects to the market and/or
failing to correct such inaccurate information. The derivative
complaints seek compensatory and other damages, restitution,
disgorgement, and other legal and equitable relief. As stated
above, the complaints are brought derivatively on our behalf,
and consequently do not seek relief from us. We however, have
entered into indemnification agreements in the ordinary course
of business with certain of the officer and director defendants
and may be obligated throughout the pendency of this action to
advance payment of legal fees and costs incurred by those
defendants pursuant to our obligations under the indemnification
agreements and/or applicable Delaware law.

While there can be no assurance, our management
currently believes that the ultimate outcome of the derivative
proceedings will not have a material adverse affect on our
financial position, results of operations, or cash flows.
However, we are unable to predict with certainty the results of
the derivative litigation.

Legal Proceedings that Arise in the Ordinary
Course of Business

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.

Note 17  Transactions with HNC

As described in Note 1, in 2000 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 2002 or 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 for such
expenses for the year-ended December 31, 2000. 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 $263 as of
December 31, 2000.

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, whichever is
greater for the second through fourth quarter 2000.
Contributions were $1,361, $1,441 and $676 for the years ended
December 31 2002, 2001 and 2000, respectively.

66



---



##### 



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share amounts)


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 year ended December 31, 2000
was $1,719.

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

|                                |  |      |      |      |  |   |         |  
|------------------------------- |  | ---- | ---- | ---- |  | - | ------- | -
|                                |  | 2001 |      | 2000
|                                |  |      |      |     
|Balance at beginning of period  |  | $    | 598  |      |  | $ | 15,399  |  
|Cost allocations payable to HNC |  |      | 0    |      |  |   | 598     |  
|Cash transfers from HNC         |  |      | 0    |      |  |   | 0       |  
|Cash transfers to HNC           |  |      | (598 | )    |  |   | (15,399 | )
|                                |  |      |      |      |  |   |         |  
|Net change during the period    |  |      | 598  |      |  |   | 14,801  |  
|                                |  |      |      |      |  |   |         |  
|Balance at end of period        |  | $    | 0    |      |  | $ | 598     |  
|                                |  |      |      |      |  |   |         |  

Note 18  Selected Quarterly Financial
Data (Unaudited)

|                                          |  |        |        |         |  |        |        |        |  |       |         |   |  |   |         |   |  |   |          |  
|----------------------------------------- |  | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ----- | ------- | - |  | - | ------- | - |  | - | -------- | -
|2002                                      |  | Mar 31 |        | June 30 |  | Sep 30 |        | Dec 31 |  | Total
|                                          |  |        |        |         |  |        |        |        |  |      
|Revenues                                  |  | $      | 53,547 |         |  | $      | 60,756 |        |  | $     | 40,453  |   |  | $ | 37,076  |   |  | $ | 191,832  |  
|Gross profit                              |  |        | 34,268 |         |  |        | 38,066 |        |  |       | 18,682  |   |  |   | 16,283  |   |  |   | 107,299  |  
|Net (loss) income                         |  |        | 1,631  |         |  |        | 2,237  |        |  |       | (94,994 | ) |  |   | (32,457 | ) |  |   | (123,583 | )
|Basic and diluted income (loss) per share |  | $      | 0.03   |         |  | $      | 0.04   |        |  | $     | (1.80   | ) |  | $ | (0.61   | ) |  | $ | (2.35    | )

|                                 |  |        |        |         |  |        |        |        |  |       |        |   |  |   |        |  |  |   |         |  
|-------------------------------- |  | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ----- | ------ | - |  | - | ------ |  |  | - | ------- | -
|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 per share |  | $      | (0.14  | )       |  | $      | (0.02  | )      |  | $     | (0.14  | ) |  | $ | 0.01   |  |  | $ | (0.29   | )

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.

Note 19  Subsequent Events

On February 5, 2003, our Board of Directors
approved a grant of 4,396,750 stock options to our employees.
This grant utilized most of our shares available for future
issuance as of that date. The recent trading prices for our
stock have reduced the value of stock options granted to
employees prior to 2003. We granted these options to employees
in February 2003 across all business functions and all
geographies to assist in the retention of personnel, which is
critical to our business.

On February 6, 2003, we entered into several
new long-term agreements with Accenture. Accenture will provide
us with a portion of our required development resources to make
custom modifications of our software and to develop software
that is funded by customers. In order to obtain competitive
rates, we have agreed to utilize a certain minimum number of
annual development days of Accenture resources. Additionally,
Accenture hired the employees in our training, translation and
documentation departments and will provide resources to us in
these areas as an outsourcing partner.

67



---



##### 



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                     
| | President and 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 12, 2003 by the following persons on behalf of the
Registrant and in the capacities indicated.

|                                         |  |                                                                                                                                        
|---------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Signature                                |  | Title (Capacity)                                                                                                                       
|                                         |  |                                                                                                                                        
|/s/ STEVEN D. LADWIGSteven D. Ladwig     |  | President and Chief Executive Officer, Director
    (PRINCIPAL EXECUTIVE OFFICER)                                                      
|                                        
|/s/ GREGORY A. EFFERTZGregory A. Effertz |  | Senior 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                                                                                                                               
|                                        
|/s/ WILLIAM J. WALSHWilliam J. Walsh     |  | Director                                                                                                                               

68



---



##### 



CERTIFICATIONS

I, Steven D. Ladwig, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Retek Inc.;                                                                                                                                                                                                                                                                              
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)     designed such
    disclosure controls and procedures to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    annual report is being prepared;
|
| | (b)     evaluated the
    effectiveness of the registrants disclosure controls and
    procedures as of a date within 90 days prior to the filing
    date of this annual report (the Evaluation Date); and                                                                                                          
|
| | (c)     presented in
    this annual report our conclusions about the effectiveness of
    the disclosure controls and procedures based on our evaluation
    as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)     all significant
    deficiencies in the design or operation of internal controls
    which could adversely affect the registrants ability to
    record, process, summarize and report financial data and have
    identified for the registrants auditors any material
    weaknesses in internal controls; and (b) any fraud, whether or
    not material, that involves management or other employees who
    have a significant role in the registrants internal
    controls; and



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



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

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

Date: March 12, 2003

69



---



##### 



CERTIFICATIONS



I, Gregory A. Effertz, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Retek Inc.;                                                                                                                                                                                                                                                                              
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officers and I are
    responsible for establishing and maintaining disclosure controls
    and procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                       



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)     designed such
    disclosure controls and procedures to ensure that material
    information relating to the registrant, including its
    consolidated subsidiaries, is made known to us by others within
    those entities, particularly during the period in which this
    annual report is being prepared;
|
| | (b)     evaluated the
    effectiveness of the registrants disclosure controls and
    procedures as of a date within 90 days prior to the filing
    date of this annual report (the Evaluation Date); and                                                                                                          
|
| | (c)     presented in
    this annual report our conclusions about the effectiveness of
    the disclosure controls and procedures based on our evaluation
    as of the Evaluation Date;                                                                                                                                



| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5.     The
    registrants other certifying officers and I have
    disclosed, based on our most recent evaluation, to the
    registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)     all significant
    deficiencies in the design or operation of internal controls
    which could adversely affect the registrants ability to
    record, process, summarize and report financial data and have
    identified for the registrants auditors any material
    weaknesses in internal controls; and (b) any fraud, whether or
    not material, that involves management or other employees who
    have a significant role in the registrants internal
    controls; and



| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officers and I have indicated
    in this annual report whether or not there were significant
    changes in internal controls or in other factors that could
    significantly affect internal controls subsequent to the date of
    our most recent evaluation, including any corrective actions
    with regard to significant deficiencies and material weaknesses.



| |     |                       
| | --- | ----------------------
| | By: | /s/ GREGORY A. EFFERTZ

| |                            
| | ---------------------------
| |                            
| | Gregory A. Effertz         
| | Principal Financial Officer

Date: March 12, 2003

70



---



##### 



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                                                                        
|        | 10.5**    |                     |  | Retek 1999 Equity Incentive Plan                                                                
|        | 10.6**    |                     |  | Retek 1999 Employee Stock Purchase Plan                                                         
|        | 10.7**    |                     |  | Retek 1999 Director Stock Option Plan                                                           
|        | 10.9***   |                     |  | Lease Agreement between Ryan 900, LLC and Retek
    Inc.                                        
|        | 10.10***  |                     |  | First Amendment to Lease Agreement between Ryan
    900, LLC and                                
|        | 10.11**** |                     |  | Retek Inc. Employment Agreement of Steven D.
    Ladwig                                         
|        | 10.12+    |                     |  | Change in control agreement by and between the
    Registrant and Steven D. Ladwig              
|        | 10.13+    |                     |  | Change in control agreement by and between the
    Registrant and Gregory A. Effertz            
|        | 10.14+    |                     |  | Change in control agreement by and between the
    Registrant and Peter A. Espinosa             
|        | 10.15+    |                     |  | Change in control plan by and between the
    Registrant and John Goedert and James B. Murdy    
|        | 10.16     |                     |  | Employment agreement of John Buchanan dated as of
    August 4, 2001                            
|        | 10.17++   |                     |  | Change in control plan by and between the
    Registrant and Duncan B. Angove                   
|        | 10.18     |                     |  | Change in control plan by and between the
    Registrant and John Gray                          
|        | 10.19     |                     |  | Offer letter by and between the Registrant and
    John Gray                                    
|        | 10.20     |                     |  | Offer letter by and between the Registrant and
    Peter A. Espinosa                            
|        | 21.1      |                     |  | Schedule of Subsidiaries                                                                        
|        | 23.1      |                     |  | Consent of PricewaterhouseCoopers LLP                                                           
|        | 24.1      |                     |  | Power of Attorney (contained on signature page)                                                 




|     |                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*    | 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.       
|    
|+    | Filed as an exhibit to our Quarterly Report of
    Form 10-Q for the quarter ended September 30, 2002,
    filed with the Securities and Exchange Commission on
    November 14, 2002, and incorporated herein by reference.



|   |                                                                                                                                                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|++ | Please see change of control plan by and between
    the Registrant and John Goedert and James Murdy as filed as an
    exhibit to our Quarterly Report of Form 10-Q for the
    quarter ended September 30, 2002, filed with the Securities
    and Exchange Commission on November 14, 2002, and
    incorporated herein by reference.