##### Table of Contents









UNITED STATES

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,
2003

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.     o

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
$339,425,756 as of June 30, 2003, based upon the closing
price of $6.30 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 10%
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 1, 2004, the number of shares of
common stock outstanding was 55,098,795.

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, 2003) for
its 2003 Annual Meeting of Stockholders to be held on
May 25, 2004.



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RETEK INC.

FORM 10-K

For the Fiscal Year Ended December 31,
2003


INDEX

|                                              |                                                                                                       |  |    |    | 
|--------------------------------------------- | ----------------------------------------------------------------------------------------------------- |  | -- | -- | 
|PART I                                        |                                                                                                       |  | 3  |   
|                                              | Item 1: Business                                                                                      |  |    | 3  | 
|                                              | Item 2: Property                                                                                      |  |    | 14 | 
|                                              | Item 3: Legal
    Proceedings                                                                         |  |    | 14 | 
|                                              | Item 4: Submission of
    Matters to a Vote of Security Holders                                       |  |    | 16 | 
|PART II                                       |                                                                                                       |  | 17 |   
|                                              | Item 5: Market for
    Registrants Common Equity and Related Stockholder
    Matters                 |  |    | 17 | 
|                                              | Item 6: Selected
    Consolidated Financial Data                                                      |  |    | 18 | 
|                                              | Item 7:
    Managements Discussion and Analysis of Financial Condition
    and Results of Operations |  |    | 18 | 
|                                              | Item 7A: Qualitative
    and Quantitative Disclosures About Market Risk                               |  |    | 37 | 
|                                              | Item 8: Financial
    Statements and Supplementary Data                                               |  |    | 37 | 
|                                              | Item 9: Changes in and
    Disagreements With Accountants on Accounting and Financial
    Disclosure  |  |    | 37 | 
|                                              | Item 9A: Controls and
    Procedures                                                                  |  |    | 37 | 
|PART III                                      |                                                                                                       |  | 39 |   
|                                              | Item 10: Directors and
    Executive Officers of the Registrant                                       |  |    | 39 | 
|                                              | Item 11: Executive
    Compensation                                                                   |  |    | 39 | 
|                                              | Item 12: Security
    Ownership of Certain Beneficial Owners and Management                           |  |    | 39 | 
|                                              | Item 13: Certain
    Relationships and Related Transactions                                           |  |    | 39 | 
|                                              | Item 14: Principal
    Accountant Fees and Services                                                   |  |    | 39 | 
|PART IV                                       |                                                                                                       |  | 40 |   
|                                              | Item 15: Exhibits,
    Financial Statement Schedules and Reports on Form 8-K                          |  |    | 40 | 
|Consent of PricewaterhouseCoopers LLP        
|Rule 13a-14(a)/15d-14(a) Certification of CEO
|Rule 13a-14(a)/15d-14(a) Certification of CFO
|Section 1350 Certification of CEO and CFO    



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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.

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 pro rata
distribution 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

Retailers face many challenges to be successful
in todays retailing environment. Essential to any
successful retailing venture is the ability to efficiently
extract actionable information from large volumes of data in
order to respond quickly to consumer demand. Reteks
solutions help provide this information in order to allow
retailers to make informed decisions in implementing their
business plan.

We have observed several trends as retailers seek
to better serve their customers. Two significant trends are:



| |    |                                                       
| | -- | ------------------------------------------------------
| | 1. | The replacement of older technology
    platforms, and
|
| | 2. | The integration of software applications.             



| |                                              
| | ---------------------------------------------
| | Replacement of Older Technology
    Platforms

Historically, large and mid-sized retailers have
relied on custom-built software systems to manage business
transactions both internally and with trading partners and
customers. These systems have typically been built using
1970s mainframe technology and many of them have been
internally developed. These older systems are generally not
Internet-enabled, and do not permit collaboration among a
retailers partners, suppliers and other members of the
supply chain. Within the last several years, retailers have

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begun to purchase packaged software solutions
designed specifically for the retail industry. However, some of
these products have been unable to provide the scalability
retailers require to manage the large amounts of data their
businesses generate. 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.


A retailers basic technology platform must
be able to adapt to a rapidly changing and competitive
landscape. Many retailers face the additional challenge of
operating in a multi-channel environment. As retailers expand
their sales outlets to include the Internet, catalogs, kiosks
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 product available when and where the customer wants it.
Retailers must have strong forecasting, planning, allocation,
replenishment and merchandising capabilities to achieve 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. These critical
capabilities cannot be delivered using many of the older
technology platforms in use today.



| |                        
| | -----------------------
| | Application Integration

Having accurate and timely data is integral to
successful retailing. Retailers use numerous software
applications either purchased from vendors or developed
internally, and those applications must interact, sharing data
and information. For example, a retailer may use a point-of sale
solution from one vendor, a merchandising system developed
internally and a data warehouse purchased from another vendor.
These applications may use different protocols, programming
languages, databases, architectures and hardware platforms or
have other technical differences. These technical differences
cause difficulties when the different applications interact.
Interaction among systems can be accomplished in one of two ways:



| |    |                         
| | -- | ------------------------
| | 1. | Data Interfacing, or    
|
| | 2. | Application Integration.

Data Interfacing is the most common approach for
having data interact between two different applications. In
order for these applications to interact data must first be
packaged in a certain format by one application, ported or
connected to the second application, and then unpackaged and
converted so that the second application can understand and use
that data. These steps increase the processing time for every
transaction and limit the systems ability to scale.
Scalability is defined as the ability to maintain service levels
and response times as transaction volumes increase.

Application Integration occurs when applications
access the same pool of data without the need to package,
unpackage, and convert data to accommodate any technical
differences. Thus, in a fully integrated environment, a
point-of-sale application would seamlessly deliver data without
conversion or modification to all other applications that
require that same data.

Retailers have become increasingly interested in
software solutions that are integrated rather than interfaced.
Often times interfaced solutions result when
best-of-breed solutions are purchased and must then
be made to share data. By selecting different vendors for
different functionality, data interchange becomes more
difficult. Data interfacing limits a systems ability to
calculate real time changes to basic items such as
inventory levels. Data interfacing also impacts the ability to
customize and upgrade software. Because each application is
separate, a change in one application may change how data must
be translated to be shared with and by that application. In
turn, this may increase costs and require additional
modifications to other interfaced applications that were not
customized or upgraded, in order to handle the changes in the
original application. All in all, data interfacing may limit the
practicality of customizations and upgrades for a
retailers entire system.

We have developed and deployed software solutions
that enable retailers to manage virtually all of their
operations. These operations include point-of-sale and store
operations, order management,

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merchandising, supply chain management and
planning, forecasting and optimization operations. Key factors
that we believe differentiate our software solutions include:




| |   |                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Application
    Integration By integrating
    our applications, we reduce the processing required to share
    data, enable real-time access to information, and improve
    performance. The use of a business logic layer enables our
    applications to access data in a consistent way.                                                                                   
|
| |  | 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.                                                                                                                                                                 
|
| |  | Scalable
    Our solutions are engineered to provide scalability to
    efficiently handle large volumes of transactions and users.                                                                                                                                                                                                                                             
|
| |  | 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 goal is to help our customers be the most
successful retailers in the world. 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 tangible, measurable return on
    investment (deliver value to our
    customers).We believe that maximizing
    our customers measurable return on investment will help us
    compete in our market space and increase our market share.                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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 in business 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 generally
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 five 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

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application service provider. The five product
groups are: Advanced Replenishment, Planning and Optimization;
Merchandise Operations Management; Supply Chain Management;
Integrated Store Operations; and Enterprise Infrastructure.




| |                                                      
| | -----------------------------------------------------
| | Advanced Replenishment, Planning and
    Optimization

Inventory management is a challenging task for
the retail industry. Retailers must ensure a wide variety of
product assortments are procured from numerous vendors,
distributed across complex supply chains and are available at
the right place, right time and right price to meet expected
consumer demand.

Predicting accurate consumer demand can best be
done by applying scientific mathematical forecasting models.
These models can help retailers understand historical trends and
can project consumer behaviors into the future, thereby
providing an accurate picture of future demand. When developing
the inventory plan to meet this demand, it is important to
understand the constraints within the supply chain and to have
the ability to automatically and proactively manage the plan to
overcome these constraints. It is also important that the item
is optimally priced and that markdown strategies are
appropriately identified and executed.

Our solutions deliver scientific forecasting,
planning, replenishment and optimization capabilities that
enable retailers to match supply with consumer demand, driving
improvements in inventory turns, margin and profitability.

Key business functions covered within the area of
Advanced Replenishment, Planning and Optimization include:
merchandise and channel planning, assortment planning, item
planning, visual space planning, promotional planning, markdown
optimization, price optimization, assortment to space
optimization, customer optimization, demand forecasting,
replenishment planning, allocation planning, replenishment
optimization, collaborative planning, forecasting and
replenishment.

Solutions supporting these business functions
include Reteks planning, optimization, forecasting, and
replenishment offerings.

Retek offers solution templates for the following
planning processes:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Merchandise Financial, Product (Item), and
    Location Planning templates provide highly flexible financial,
    product, channel and location planning by creating a business
    plan for all products across an organization. Merchandise
    Financial Planning helps retailers proactively respond to
    changing conditions and take advantage of unique market
    opportunities that may have been otherwise lost due to the lack
    of timely information.   
|
| | Retek® Item Planning software provides
    full life cycle, item level planning capabilities to produce a
    bottom up plan in support of, and in conjunction with, an
    overall financial plan. Item Planning is a proactive
    pre-season and in-season approach to product planning and
    management.                                                                                                                                                           
|
| | Retek® Assortment Planning software
    templates help retailers determine the optimum product mix, and
    item depth and breadth necessary to satisfy customer demand in
    each store. Combining the art and science of merchandising, the
    assortment plans are derived within the constraints of the
    financial plan and available space. This results in improved
    customer service, increased revenues and increased return on
    inventory investment.

Retek offers the following optimization services
and solutions:



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Customer Revenue Optimization
    software provides a tool kit of advanced mathematics
    to use in conjunction with Reteks proprietary
    behavior profiling techniques to help predict future
    buying habits of customers.
|
| | Retek® Space Optimization software provides
    optimal space, fixture and shelf space allocation
    recommendations based on business rules, forecasted demand and
    profit potential to maximize revenues and profits.                  

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| |                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Inventory Optimization software 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® Markdown Optimization software
    provides the timing of, and price recommendations for the
    initial and additional clearance markdowns within the boundaries
    of global and business specific rules to maximize revenue and
    profit.                                                                             

Solutions supporting forecasting business
processes include:



| |                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Forecasting software provides highly
    accurate forecasts that can be used to improve the planning,
    allocation and replenishment processes. This solution enables
    retailers to more accurately predict demand for products and
    thus minimize out of stock merchandise, lower excess inventory
    and improve supply chain planning and management.
|
| | Retek® Promotional Forecasting software is a
    promotional forecasting tool that tracks and analyzes the
    profitability of promotions or the effectiveness of specific
    promotional features and components. By measuring promotional
    effectiveness retailers can improve how advertising promotion
    dollars are spent and reduce unnecessary mark-downs.

Solutions supporting replenishment business
processes include:



| |                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Advanced Inventory Planning software
    integrates with Retek® Demand Forecasting software to
    produce time-phased order plans that are synchronized across the
    supply chain taking into account real world constraints such as
    actual inventory, logistics and available labor.      
|
| | Retek® Allocation software supports the
    product allocation process to individual stores. Proper
    allocation ensures the right quantity of product in the right
    location at the right time to maximize sales, profits and
    customer satisfaction.                                           
|
| | Retek® Collaborate software is a web-based,
    collaborative solution that 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.



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

Key business processes covered within the area of
merchandise operations management include merchandise
management, inventory and financial tracking, sales audit,
rules-based pricing, invoice matching as well as collaborative
design and sourcing.

Solutions supporting these business processes
include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Merchandising System software is a
    flexible, scalable and proven foundation to execute a broad
    range of core merchandising activities including inventory,
    purchasing and vendor management. This solution records and
    controls virtually all retail business information and helps
    ensure consistent and accurate data across integrated systems.
    Improved consistency and availability of information allows
    retailers to make better merchandising decisions.                                             
|
| | Retek® Sales Audit software provides for
    evaluation of point-of-sale data to help ensure accuracy and
    completeness of information exported to downstream systems.
    Retek® Sales Audit is designed with flexibility in mind to
    accommodate varying business practices. User-defined totals
    support customer calculation of over and shorts and virtually
    any other data received from the point-of-sale. User-defined
    audit rules can be applied against totals or raw transaction
    data to identify exceptions and

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | areas of concern to the retailer. Retek®
    Sales Audit allows for efficient delivery of high-quality sales
    data to support improved decision and optimization processes and
    reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Retek® Invoice Matching software provides
    for the efficient verification of invoices, a critical control
    process retailers use to ensure the accuracy of information used
    to calculate inventory values and invoices paid. Retek Invoice
    Matching is a natural complement to the Retek Merchandising
    System as many of the inputs necessary to the invoice
    verification process are provided through the merchandising
    system. As an integrated solution with Retek® Merchandising
    System, Retek Invoice Matching customers can realize
    productivity increases, reduced maintenance and lower total cost
    of ownership.
|
| | Retek® Price Management software assists
    retailers make better, faster and more proactive business
    pricing decisions for a large number of products and stores.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Retek® Trade Management software automates
    the international procurement process by linking partners in the
    supply chain and moving information as products move through the
    sourcing, buying and delivery processes. This solution gives
    retailers better delivery information, better visibility into
    their pipelines and improved regulatory compliance for
    international orders.                                                                                                                                                                                                                                                  
|
| | Retek® WebTrack software links retailers and
    their trading partners via the Internet to collaboratively
    manage the process of developing and sourcing goods. This
    solution provides retailers with greater visibility to goods
    within their supply chain. This allows retailers to proactively
    spot and fix bottlenecks, improving both the predictability and
    accuracy of product availability.                                                                                                                                                                                                                                      
|
| | Retek® Design software enables real-time
    collaboration to support new product development and decreases
    the product cycle time by linking retailers and suppliers via
    the Internet.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Retek® Master Data Management software will
    help retailers improve the quality of item information, reduce
    item master errors, speed the time-to-market for new product
    introductions and reduce labor costs. The solution allows the
    ability to synchronize item data across a retailers
    internal systems (Retek, third party and legacy applications)
    and with suppliers. This product is scheduled to be generally
    available in the first half of 2004.                                                                                                                                                                       



| |                        
| | -----------------------
| | 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 solutions supporting these business
processes are:



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Distribution Management software is a
    warehouse management system that plans, manages and optimizes
    distribution center operations. This results in better inventory
    flow through the warehouse and lowers labor and distribution
    costs.
|
| | Retek® Labor Management software provides
    review and reporting capabilities to manage labor productivity
    and improve performance in the warehouse.                                                                                                     

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 scalable and open architecture that is
operating system

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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 processes
include:



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Point-of-Sale software is a Java
    based point-of-sale software system that manages the process for
    all types of customer transactions. The solution is operated on
    lower cost hardware and provides a simple user interface,
    reducing training costs and transaction errors.                                                           
|
| | Retek® Store Inventory Management software
    provides real-time data communications between stores and their
    corporate offices. This application supports store level
    activities such as item look-up, stock counts and transfers,
    resulting in improved accuracy of inventory information,
    in-store efficiency and increased sell-through.

Additional companion products in ISO support
consumer interaction and selling efficiency include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Retek® Brickstream software allows retailers
    to monitor in store customer shopping behavior. This solution
    monitors customer movements in the store and produces real-time
    feedback regarding customer checkout times. This solution also
    monitors customer traffic patterns and interactions around
    promotions and displays, giving store personnel feedback on the
    effectiveness of a particular display.
|
| | Retek® Customer Order Management software
    supports retailers that sell through catalogs and web sites by
    providing real-time inventory and customer order information. As
    a result, customers receive a consistent shopping experience
    across channels and retailers are able to maintain a
    comprehensive view of the customer, while reducing the amount of
    inventory necessary to satisfy demand.        

Enterprise Infrastructure

Supporting a retail enterprise is a substantial
task. To quickly respond to changing customer demand, 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 Warehouse software is a robust
    and retail-specific data warehouse that delivers improved
    decision support through advanced analytics and performance
    analysis that can be tailored for use by everyone in a
    retailers organization, from corporate headquarters to
    stores.                                                                                                                                                                                                                                                                                                                                                                                
|
| | Retek® Active Retail Intelligence software
    is an exception management system that automates routine tasks,
    identifies opportunities, recommends courses of action and
    automates routine tasks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | Retek® Workbench software provides a
    role-based portal for intuitive application navigation and
    enhanced usability by end users.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Retek® Integration Solution software 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 Extract, Transfer and
    Load (RETL) provides high-volume data replication required for
    most planning, optimization and reporting solutions. Retek
    Integrator provides the ability to share data between Retek
    e-services and other internal and external systems used by
    retailers and their trading partners.



| |               
| | --------------
| | Retek In-a-Box

The Retek In-a-BoxTM solution set
created for mid-market retailers, or retailers with annual
revenues between $200 million and $3.0 billion. In
comparison to larger retailers, many mid-market retailers
operate with less employee and financial resources as well as
higher product costs. To address this market, Retek In-a-Box
offers a complete infrastructure for a retailer including
software, hardware and implementation

9



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##### Table of Contents



services from Retek and key partners. Retek
In-a-Box includes applications that support the following
functions:




| |   |                                                        
| | - | -------------------------------------------------------
| |  | Merchandising,                                         
|
| |  | Point-of-Sale,                                         
|
| |  | Store Inventory Management,                            
|
| |  | Sales Audit,                                           
|
| |  | Invoice Matching,                                      
|
| |  | Performance Reporting and Exception
    Management, and
|
| |  | Integration.                                           

The Retek In-the-Box solution set is meant to be
an all inclusive offering that offers many of the same features
of our regular Retek products, but bundled together for
simplified implementation, lower total cost of ownership and
lower integration risks.

Retek Professional Services

Retek Professional Services help 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. 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. Our
professional services have the following attributes:



| |   |                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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. These services are customarily
    billed in advance for one-year terms.                                                        
|
| |  | We also provide strategic technical advisory
    services after product delivery. These services and support are
    designed to help our customers exploit the full value and
    functionality of our products.                                                                
|
| |  | 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. These services are typically billed on a per class
    or per person basis.

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
$200 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 2003,
we had one customer, The GAP, Inc., who accounted for
greater than 10% of total revenues.

Government Contracts

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

10



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##### Table of Contents



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 99%, 98% and 96% of our
total revenue in 2003, 2002 and 2001, 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, 2003.
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, 2003, 2002 and
2001, 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 included in Item 15 of this Annual Report on
Form 10-K beginning on page 40.

Research and Development

Our research and development group has been a
critical component of our overall success. As of
December 31, 2003, our research and development group was
comprised of 320 individuals in Atlanta, GA, Minneapolis, MN and
the United Kingdom. In addition, we continue to have 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 centrally
organized. The group is responsible for product development,
implementation of product strategy, delivery of product releases
and support of our software applications.

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 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
$44.5 million, $47.2 million and $42.6 million in
the fiscal years 2003, 2002 and 2001, 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
retailers in-house technical staffs, traditional
enterprise resource planning

11



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##### Table of Contents



vendors and other vendors of retail specific
solutions. Of these vendors, our principal competitors include
JDA Software, SAP, Manhattan Associates, Manugistics and
i2 Technologies. 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 more timely 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 to 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 the source code for our software,
documentation and other written materials under trade secret and
copyright laws. We license our software under signed license
agreements, which impose restrictions on the licensees
ability to utilize the software. Finally, we seek to avoid
disclosure of our intellectual property by requiring employees
and consultants with access to our proprietary information to
execute confidentiality agreements with us and by restricting
access to our source code.

We rely on technology that we license from third
parties, including software that is integrated with internally
developed software and used in our line of products to perform
key functions. For example, we license the e*Gate enterprise
application integration software from SeeBeyond Corporation,
business intelligence software from MicroStrategy, Inc.,
the Acumate component from Lucent Technologies and Wavelink
Studio from Wavelink Corporation. These licenses are
non-exclusive, worldwide and royalty-based. The royalties we
paid SeeBeyond, MicroStrategy, Lucent and Wavelink under these
licenses were, in each case, less than 5% of our total revenue
in each of the 2003, 2002 and 2001 fiscal years. 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.

12



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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 or earnings.

Employees

At December 31, 2003, we had 640 employees
based in North America, Europe, Asia, Australia and other
countries. None of our employees are subject to a collective
bargaining agreement except for certain of our French employees
and we believe we have good relations with our employees.

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
|                   |  |     |    |         
|Martin J. Leestma  |  |     | 45 |          |  | President and Chief Executive Officer                                                                 
|John L. Goedert    |  |     | 37 |          |  | Chief Operating Officer                                                                               
|Gregory A. Effertz |  |     | 41 |          |  | Senior Vice President, Finance &
    Administration, Chief Financial Officer, Treasurer, and Secretary
|Jerome Dolinsky    |  |     | 38 |          |  | Senior Vice President, World Wide Sales                                                               
|Thomas F. Carretta |  |     | 45 |          |  | Vice President, Legal and General Counsel                                                             
|Duncan B. Angove   |  |     | 36 |          |  | Chief Strategy Officer                                                                                
|John R. Gray       |  |     | 38 |          |  | Chief Technology Officer                                                                              
|James B. Murdy     |  |     | 41 |          |  | Controller                                                                                            

Martin J. Leestmajoined us in March 2003 as our
President and Chief Executive Officer. Prior to joining Retek,
Mr. Leestma was a Partner with Accenture Consulting most
recently serving as Global Managing Partner CPG/ Retail.
Mr. Leestma holds a Bachelor of Science degree in
Industrial Management & Computer Sciences from Purdue
University.

John L. Goedertjoined us in June 1996 as Senior Vice
President, research and development and is currently our Chief
Operating Officer, a position he has held since February 2000.
Mr. Goedert holds a Bachelor of Business Administration in
Finance from Iowa State University.

Gregory A. Effertzjoined us in March 1997 as Senior 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.

13



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Jerome Dolinskyjoined us in August of 1998 and is
currently our Senior Vice President, World Wide Sales a position
he has held since December 2003. Mr. Dolinsky holds a
Bachelor of Science degree from Weber State University.

Thomas F. Carrettajoined us in December of 2000 and is
currently our Vice President, Legal and Lead Counsel a position
he has held since December 2003. Prior to joining Retek, from
May 1998 to December 2001, he served as General Counsel and
Corporate Secretary of FirePond, Inc. From 1988 to 1998,
Mr. Carretta was General Counsel for Comtrol Corporation
and affiliated companies. Mr. Carretta holds a Bachelor of
Arts in English from Loyola Marymount University and holds a
Juris Doctorate from Hamline University School of Law.

Duncan B. Angovejoined us in September 1997 and is
currently our Chief Strategy Officer. 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, a
position he has held since January 2003. From February 1999 to
April 2002 he 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 is in Minneapolis,
Minnesota.

We also have leased regional offices located in
Atlanta, Georgia; Australia, France, Germany 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.




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, as amended (the Exchange Act) 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 Exchange Act. 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

14



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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, 2000, 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.

On June 30, 2003, a Special Litigation
Committee of the Board of Directors of the Company approved a
Memorandum of Understanding (the MOU) reflecting a
tentative settlement in which the plaintiffs agreed to dismiss
the case against the Company with prejudice in return for the
assignment by the Company of claims that the Company might have
against its underwriters. The same offer of settlement was made
to all issuer defendants involved in the litigation. No payment
to the plaintiffs by the Company is required under the MOU.
There can be no assurance that the MOU will result in a formal
settlement or that the Court will approve the settlement that
the MOU sets forth.

The Company believes that it and the individual
defendants have meritorious defenses to the claims made in the
complaint and, if the MOU does not result in a formal settlement
approved by the Court, intends to contest the lawsuit
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 federal court in
Minnesota appointed a lead plaintiff and lead plaintiffs
counsel on February 14, 2003. The consolidated complaint
(the Consolidated Complaint) alleges, among other
things, violations of Sections 10(b) and 20(a) of the
Exchange Act against us and certain of our current and former
officers and directors. Specifically, the Consolidated Complaint
alleges that, among other things, between July 19, 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 Consolidated Complaint
alleges 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. On May 30, 2003, the Company and the individual
defendants served a motion to dismiss the Consolidated
Complaint. On January 27, 2004, the Court heard arguments
on the motion to dismiss, and the parties are currently awaiting
a ruling by the Court.

We dispute plaintiffs allegations in the
consolidated 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
consolidated 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 consolidated federal class action is without
merit, it is possible that the litigation 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

15



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##### Table of Contents



adverse impact on the results of operations for
the period in which the ruling occurs, or in a period thereafter.




| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | State Derivative Litigation in the State of
    Minnesota, District Court, Hennepin County

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 consolidate their respective actions, although the
derivative plaintiffs have not yet filed a consolidated
derivative complaint. 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, 2003.

16



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##### Table of Contents






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
|               |  |      |       |    
|2003:          |  |      |       |     |  |   |       | 
|First Quarter  |  | $    | 6.17  |     |  | $ | 2.62  | 
|Second Quarter |  | $    | 8.50  |     |  | $ | 5.02  | 
|Third Quarter  |  | $    | 7.89  |     |  | $ | 6.00  | 
|Fourth Quarter |  | $    | 11.49 |     |  | $ | 6.75  | 
|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 1, 2004, the last reported sale
price for shares of our common stock on the Nasdaq National
Market was $8.31 per share.

There were approximately 173 holders of record of
our common stock as of March 1, 2004.

Equity Compensation Plan Information

|                                                               |       |                   |            |                   |  |                           |       |       |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ----------------- | ---------- | ----------------- |  | ------------------------- | ----- | ----- |  |  | --------- | --------- | 
|                                                               |       | Number of         |            |                   |  |                          
|                                                               |       | securities to be  |            |                   |  | Number of securities     
|                                                               |       | issued upon       |            | Weighted-average  |  | remaining available for  
|                                                               |       | exercise of       |            | exercise price of |  | future issuance under    
|                                                               |       | outstanding       |            | outstanding       |  | equity compensation plans
|                                                               |       | options, warrants |            | options, warrants |  | (excluding securities    
|                                                               |       | and rights as of  |            | and rights as of  |  | reflected in column (a)) 
|                                                               |       | December 31, 2003 |            | December 31, 2003 |  | as of December 31, 2003  
|Plan Category                                                  |       | (a)               |            | (b)               |  | (c)                      
|                                                               |       |                   |            |                   |  |                          
|Equity compensation plans approved by security
    holders     |       |                   | 11,650,224 |                   |  | $                         | 10.84 |       |  |  | 2,148,550 |          
|Equity compensation plans not approved by
    security holders |       |                   |           |                   |  |                           |      |       |  |  |          |          
|                                                               | Total |                   |            | 11,650,224        |  |                           | $     | 10.84 |  |  |           | 2,148,550 | 

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.

17



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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,              
|                                               |  |                                      
|                                               |  | 2003                                  |         | 2002 |  | 2001 |          | 2000 |  | 1999
|                                               |  |                                       |         |      |  |      |          |      |  |     
|                                               |  |                                      
|                                               |  | (in thousands, except per share data)
|Consolidated Statement of Operations
    Data: |  |                                       |         |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |        |  
|Total revenue                                  |  | $                                     | 168,329 |      |  | $    | 191,832  |      |  | $    | 179,474 |   |  | $ | 91,957  |   |  | $ | 69,159 |  
|Gross profit                                   |  |                                       | 79,657  |      |  |      | 107,299  |      |  |      | 104,449 |   |  |   | 38,212  |   |  |   | 45,166 |  
|Operating loss                                 |  |                                       | (20,227 | )    |  |      | (46,742  | )    |  |      | (23,319 | ) |  |   | (65,598 | ) |  |   | (7,096 | )
|Net loss                                       |  |                                       | (20,533 | )    |  |      | (123,583 | )    |  |      | (14,310 | ) |  |   | (42,905 | ) |  |   | (5,369 | )
|Basic and diluted net loss per common share    |  | $                                     | (0.38   | )    |  | $    | (2.35    | )    |  | $    | (0.29   | ) |  | $ | (0.91   | ) |  | $ | (0.13  | )
|Cash dividend declared per common share        |  |                                       |        |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |       |  

|                                 |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|-------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                 |  |               
|                                 |  | December 31,  
|                                 |  |               
|                                 |  | 2003           |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                 |  |                |         |      |  |      |         |      |  |     
|                                 |  |               
|                                 |  | (in thousands)
|Consolidated Balance Sheet Data: |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|Cash and cash equivalents        |  | $              | 54,275  |      |  | $    | 56,464  |      |  | $    | 70,166  |  |  | $ | 31,058  |  |  | $ | 83,680  | 
|Working capital                  |  |                | 69,104  |      |  |      | 46,857  |      |  |      | 59,309  |  |  |   | 35,069  |  |  |   | 84,977  | 
|Total assets                     |  |                | 178,229 |      |  |      | 198,567 |      |  |      | 299,370 |  |  |   | 195,183 |  |  |   | 154,233 | 
|Payable to HNC Software Inc.     |  |                |        |      |  |      |        |      |  |      |        |  |  |   | 598     |  |  |   | 15,399  | 
|Debt obligations                 |  |                | 78      |      |  |      | 159     |      |  |      | 236     |  |  |   | 453     |  |  |   |        | 
|Total stockholders equity       |  |                | 88,911  |      |  |      | 101,448 |      |  |      | 203,523 |  |  |   | 124,595 |  |  |   | 123,975 | 




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 pro rata distribution 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, 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. We revised the terms of our software licensing
agreements for a substantial portion of our license revenues.

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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), 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 weakened 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. 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 and
continuing in 2003, we also increased our sales and marketing
efforts in the mid-market. We consider the Tier 1 retail
market to be retail companies with annual revenues in excess of
$3 billion and mid-market to be retail companies with
annual revenues from $200 million to $3 billion. We
have recently experienced increased sales activity in the
mid-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
35%, 36% and 33% of our total revenues in 2003, 2002 and 2001,
respectively. We believe that this level of 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. 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.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 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

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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.


Customer Funded Product
Development On an on-going
basis, we undertake new product development work that is fully
funded by one or more of our customers. This gives us an
opportunity to incorporate real world best business
practices into a product that we are able to sell to existing
customers and prospects as soon as it is completed. We have
developed several products in this way and expect we will
continue to use this method to expand and enhance our product
set.

Development Relationship with
Accenture

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. Our minimum payments in
2004 are $2.2 million. We entered into these agreements to
manage the variability in the demand for certain services and to
enhance our ability to provide solutions to customers at
competitive rates.

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, as well as related disclosures 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. 104, Revenue Recognition in Financial
Statements, which superseded SAB 101.

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 of fair value (VSOE) exists for the
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. In
arrangements where we do not have VSOE for all elements and we
are not selling technical advisory services, we follow the
residual method. For a substantial portion of our software
license products sold, 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 as no vendor specific

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objective evidence of fair value exists for
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. Maintenance revenue is deferred and
recognized ratably over the maintenance period Service revenue,
including consulting and training services, 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, which requires
management estimates and judgments. 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 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, 2003, we have recorded a
valuation allowance against our deferred tax assets of
$106.8 million. 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. We will continue to evaluate the
need for a full valuation allowance, which will involve
substantial management judgment. 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 allowances may be required. As of December 31,
2003 and 2002, we have an allowance for doubtful accounts of
$3.5 million and $5.7 million, respectively.



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

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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 $30.4 million and
$47.8 million as of December 31, 2003 and 2002,
respectively.

Goodwill represents the excess of the aggregate
purchase price over the fair value of net assets, including in
process research and development, of acquired businesses.
Goodwill is tested for impairment annually, or more frequently
if changes in circumstance or the occurrence of events suggest
an impairment exists. The test for impairment requires us to
make several estimates about fair value, most of which are based
on projected future cash flows. Our estimates associated with
the goodwill impairment tests are considered critical due to the
amount of goodwill recorded on our consolidated balance sheets
and the judgment required in determining fair value amounts,
including projected future cash flows. Goodwill was
$13.8 million as of both December 31, 2003 and 2002.



| |                            
| | ---------------------------
| | 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 included 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 in the fourth quarter of
2002. We recorded an additional charge of $0.3 million in
2003 to reflect adjustments to final severance benefits paid. As
of December 31, 2003, all payments had been made to the
severed individuals.

We also recorded a net loss on lease abandonment
of $17.0 million in the fourth quarter of 2002. In the
third quarter of 2003 we recorded a $0.1 million reduction
to the estimated lease abandonment charges. The lease
abandonment loss recorded in the fourth quarter of 2002
consisted of the payments to be made for the remaining lease
term of the abandoned space aggregating $31.1 million, net
of estimated sublease income of $14.1 million. Lease terms
of the leased space abandoned range 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 subjective and
includes assumptions regarding the periods of sublease and the
price per square foot to be paid by the sublessors. 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. As of
December 31, 2003, the remaining accrual for lease
obligations and terminations is $14.5 million.

Results of Operations



| |                                                  
| | -------------------------------------------------
| | Understanding Our Major Revenues and
    Expenses



| |         
| | --------
| | Revenues

We record revenues for the sale of software
licenses, maintenance, and services. License revenues may be
recognized by one of three methods based on the elements of the
arrangement and contract terms:



| |    |                                                                   
| | -- | ------------------------------------------------------------------
| | 1. | Ratably over the technical advisory period,                       
|
| | 2. | Upon delivery if all other criteria are
    met, or               
|
| | 3. | As services are performed on a percentage of
    completion basis.

Software licenses are generally sold with
technical advisory services and revenues are ratably spread over
the length of the advisory services. For example, a
$7.5 million license contract sold with technical advisory
services of fifteen months would be recognized at a rate of
$0.5 million per month over the period

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of the technical advisory services. If that same
contract were recognized upon delivery, $7.5 million would
all be recognized during the reporting period. If the
$7.5 million contract revenues were recognized using the
percent complete method the amount of revenue would be based on
how much of the work was completed in a period related to the
license. Thus, if 20% of the total estimated work was completed
during the reporting period, $1.5 million would be
recognized as revenue.


Fluctuations in license revenues between periods
whether increasing or decreasing are influenced by the following
factors:



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | The length of the technical advisory periods.
    Technical advisory periods generally run from twelve to
    twenty-four months depending on the goals of the customer. If a
    license contract has a shorter advisory period, the amount of
    revenue recognized will be higher on a monthly basis, whereas if
    the technical advisory period is longer, the amount of license
    revenue recognized on a monthly basis will be less.                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | 2. | Increases or decreases in license revenue may be
    dependent upon the number of license contracts being recognized.
    Because we recognize revenue in monthly amounts over a period of
    time there are layers of revenue being recognized.
    Thus, an increase or decrease in revenues is not only dependent
    upon the size of the contracts but the number of contracts being
    concurrently recognized. Fluctuations in our revenues may result
    from the rate at which we add more contracts, or
    layers of revenue, as other are taken away because
    they are fully recognized.                                                                                                                                                                                                                                                                 
|
| | 3. | Timing of contracts signed. Depending on when a
    contract is signed, it may not have an impact on the reported
    periods results. Many of our contracts are signed in the
    last month of the quarter, thus, major contracts may not impact
    the period in which they are signed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | 4. | The mix of license revenues recognized upon
    shipment or percent complete may impact our revenues. If
    proportionately more contracts are signed without technical
    advisory services, this may materially affect our revenue
    recognition during the quarter. In the case of recognition based
    on shipment, this may materially increase the period revenues.
    An increase in percent complete license revenues would cause
    revenues to fluctuate depending on the amount of work that could
    be completed on those projects. If there is a shift in license
    contracts that adds proportionately more or less percent
    complete arrangements or more or less software revenues that are
    recognized upon shipment, revenue streams may be materially
    affected both in the current period and in the outlook of the
    future periods.

Maintenance revenues are typically recognized
ratably over the longer of the maintenance period or over the
technical advisory period associated with the maintenance
revenue streams. Services revenue is typically recognized on a
time and materials basis as services are performed.



| |         
| | --------
| | Expenses

Employee and related costs represent our largest
expense and software engineers represent the largest segment of
our employees. We manage our software engineers as a resource
pool to be applied against the demands of our business. Software
engineers have many differing skills and expertise that create
sub-sets within this resource pool. Software engineers work in
many different capacities within our organization and therefore
associated costs are included in many line items in our
Statement of Operations including:



| |    |                                 
| | -- | --------------------------------
| | 1. | Cost of License and Maintenance,
|
| | 2. | Cost of Services and Others,    
|
| | 3. | Research and Development, and   
|
| | 4. | Sales and marketing.            

We assign software engineers in our resource pool
to projects across the organization based on demand regardless
of what Statement of Operations line item is charged the
applicable cost. As a result, the number of software engineers
working on a license and maintenance project may quickly change
to a

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research and development project based on the
individual project needs. We may have a reduction in the total
number of software engineers during a period, but personnel and
related expenses for a certain line item may increase because
the remaining software engineers work on projects based on need
and demand. Projects are assigned to a Statement of Operations
line item based on the type of project involved.


Another significant expense is third party
consultant costs. Generally, third party consultants are
software engineers utilized to supplement, or in place of, our
employee software engineers. Third party consultants are used on
an as-needed basis depending on the availability and skills of
internal resources and our ability to leverage our relationships
with third party integrators. Third party consultants offer
flexibility to meet our programming needs without increasing
fixed costs.

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,            
|                                                                                                |                                                 |                         
|                                                                                                |                                                 | 2003                     |     | 2002 |     | 2001
|                                                                                                |                                                 |                          |     |      |     |     
|Revenue:                                                                                        |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                | License and maintenance                         |                          |     | 54   | %   |      |     | 69 | %   |  |     | 73 | %  
|                                                                                                | Services and other                              |                          |     | 46   |     |      |     | 31 |     |  |     | 27 |    
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                |                                                 | Total revenue            |     |      | 100 |      |     |    | 100 |  |     |    | 100 | 
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Cost of revenue:                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                | License and maintenance                         |                          |     | 18   |     |      |     | 21 |     |  |     | 22 |    
|                                                                                                | Services and other                              |                          |     | 35   |     |      |     | 23 |     |  |     | 20 |    
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                |                                                 | Total cost of revenue    |     |      | 53  |      |     |    | 44  |  |     |    | 42  | 
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Gross margin                                                                                    |                                                 |                          | 47  |      |     |      | 56  |    |     |  | 58  |   
|Operating expenses:                                                                             |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                | Research and development                        |                          |     | 26   |     |      |     | 24 |     |  |     | 23 |    
|                                                                                                | Sales and marketing                             |                          |     | 20   |     |      |     | 27 |     |  |     | 30 |    
|                                                                                                | General and administrative                      |                          |     | 9    |     |      |     | 10 |     |  |     | 12 |    
|                                                                                                | Acquisition related amortization of intangibles |                          |     | 4    |     |      |     | 5  |     |  |     | 6  |    
|                                                                                                | Impairment of intangible asset                  |                          |     |     |     |      |     | 4  |     |  |     |   |    
|                                                                                                | Restructuring expense                           |                          |     |     |     |      |     | 10 |     |  |     |   |    
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|                                                                                                |                                                 | Total operating expenses |     |      | 59  |      |     |    | 80  |  |     |    | 71  | 
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Operating loss                                                                                  |                                                 |                          | (12 | )    |     |      | (24 | )  |     |  | (13 | ) 
|Other income, net                                                                               |                                                 |                          | 1   |      |     |      | 1   |    |     |  | 1   |   
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Loss before income tax provision (benefit)                                                      |                                                 |                          | (11 | )    |     |      | (23 | )  |     |  | (12 | ) 
|Income tax provision (benefit)                                                                  |                                                 |                          | 1   |      |     |      | 41  |    |     |  | (4  | ) 
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Net loss                                                                                        |                                                 |                          | (12 | )%   |     |      | (64 | )% |     |  | (8  | )%
|                                                                                                |                                                 |                          |     |      |     |      |     |    |     |  |     |   
|Cost of license and maintenance revenue, as a
    percentage of license and maintenance revenue |                                                 |                          | 34  | %    |     |      | 30  | %  |     |  | 30  | % 
|Cost of services and other revenue, as a
    percentage of services and other revenue           |                                                 |                          | 74  | %    |     |      | 75  | %  |     |  | 75  | % 

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| |                                                 
| | ------------------------------------------------
| | Years Ended December 31, 2003, 2002 and
    2001



| |        
| | -------
| | Revenue

Total revenue.Total
revenue decreased 12% to $168.3 million in 2003 and
increased 7% to $191.8 million in 2002 from
$179.5 million in 2001. Total revenue in 2003 decreased
primarily due to a drop in license revenue, which was partially
offset by an increase in service revenues. Total revenue
increased in 2002 primarily due to an increase in services and
other revenues.

License and maintenance
revenue.License and maintenance
revenue decreased 32% to $90.2 million in 2003 and
increased 1% to $132.6 million in 2002 from
$131.7 million in 2001. License revenue decreased in 2003
due to a slow down in the U.S. and world economies and our
potential customers are more deliberately evaluating software
solutions, which has extended our sales cycles. Although there
was some improvement throughout 2003, economic conditions remain
difficult for retailers and this affects their willingness to
make larger capital expenditures. Maintenance revenues decreased
$0.9 million in 2003 to $30.3 million. The decrease is
primarily due to one customer not renewing their maintenance
agreement, because the customer made a strategic decision to
outsource all IT functions to a third party provider. This
decrease was partially offset by our increasing base of
customers that purchase software maintenance from us. The
increase in 2002 license and maintenance revenues as compared to
2001 revenues was due to an increase in maintenance revenues
offset by a decrease in license revenues. License revenues
decreased due to the difficult economic conditions for retailers
as noted previously. Maintenance revenue increased $8.6 in 2002
to $31.2 million due to a growing base of customers that
have installed our software solutions.

Services and other
revenue.Services and other revenue
increased 32% to $78.1 million in 2003 and 24% to
$59.2 million in 2002 from $47.8 million in 2001. The
increase in services and other revenue in 2003 was due to
several large concurrent projects being serviced by us during
the year as well as an increase in our contracted rates.
Consulting and custom development revenue increased
$19.4 million for the year ended December 31, 2003 and
was partially offset by decreases in various services and other
revenues. We have relationships with third party integrators and
consultants that contract either with us or directly with our
customers for services and other integration needs. Our
customers proportionate use of our service offerings or
other third party integrators and consultants may cause our
services revenue to vary independently of changes in license and
maintenance revenue. However, for 2003 the increases in services
and other revenues was directly related to our increasing
customer base and the demand by retailers to customize
functionality in our software to their operating needs. For
2002, the increase in services and other revenue was due to our
expanding customer base, as consulting and custom development
increased $13.0 million over 2001.



| |                
| | ---------------
| | Cost of Revenue

Cost of license and maintenance
revenue.Cost of license and
maintenance revenue consists of fees for third party software
products that are integrated into our products, third party
license development costs, salaries and related expenses of our
customer support organization, other infrastructure costs and an
allocation of our facilities and depreciation expense. Cost of
license and maintenance revenue decreased 23% to
$31.0 million in 2003 and increased 3% to
$40.1 million in 2002 from $39.0 million in 2001. The
decrease in cost of license and maintenance revenue in 2003 was
due to a $6.1 million decrease in third party consultant
costs, a $1.7 million decrease in non-cash amortization and
a $0.9 million decrease in overhead allocation. Third party
consultants were used in 2002 to help with several funded
development contracts that were mostly completed. We anticipate
the use of additional third party consultant resources to
complete pending funded development contracts. Non-cash
amortization decreased because several intangible assets were
fully amortized in 2002. Our overhead costs decreased due to our
restructuring efforts. Because we abandoned leased space with
our restructuring in 2002 and recorded a loss at that time, we
now have less rent expense allocated. The increase in cost of
license and maintenance revenues 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

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addition, 2001 contained $1.7 million in
asset impairment charges for which similar charges did not occur
in 2002. As a percentage of license and maintenance revenue,
cost of license and maintenance revenue increased to 34% in 2003
from 30% for the corresponding prior year. This is due to both
the amount and proportion of funded development and maintenance
revenues as compared to total license and maintenance revenues
in 2003. Funded development and maintenance revenues typically
have lower margins than license revenues. The increase in
percentage costs of license and maintenance revenues for 2003 is
due to an increase in funded development projects as well as
funded development revenues represent a larger proportion of
total license and maintenance revenues over the prior year. In
addition maintenance revenues in 2003 represented a larger
proportion of total license and maintenance revenues.


Cost of services and other
revenue.Cost of services and other
revenue include salaries and related expenses of our consulting
organization, cost of third parties contracted to provide
consulting services to our customers and an allocation of
facilities and depreciation expense. Cost of services and other
revenue increased 30% to $57.6 million in 2003 and 23% to
$44.5 million in 2002 from $36.0 million in 2001. The
increase in cost of services and other revenues in 2003 was
primarily due to a $13.4 million increase in third party
consulting costs. Third party consultants are used on an as
needed basis depending on the availability and skills of
internal resources and our ability to leverage our relationships
with third party integrators. Also, demand for third party
consultants fluctuates due to the location of our services
customers. Service projects for international customers are
typically staffed by local third party consultants, rather than
internal resources, thus as we continue to expand our
international customer base, we may increase our use of third
party consultants. As a percentage of services and other
revenue, the cost of services and other revenue decreased to
74%, from 75% for the corresponding prior year. This increase in
margins was due to higher billing rates for our services. 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.



| |                   
| | ------------------
| | Operating Expenses

Research and
development.Research and development
expenses, which are expensed as incurred, consist primarily of
salaries and related costs of our software engineering
organization, fees paid to third party consultants and an
allocation of facilities and depreciation expenses. Research and
development expenses decreased 6% to $44.5 million in 2003
and increased 11% to $47.2 million in 2002 from
$42.6 million in 2001. The decrease in research and
development expenses in 2003 was due a $4.9 million
decrease in personnel and related expenses, $0.9 million
decrease in non-cash compensation expenses and a
$0.3 million decrease in employee development, which were
partially offset by a $3.6 million increase in third party
consultant costs. The decrease in personnel and related costs
was due to our restructuring efforts initiated in 2002. Non-cash
charges decreased because the deferred stock based compensation
related to certain stock option grants were fully amortized in
2003. The increase in third party consultant costs for 2003 was
due to our need to staff certain development projects that could
not be staffed internally. We use third party consultants on an
as needed basis, in particular if our internal resources are not
sufficient to complete the necessary development activities. We
anticipate leveraging third party consultants in the future to
assist in certain development activities. The increase in
research and development expenses 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.

Sales and marketing.Sales and marketing expenses consist primarily of salaries and
the 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 expenses decreased 35% to
$33.7 million in 2003 and 3% to $51.5 million in 2002
from $53.4 million in 2001. The decrease in sales

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and marketing expense in 2003 was due to a
$9.9 million decrease in employee and related costs, a
$4.5 million decrease in direct allocation depreciation, a
$1.0 million decrease in overhead allocation, a $1.0
decrease in corporate marketing, a $0.4 million decrease in
recruiting and a $0.3 million decrease in non-cash
compensation. The decrease in personnel and related costs as
well as overhead allocation was due to our restructuring efforts
initiated in 2002. We had fewer personnel and less total
overhead costs. This decrease in personnel also affected our
recruiting programs as we had fewer employee hires in 2003. The
decrease in direct allocation depreciation was due to an asset
that was fully depreciated as of December 31, 2002;
therefore, no such costs were recognized in 2003. Corporate
marketing expenditures decreased as we re-evaluated and
subsequently discontinued certain marketing programs. Non-cash
charges decreased because the deferred stock based compensation
related to certain stock option grant was fully amortized in
2003. The decrease in sales and marketing expenses in 2002 was
due to a $3.7 million decrease in personnel and related
expenses and a $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. We
expect sales and marketing expense to increase in absolute
dollars as we increase our sales staff and market new product
introductions.


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 18% to $14.9 million in 2003 and 13% to
$18.3 million in 2002 from $21.0 million in 2001.
General and administrative expenses decreased in 2003 due to a
$1.0 million decrease in professional services and a
$0.5 million decrease in personnel and related expenses.
Additionally, 2003 general and administrative expenses decreased
due to a $1.6 million decrease in bad debt expense for a
note receivable that was incurred in 2002. The decrease in
professional services is primarily due to less legal costs
incurred to defend against various claims against us. The
decrease in personnel and related costs was due to our
restructuring efforts initiated in 2002. The decrease in general
and administrative expenses in 2002 was primarily due to charges
incurred in 2001 related to our move to our new corporate
facilities. In 2001 we had a $6.9 million charge to
write-off obligations and assets on space we abandoned and this
caused a decrease in 2002 general and administrative expenses
relative to 2001. This decrease was partially offset by an
increase in general and administrative expenses in 2002 from 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.

Impairment of intangible
asset.The impairment of intangible
assets during 2002 relates to the intangible asset acquired from
Henderson Ventures, Inc. (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 during the
third quarter 2002. 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.

Acquisition-related amortization of
intangibles.In connection with our
purchase of HighTouch Technologies, Inc. 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 $6.7 million was
allocated to intangibles, $19.7 million was allocated to
goodwill 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 WebTrack Limited 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 $6.3 million was
allocated to intangibles, $0.3 million was allocated to
goodwill 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.

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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 included 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 in the fourth quarter of
2002. We recorded an additional charge of $0.3 million in
2003 to reflect adjustments to final severance benefits paid. As
of December 31, 2003, all payments had been made to the
severed individuals.

We also recorded a net loss on lease abandonment
of $17.0 million in the fourth quarter of 2002. In the
third quarter of 2003 we recorded a $0.1 reduction to the
estimated lease abandonment charges. The lease abandonment loss
recorded in the fourth quarter of 2002 consisted of the payments
to be made for the remaining lease term of the abandoned space
aggregating $31.1 million, net of estimated sublease income
of $14.1 million. Lease terms of the leased space abandoned
range 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 be paid by the
sublessees. 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. As of December 31, 2003, the remaining accrual
for lease obligations and terminations is $14.5 million.

The following table sets forth a summary of the
restructuring charges, adjustments to the provision, payment
made against those charges and the remaining liabilities as of
December 31, 2003.

|                                   |  |               |        |            |  |                   |      |              |  |       |        |                   |  |   |      |   |  |   |        |   |  |   |        | 
|---------------------------------- |  | ------------- | ------ | ---------- |  | ----------------- | ---- | ------------ |  | ----- | ------ | ----------------- |  | - | ---- | - |  | - | ------ | - |  | - | ------ | 
|                                   |  | Restructuring |        |            |  | Balance as of     |      | Adjustments  |  | Cash  |        | Balance as of    
|                                   |  | Charges       |        | Cash Usage |  | December 31, 2002 |      | to provision |  | Usage |        | December 31, 2003
|                                   |  |               |        |            |  |                   |      |              |  |       |        |                  
|Lease obligations and terminations |  | $             | 17,019 |            |  | $                 |     |              |  | $     | 17,019 |                   |  | $ | (113 | ) |  | $ | (2,432 | ) |  | $ | 14,474 | 
|Severance and related benefits     |  |               | 2,623  |            |  |                   | (940 | )            |  |       | 1,683  |                   |  |   | 281  |   |  |   | (1,964 | ) |  |   |       | 
|                                   |  |               |        |            |  |                   |      |              |  |       |        |                   |  |   |      |   |  |   |        |   |  |   |        | 
|Total                              |  | $             | 19,642 |            |  | $                 | (940 | )            |  | $     | 18,702 |                   |  | $ | 168  |   |  | $ | (4,396 | ) |  | $ | 14,474 | 
|                                   |  |               |        |            |  |                   |      |              |  |       |        |                   |  |   |      |   |  |   |        |   |  |   |        | 

Related to the lease abandonment charge, we
recorded $1.9 million of accelerated depreciation on
equipment and leasehold improvements to be abandoned in 2003,
which is recorded as general and administrative expense.

Interest and other income,
net.Interest and other income, net
decreased by $0.6 million 2003 and increased
$0.3 million in 2002. The decrease in 2003 was primarily
due to lower interest income earned during the period. The
increase in other income in 2002 was due to an increase in
interest income and a decrease in other (expense) primarily
due to fewer penalties and fewer non-interest charges related to
lines of credit.

Income tax provision
(benefit).The income tax provision
decreased by $77.2 million in 2003 and increased
$86.2 million in 2002 from the income tax benefit recorded
in 2001. 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. 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. Through the second quarter of 2002, the tax amounts
were

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based on managements estimates of the
effective tax rates to be incurred by us during those respective
full years.


The income tax provision for 2003 relates to
state and foreign income taxes.

Liquidity and Capital Resources

At December 31, 2003, our cash, cash
equivalents and investment balance was $94.2 million,
representing a $8.7 million increase during 2003. This
increase is due to a $2.4 million increase from operations,
$4.8 million from the issuance of common stock through
employee stock option exercises and proceeds from shares issued
through our Employee Stock Purchase Plan and $3.1 million
from foreign currency gains, which was partially offset by
$1.5 million of purchases of property and equipment. Our
cash requirements for servicing debt will be less than
$0.1 million in 2004. Cash from operations is primarily the
difference between cash payments from customers to us and
payments we make to vendors and for internal expenses, primarily
personnel and related costs of our employees.

Net cash provided by operations was
$2.4 million for 2003, net cash used by operating
activities was $2.3 million in 2002 and net cash provided
by operating activities was $23.6 million in 2001. Sources
of cash for 2003 include operating cash flow adjustments for
depreciation and amortization expense, amortization of stock
based compensation and bad debt provisions, as well as decreases
of accounts receivable and other assets. Uses of cash for 2003
were due to net losses and a decrease in accrued liabilities,
accrued restructuring and deferred revenue. 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

Net cash used by investing activities was
$12.4 million for 2003. Uses of cash included net purchases
of investments for sale and purchases of property and equipment.
The increase in investments for sale was due to the timing of
when investments matured and the proceeds used to subsequently
purchase additional investments. We purchase investments
designed to protect our capital investment, 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. Recently our investment mix has included more
short-term instruments because the difference between short term
and long-term interest rates is not large enough to justify long
term holding periods. Net cash used in investing activities was
$27.3 and $13.3 million in 2002 and 2001, respectively. In
2002, uses of cash were due to the acquisition of property and
equipment, purchase 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
were 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.

Net cash provided by financing activities was
$4.8 million in 2003. Sources of cash were primarily due to
the issuance of common stock through employee stock option
exercises and proceeds from shares issued through our Employee
Stock Purchase Plan. Net cash provided by financing activities
was $13.1 million in 2002 and $28.5 million in 2001.
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.

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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 at December 31, 2003, and the effect such
obligations are expected to have on our liquidity and cash flow
in future periods (dollars in thousands).

|                        |       |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |        |        | 
|----------------------- | ----- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                        |       |      |       |       |  |      |       |       |  |      |       | After
|Contractual Obligations |       | 2004 |       | 2005  |  | 2006 |       | 2007  |  | 2008 |       | 2008 
|                        |       |      |       |       |  |      |       |       |  |      |       |      
|Operating leases        |       | $    | 6,950 |       |  | $    | 5,854 |       |  | $    | 5,406 |       |  | $ | 5,293 |       |  | $ | 5,029 |       |  | $ | 28,903 |       
|Contract Commitments    |       |      | 2,200 |       |  |      |      |       |  |      |      |       |  |   |      |       |  |   |      |       |  |   |       |       
|Notes payable           |       |      | 78    |       |  |      |      |       |  |      |      |       |  |   |      |       |  |   |      |       |  |   |       |       
|                        |       |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |        |       
|                        | Total |      | $     | 9,228 |  |      | $     | 5,854 |  |      | $     | 5,406 |  |   | $     | 5,293 |  |   | $     | 5,029 |  |   | $      | 28,903 | 
|                        |       |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |        |       

|                             |       |      |   |      |  |      |   |      |  |      |       |       |  |   |       |       |  |   |   |   |  |   |   |   | 
|---------------------------- | ----- | ---- | - | ---- |  | ---- | - | ---- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | - | - |  | - | - | - | 
|                             |       |      |   |      |  |      |   |      |  |      |       | After
|Other Commercial Commitments |       | 2004 |   | 2005 |  | 2006 |   | 2007 |  | 2008 |       | 2008 
|                             |       |      |   |      |  |      |   |      |  |      |       |      
|Standby letters of credit    |       | $    |  |      |  | $    |  |      |  | $    | 2,000 |       |  | $ | 2,140 |       |  | $ |  |   |  | $ |  |  
|                             |       |      |   |      |  |      |   |      |  |      |       |       |  |   |       |       |  |   |   |   |  |   |   |  
|                             | Total |      | $ |      |  |      | $ | 0    |  |      | $     | 2,000 |  |   | $     | 2,140 |  |   | $ | 0 |  |   | $ | 0 | 
|                             |       |      |   |      |  |      |   |      |  |      |       |       |  |   |       |       |  |   |   |   |  |   |   |  

As of December 31, 2003, there were no
balances drawn against the line of credit or standby letters of
credit.

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

Recent Accounting Pronouncements

In January 2003, the FASB issued FASB
Interpretation No. (FIN) 46, Consolidation of Variable
Interest Entities. FIN 46 addresses the requirements for
business enterprises to consolidate related entities, for which
they do not have controlling interests through voting or other
rights, if they are determined to be the primary beneficiary as
a result of variable economic interests. FIN 46 provides
guidance for determining the primary beneficiary for entities
with multiple economic interests. FIN 46 is effective at
the time of investment for interests obtained in a variable
economic entity after January 31, 2003. Beginning in fiscal
year 2004, FIN 46, as amended, will be applied to interests
in variable interest entities (VIEs) acquired prior to
February 1, 2003. We currently have no contractual
relationship or other business relationship with a variable
interest entity and therefore the adoption of FIN No. 46
will not have a material effect on our consolidated financial
position, results of operations or cash flows. However, if we
enter into any such arrangement with a variable interest entity
in the future, our consolidated financial position or results of
operations may be adversely effected.

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and EquitySFAS 150 requires that certain
financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include
mandatory redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares
in exchange for cash or other assets and certain obligations
that can be settled with shares of stock. SFAS 150 is
effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS 150 did not have a
material impact on our consolidated financial position, results
of operations or cash flows.

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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, alliance agreements, 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;                                                                                
|
| |  | 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 may 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

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attention and resources, which could 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 of fair value
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 our expectations of 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 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 cost reduction 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 to 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 evaluating
solutions more deliberately, which has resulted in extending our
sales cycles. 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

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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
certain 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
also 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.

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

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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 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.

SUBSTANTIALLY ALL 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 services 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 have negatively impacted demand
for our products and services. Such competitive pressures and
softness of economic conditions could continue to cause retail
customers and potential customers to

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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 MicroStrategy, Wavelink, SeeBeyond,
Lucent, 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.

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

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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 GLOBAL UNREST
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 global unrest may adversely affect our business,
results of operation, financial condition or future growth.
Terrorist attacks and global unrest 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.

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.

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|         |                                                               
|-------- | --------------------------------------------------------------
|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, 2003 was
$94.2 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 $0.1 million in notes payable
as of December 31, 2003 are at a fixed interest rate.

|                      |  |                        |     |       |  |            |    |  |  |   |    | 
|--------------------- |  | ---------------------- | --- | ----- |  | ---------- | -- |  |  | - | -- | 
|                      |  |                       
|                      |  | Expected Maturity Date
|                      |  |                       
|                      |  | 2004                   |     | Total |  | Fair Value
|                      |  |                        |     |       |  |           
|                      |  |                       
|                      |  | (US $ in thousands)   
|Liabilities:          |  |                        |     |       |  |            |    |  |  |   |    | 
|Long Term Debt        |  | $                      | 81  |       |  | $          | 81 |  |  | $ | 78 | 
|Average Interest Rate |  |                        | 7.0 | %     |  |            |    |  |  |   |    | 

Foreign Currency Exchange Rate Risk

We develop products in the United States and sell
in North America, Australia, 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%, 25% and 28% of our total sales were denominated in
currencies other than the U.S. dollar in 2003, 2002 and
2001, 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, 2003 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 40.






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






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a) An evaluation was carried out under the
supervision and with the participation of Reteks
management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the

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design and operation of Reteks disclosure
controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered
by this annual report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded
that Reteks disclosure controls and procedures are
effective to ensure that information required to be disclosed by
Retek in reports that it files or submits under the Exchange Act
is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms.


No change in Reteks internal control over
financial reporting was identified in connection with the
evaluation required by Rule 13a-15(d) of the Exchange Act
that occurred during the period covered by this report and that
has materially affected, or is reasonably likely to materially
affect, Reteks internal control over financial reporting.

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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, 2003, 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.

Retek has adopted a Code of Ethics that applies
to our principal executive officer, principal financial officer,
principal accounting officer, controller and other persons
performing similar functions. We have posted the Code of Ethics
on our website located at www.retek.com. We intend to post on
our website any amendment to, or waiver from, a provision of our
Code of Ethics that applies to our principal executive officer,
principal financial officer principal accounting officer,
controller and other persons performing similar functions within
five business days following the date of such amendment or
waiver.






|         |                       
|-------- | ----------------------
|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, 2003, 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, 2003, 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, 2003, under the caption
Certain Transactions.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information required by this item is
incorporated by reference from the information contained in our
Proxy Statement for the Annual Meeting for Shareholders which
will be filed with the Securities and Exchange Commission within
120 days after December 31, 2003 under the caption
Principal Accounting Fees and Services.

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PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|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 Auditors                                                                                                                 |  |        | 41 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                                                               |  |        | 42 | 
|Consolidated Statements of Operations as of
    December 31, 2003, 2002 and 2001                                                               |  |        | 43 | 
|Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, 2002 and 2001                                                 |  |        | 44 | 
|Consolidated Statements of Changes in
    Stockholders Equity and Comprehensive Loss for the years
    ended December 31, 2003, 2002 and 2001 |  |        | 45 | 
|Notes to Consolidated Financial Statements                                                                                                     |  |        | 46 | 

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 on page 70.

(b) Reports on Form 8-K

On October 21, 2003 we furnished a current
report on Form 8-K, reporting under Item 12 that we
issued a press release disclosing material non-public
information regarding the results of operations for the quarter
ended September 30, 2003 that included additional
information that was not in accordance with, or an alternative
for, generally accepted accounting principles.

40



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##### Table of Contents



Report of Independent Auditors

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 40 present fairly, in all
material respects, the financial position of Retek Inc. (the
Company) and its subsidiaries at December 31, 2003 and
2002, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2003 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, in 2002 the Company adopted the provisions
of Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets. Under SFAS statement No. 142, goodwill and
indefinite-lived intangible assets are no longer amortized, but
are reviewed at least annually for impairment.

PricewaterhouseCoopers LLP

Minneapolis, Minnesota


January 23, 2004


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##### Table of Contents



Retek Inc.

Consolidated Balance Sheet

(in thousands, except per share
data)


|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |        |         |         | 
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------ | ------ | ------- | ------- | -------- | ------ | ------- | ------- | 
|                                                        |                                                                                                                                                                           |                           
|                                                        |                                                                                                                                                                           | December 31,              
|                                                        |                                                                                                                                                                           |                           
|                                                        |                                                                                                                                                                           | 2003                       |              | 2002  
|                                                        |                                                                                                                                                                           |                            |              |       
|ASSETS                                                 
|Current assets:                                         |                                                                                                                                                                           |                            |              |        |         |         |          |       
|                                                        | Cash and cash equivalents                                                                                                                                                 |                            | $            | 54,275 |         |         | $        | 56,464 |        
|                                                        | Investments                                                                                                                                                               |                            |              | 36,287 |         |         |          | 29,045 |        
|                                                        | Accounts receivable, net                                                                                                                                                  |                            |              | 33,699 |         |         |          | 43,185 |        
|                                                        | Other current assets                                                                                                                                                      |                            |              | 5,827  |         |         |          | 8,011  |        
|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |       
|                                                        |                                                                                                                                                                           | Total current assets       |              |        | 130,088 |         |          |        | 136,705 |        
|Investments                                             |                                                                                                                                                                           |                            | 3,658        |        |         |         |         |       
|Property and equipment, net                             |                                                                                                                                                                           |                            | 12,227       |        |         |         | 19,513   |       
|Intangible assets, net                                  |                                                                                                                                                                           |                            | 18,208       |        |         |         | 28,287   |       
|Goodwill                                                |                                                                                                                                                                           |                            | 13,817       |        |         |         | 13,817   |       
|Other assets                                            |                                                                                                                                                                           |                            | 231          |        |         |         | 245      |       
|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |       
|                                                        |                                                                                                                                                                           |                            | Total assets |        | $       | 178,229 |          |        | $       | 198,567 | 
|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |       
|LIABILITIES AND STOCKHOLDERS
    EQUITY               
|                                                       
|Current liabilities:                                    |                                                                                                                                                                           |                            |              |        |         |         |          |       
|                                                        | Accounts payable                                                                                                                                                          |                            | $            | 15,739 |         |         | $        | 15,708 |        
|                                                        | Accrued liabilities                                                                                                                                                       |                            |              | 10,410 |         |         |          | 13,345 |        
|                                                        | Accrued restructuring costs                                                                                                                                               |                            |              | 2,757  |         |         |          | 4,188  |        
|                                                        | Deferred revenue                                                                                                                                                          |                            |              | 32,000 |         |         |          | 42,012 |        
|                                                        | Note payable, current portion                                                                                                                                             |                            |              | 78     |         |         |          | 81     |        
|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |       
|                                                        |                                                                                                                                                                           | Total current liabilities  |              |        | 60,984  |         |          |        | 75,334  |        
|Accrued restructuring costs, net of current
    portion |                                                                                                                                                                           |                            | 11,717       |        |         |         | 14,514   |       
|Note payable, net of current portion                    |                                                                                                                                                                           |                            |             |        |         |         | 78       |       
|Deferred revenue, net of current portion                |                                                                                                                                                                           |                            | 16,617       |        |         |         | 7,193    |       
|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |       
|                                                        |                                                                                                                                                                           | Total liabilities          |              |        | 89,318  |         |          |        | 97,119  |        
|Commitments and Contingencies                           |                                                                                                                                                                           |                            |              |        |         |         |          |       
|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, 54,658 shares and
    53,177 shares issued and outstanding at December 31,
    2003 and 2002, respectively |                            |              | 547    |         |         |          | 532    |        
|Paid-in capital                                         |                                                                                                                                                                           |                            | 283,449      |        |         |         | 278,680  |       
|Deferred stock-based compensation                       |                                                                                                                                                                           |                            | (45          | )      |         |         | (1,451   | )     
|Accumulated other comprehensive income                  |                                                                                                                                                                           |                            | 2,310        |        |         |         | 504      |       
|Accumulated deficit                                     |                                                                                                                                                                           |                            | (197,350     | )      |         |         | (176,817 | )     
|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |       
|                                                        |                                                                                                                                                                           | Total stockholders equity |              |        | 88,911  |         |          |        | 101,448 |        
|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |       
|Total liabilities and stockholders equity              |                                                                                                                                                                           | $                          | 178,229      |        |         | $       | 198,567  |       
|                                                        |                                                                                                                                                                           |                            |              |        |         |         |          |       

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



Retek Inc.

Consolidated Statements of
Operations

(in thousands, except per share
data)


|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |         |         | 
|----------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ------- | -------- | ------- | - | ------- | ------- | ------- | 
|                                                                                          |                                                 |                         
|                                                                                          |                                                 | Year Ended December 31, 
|                                                                                          |                                                 |                         
|                                                                                          |                                                 | 2003                     |         | 2002    |         | 2001
|                                                                                          |                                                 |                          |         |         |         |     
|Revenue:                                                                                  |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          | License and maintenance                         |                          | $       | 90,195  |         |      | $       | 132,607  |         |   | $       | 131,682 |        
|                                                                                          | Services and other                              |                          |         | 78,134  |         |      |         | 59,225   |         |   |         | 47,792  |        
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          |                                                 | Total revenue            |         |         | 168,329 |      |         |          | 191,832 |   |         |         | 179,474 | 
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|Cost of revenue:                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          | License and maintenance                         |                          |         | 31,047  |         |      |         | 40,066   |         |   |         | 39,001  |        
|                                                                                          | Services and other                              |                          |         | 57,625  |         |      |         | 44,467   |         |   |         | 36,024  |        
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          |                                                 | Total cost of revenue    |         |         | 88,672  |      |         |          | 84,533  |   |         |         | 75,025  | 
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          |                                                 | Gross profit             |         |         | 79,657  |      |         |          | 107,299 |   |         |         | 104,449 | 
|Operating expenses:                                                                       |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          | Research and development                        |                          |         | 44,527  |         |      |         | 47,197   |         |   |         | 42,550  |        
|                                                                                          | Sales and marketing                             |                          |         | 33,685  |         |      |         | 51,507   |         |   |         | 53,362  |        
|                                                                                          | General and administrative                      |                          |         | 14,913  |         |      |         | 18,260   |         |   |         | 21,017  |        
|                                                                                          | Acquisition related amortization of intangibles |                          |         | 6,591   |         |      |         | 8,749    |         |   |         | 10,839  |        
|                                                                                          | Impairment of intangible asset                  |                          |         |        |         |      |         | 8,686    |         |   |         |        |        
|                                                                                          | Restructuring expense                           |                          |         | 168     |         |      |         | 19,642   |         |   |         |        |        
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          |                                                 | Total operating expenses |         |         | 99,884  |      |         |          | 154,041 |   |         |         | 127,768 | 
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|Operating loss                                                                            |                                                 |                          | (20,227 | )       |         |      | (46,742 | )        |         |   | (23,319 | )      
|Interest income                                                                           |                                                 |                          | 1,124   |         |         |      | 1,898   |          |         |   | 2,354   |        
|Interest expense                                                                          |                                                 |                          | (21     | )       |         |      | (41     | )        |         |   | (94     | )      
|Other income (expense), net                                                               |                                                 |                          | 362     |         |         |      | 257     |          |         |   | (432    | )      
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          | Loss before income tax provision (benefit)      |                          |         | (18,762 | )       |      |         | (44,628  | )       |   |         | (21,491 | )      
|Income tax provision (benefit)                                                            |                                                 |                          | 1,771   |         |         |      | 78,955  |          |         |   | (7,181  | )      
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|                                                                                          | Net loss                                        |                          |         | (20,533 | )       |      |         | (123,583 | )       |   | $       | (14,310 | )      
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|Basic and diluted net loss per common share                                               |                                                 | $                        | (0.38   | )       |         | $    | (2.35   | )        |         | $ | (0.29   | )      
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        
|Weighted average shares used in computing basic
    and diluted net loss per common share |                                                 |                          | 53,801  |         |         |      | 52,483  |          |         |   | 49,925  |        
|                                                                                          |                                                 |                          |         |         |         |      |         |          |         |   |         |        

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



Retek Inc.

Consolidated Statements of Cash
Flows

(in thousands)


|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |          |   |         |         |  
|------------------------------------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------- | ------------------------------------------------------- | - | ------ | ------- | -------- | ------ | ------- | ------- | -------- | - | ------- | ------- | -
|                                                             |                                                                                               |                                                                               
|                                                             |                                                                                               | Year Ended December 31,                                                       
|                                                             |                                                                                               |                                                                               
|                                                             |                                                                                               | 2003                                                                           |                       | 2002                                                    |   | 2001  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |       
|Cash flows from operating
    activities:                    |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Net loss                                                                                      |                                                                                | $                     | (20,533                                                 | ) |        | $       | (123,583 | )      |         | $       | (14,310  | )
|                                                             | Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities: |                                                                                |                       |                                                         |   |        |         |          |        |         |         |          |  
|                                                             | Deferred income tax provision (benefit)                                                       |                                                                                |                       |                                                        |   |        |         | 74,227   |        |         |         | (24,409  | )
|                                                             | Depreciation and amortization expense                                                         |                                                                                |                       | 18,888                                                  |   |        |         | 29,252   |        |         |         | 28,555   |  
|                                                             | Amortization of stock-based compensation                                                      |                                                                                |                       | 1,356                                                   |   |        |         | 3,141    |        |         |         | 5,344    |  
|                                                             | Provision for doubtful accounts                                                               |                                                                                |                       | 1,600                                                   |   |        |         | 2,500    |        |         |         | 2,808    |  
|                                                             | 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   |  
|                                                             | Lease abandonment                                                                             |                                                                                |                       |                                                        |   |        |         |         |        |         |         | 5,253    |  
|                                                             | Restructuring expense                                                                         |                                                                                |                       | 168                                                     |   |        |         | 19,642   |        |         |         |         |  
|                                                             | Changes in assets and liabilities, excluding
    impact of acquisitions:                      |                                                                                |                       |                                                         |   |        |         |          |        |         |         |          |  
|                                                             |                                                                                               |                                                                                | Accounts receivable   |                                                         |   | 6,574  |         |          |        | (5,508  | )       |          |   | (16,554 | )      
|                                                             |                                                                                               |                                                                                | Other assets          |                                                         |   | 2,198  |         |          |        | (1,460  | )       |          |   | 3,419   |        
|                                                             |                                                                                               |                                                                                | Accounts payable      |                                                         |   | 31     |         |          |        | 4,970   |         |          |   | (354    | )      
|                                                             |                                                                                               |                                                                                | Accrued liabilities   |                                                         |   | (3,103 | )       |          |        | (1,941  | )       |          |   | 2,471   |        
|                                                             |                                                                                               |                                                                                | Accrued restructuring |                                                         |   | (4,228 | )       |          |        |        |         |          |   |        |        
|                                                             |                                                                                               |                                                                                | Deferred revenue      |                                                         |   | (588   | )       |          |        | (17,524 | )       |          |   | 13,705  |        
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             |                                                                                               |                                                                                |                       | Net cash provided by (used in) operating
    Activities |   |        | 2,363   |          |        |         | (2,317  | )        |   |         | 23,588  |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|Cash flows from investing
    activities:                    |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Acquisition of intangible asset                                                               |                                                                                |                       |                                                        |   |        |         | (8,890   | )      |         |         |         |  
|                                                             | Purchases of investments for sale                                                             |                                                                                |                       | (365,779                                                | ) |        |         | (195,664 | )      |         |         | (235,165 | )
|                                                             | Sales of investments for sale                                                                 |                                                                                |                       | 354,863                                                 |   |        |         | 182,026  |        |         |         | 240,487  |  
|                                                             | Acquisitions of property and equipment                                                        |                                                                                |                       | (1,523                                                  | ) |        |         | (4,751   | )      |         |         | (18,638  | )
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             |                                                                                               |                                                                                |                       | Net cash used in investing activities                   |   |        | (12,439 | )        |        |         | (27,279 | )        |   |         | (13,316 | )
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|Cash flows from financing
    activities:                    |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Net proceeds from the issuance of common stock                                                |                                                                                |                       | 4,834                                                   |   |        |         | 13,135   |        |         |         | 28,676   |  
|                                                             | Repayment of debt                                                                             |                                                                                |                       | (81                                                     | ) |        |         | (77      | )      |         |         | (217     | )
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             |                                                                                               |                                                                                |                       | Net cash provided by (used in) financing
    Activities |   |        | 4,753   |          |        |         | 13,058  |          |   |         | 28,459  |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Effect of exchange rate changes on cash                                                       |                                                                                |                       | 3,134                                                   |   |        |         | 2,836    |        |         |         | 377      |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Net (decrease) increase in cash and cash
    equivalents                                      |                                                                                |                       | (2,189                                                  | ) |        |         | (13,702  | )      |         |         | 39,108   |  
|                                                             | Cash and cash equivalents at beginning of period                                              |                                                                                |                       | 56,464                                                  |   |        |         | 70,166   |        |         |         | 31,058   |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Cash and cash equivalents at end of period                                                    |                                                                                | $                     | 54,275                                                  |   |        | $       | 56,464   |        |         | $       | 70,166   |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|Significant non-cash investing and financing
    activities: |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             |                                                                                               | Removal cost method of investment obtained from
    exchange software products |                       | $                                                       |  |        |         | $        | (4,000 | )       |         | $        |  |        
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Minority investment obtained through issuance of
    warrants                                 |                                                                                | $                     |                                                        |   |        | $       |         |        |         | $       | 12,505   |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Acquisition of intellectual property through
    issuance of common stock                     |                                                                                | $                     |                                                        |   |        | $       |         |        |         | $       | 30,198   |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|Supplemental cash flow disclosure:                           |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Interest paid                                                                                 |                                                                                | $                     | 9                                                       |   |        | $       | 14       |        |         | $       | 17       |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         
|                                                             | Income taxes paid                                                                             |                                                                                | $                     | 924                                                     |   |        | $       | 929      |        |         | $       | 870      |  
|                                                             |                                                                                               |                                                                                |                       |                                                         |   |        |         |          |        |         |         |         

See accompanying notes to consolidated financial
statements.

44



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##### Table of Contents



Retek Inc.

Consolidated Statements of Changes in
Stockholders Equity

and Comprehensive Loss


(in thousands)


|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------- |  | ------------ | ------ | ------- |  | ----------- | --- | ------------- |  | ------------- | ------- | ------------- |  | ------------- | ------ | ---- |  | - | ------ | - |  | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                                                          |  |              |        |         |  |             |     | Accumulated   |  |               |         |               |  |              
|                                                                          |  | Common stock |        |         |  | Deferred    |     | other         |  |               |         | Total         |  |              
|                                                                          |  |              |        | Paid-in |  | stock-based |     | comprehensive |  | Accumulated   |         | stockholders |  | Comprehensive
|                                                                          |  | Shares       |        | Amount  |  | capital     |     | compensation  |  | income (loss) |         | Deficit       |  | equity        |        | loss
|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |     
|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 | )
|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|Tax benefit from stock options                                            |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|Common stock issued under Employee Stock Purchase
    Plan                |  |              | 1,278  |         |  |             | 13  |               |  |               | 3,725   |               |  |               |        |      |  |   |        |   |  |   |          |   |  |   | 3,738    |   |  |   |          |  
|Common stock options exercised                                            |  |              | 203    |         |  |             | 2   |               |  |               | 1,094   |               |  |               |        |      |  |   |        |   |  |   |          |   |  |   | 1,096    |   |  |   |          |  
|Amortization of stock-based compensation                                  |  |              |        |         |  |             |     |               |  |               |         |               |  |               | 1,356  |      |  |   |        |   |  |   |          |   |  |   | 1,356    |   |  |   |          |  
|Deferred stock-based compensation                                         |  |              |        |         |  |             |     |               |  |               | (50     | )             |  |               | 50     |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|Unrealized gain on investments                                            |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |      |  |   | (16    | ) |  |   |          |   |  |   | (16      | ) |  |   | (16      | )
|Foreign currency translation adjustment                                   |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |      |  |   | 1,822  |   |  |   |          |   |  |   | 1,822    |   |  |   | 1,822    |  
|Net loss                                                                  |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |      |  |   |        |   |  |   | (20,533  | ) |  |   | (20,533  | ) |  |   | (20,533  | )
|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  
|Balance at December 31, 2003.                                             |  |              | 54,658 |         |  | $           | 547 |               |  | $             | 283,449 |               |  | $             | (45    | )    |  | $ | 2,310  |   |  | $ | (197,350 | ) |  | $ | 88,911   |   |  | $ | (18,727  | )
|                                                                          |  |              |        |         |  |             |     |               |  |               |         |               |  |               |        |      |  |   |        |   |  |   |          |   |  |   |          |   |  |   |          |  

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



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 Advanced Replenishment, Planning and
Optimization, which enables retailers to combine their planning
functions with their execution systems; 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, 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.

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.

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/(loss) on investments was ($16),
$11 and $55 at December 31, 2003, 2002 and 2001,
respectively. The debt securities mature in 2003 through 2006.

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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 Companys investments as of
December 31, 2003 and 2002 were as follows:

|                                    |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|----------------------------------- |  | ---- | ------ | ---------- |  | ---------- | ------ | ---------- |  | - | -- |  |  | - | -- | -
|                                    |  |      |        | Aggregate  |  | Unrealized |        | Unrealized
|                                    |  | Cost |        | Fair Value |  | gains      |        | losses    
|                                    |  |      |        |            |  |            |        |           
|As of December 31, 2003:            |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|Commercial paper                    |  | $    | 1,499  |            |  | $          | 1,499  |            |  | $ |   |  |  | $ |   |  
|Government agencies                 |  |      | 28,252 |            |  |            | 28,272 |            |  |   | 20 |  |  |   |   |  
|State and local municipalities debt |  |      | 4,991  |            |  |            | 4,987  |            |  |   |   |  |  |   | (4 | )
|Corporate debt                      |  |      | 5,187  |            |  |            | 5,187  |            |  |   |   |  |  |   |   |  
|                                    |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|                                    |  | $    | 39,929 |            |  | $          | 39,945 |            |  | $ | 20 |  |  | $ | (4 | )
|                                    |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  
|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 | )
|                                    |  |      |        |            |  |            |        |            |  |   |    |  |  |   |    |  

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 the 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 booked as a contra revenue item 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 for property and equipment was $8,809,
$14,943 and $15,246 for the years ended December 31, 2003,
2002 and 2001, respectively. The assets and related accumulated
depreciation accounts are adjusted for asset retirements and
disposals with the resulting gain or loss included in operations.

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 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.

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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 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 4.6 years as of
December 31, 2003.

Goodwill

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 this 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.
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
(dollars in thousands, except per share amounts):

|                      |                                                |      |         |       |  
|--------------------- | ---------------------------------------------- | ---- | ------- | ----- | -
|                      |                                                | 2001
|                      |                                                |     
|Net loss, as reported |                                                | $    | (14,310 | )    
|                      | Add: Goodwill amortization expense, net of tax |      |         | 4,667 |  
|                      |                                                |      |         |      
|Pro forma net loss    |                                                | $    | (9,643  | )    
|Loss per share:       |                                                |      |         |      
|                      | Basic and diluted  as reported                |      | $       | (0.29 | )
|                      | Basic and diluted  pro forma                  |      | $       | (0.19 | )

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 of the product(s) 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 6). 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 9).

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.

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Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

(unless otherwise noted, in thousands, except
for share and per share 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 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 2003 and 2002 in accordance with
SFAS No. 142 resulted in no impairment losses. We also
recorded no goodwill impairment losses during 2001, which was
prior to adopting SFAS No. 142.

Advertising

We expense advertising costs as incurred.
Advertising expense was approximately $381, $657 and $1,440 for
the years ended December 31, 2003, 2002 and 2001,
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.

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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 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 13 for additional
information regarding employee stock plans.

|                                                                                                            |                                 |      |         |       |   |      |          |       |   |   |         |       |  
|----------------------------------------------------------------------------------------------------------- | ------------------------------- | ---- | ------- | ----- | - | ---- | -------- | ----- | - | - | ------- | ----- | -
|                                                                                                            |                                 | 2003 |         | 2002  |   | 2001
|                                                                                                            |                                 |      |         |       |   |     
|Net loss, as reported                                                                                       |                                 | $    | (20,533 | )     |   | $    | (123,583 | )     |   | $ | (14,310 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                            |                                 |      | 1,356   |       |   |      | 3,141    |       |   |   | 5,344   |      
|Deduct: Total stock-based compensation expense
    determined under fair value based method for all rewards |                                 |      | (1,137  | )     |   |      | (50,028  | )     |   |   | (45,995 | )    
|                                                                                                            |                                 |      |         |       |   |      |          |       |   |   |         |      
|Pro forma net loss                                                                                          |                                 | $    | (20,314 | )     |   | $    | (170,470 | )     |   | $ | (54,961 | )    
|                                                                                                            |                                 |      |         |       |   |      |          |       |   |   |         |      
|Loss per share:                                                                                             |                                 |      |         |       |   |      |          |       |   |   |         |      
|                                                                                                            | Basic and diluted  as reported |      | $       | (0.38 | ) |      | $        | (2.35 | ) |   | $       | (0.29 | )
|                                                                                                            | Basic and diluted  pro forma   |      |         | (0.38 | ) |      |          | (3.25 | ) |   |         | (1.10 | )

Total stock-based compensation expense is shown
net of forfeitures of $22,924, $6,872 and $4,142 in 2003, 2002
and 2001, respectively.

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. 104, Revenue Recognition in Financial
Statements, which superseded SAB 101.

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 of fair value (VSOE) exists for the
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. In
arrangements where we do not have VSOE for all elements and we
are not selling technical advisory services, we follow the
residual method. For a substantial portion of our software
license products sold, 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 as no vendor specific objective evidence of fair
value exists for 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. Maintenance
revenue is deferred and recognized ratably over the maintenance
period Service revenue, including consulting and training
services, 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, which requires
management estimates and judgments. Amounts received under

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Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

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


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.

Foreign Currency Translation

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

Diversification of Credit Risk

Our financial instruments that are subject to
concentrations of credit risk consist primarily of cash
equivalents and accounts receivable, which are generally not
collateralized. Our policy is to place our cash and cash
equivalents with high credit quality financial institutions in
order to limit the amount of our credit exposure. Our cash and
cash equivalent balances at December 31, 2003, are
deposited with five financial institutions. Cash and cash
equivalents of $53.8 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.

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Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

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


New Accounting Pronouncements

In January 2003, the FASB issued FASB
Interpretation No. (FIN) 46, Consolidation of Variable
Interest Entities. FIN 46 addresses the requirements for
business enterprises to consolidate related entities, for which
they do not have controlling interests through voting or other
rights, if they are determined to be the primary beneficiary as
a result of variable economic interests. FIN 46 provides
guidance for determining the primary beneficiary for entities
with multiple economic interests. FIN 46 is effective at
the time of investment for interests obtained in a variable
economic entity after January 31, 2003. Beginning in fiscal
year 2004, FIN 46, as amended, will be applied to interests
in variable interest entities (VIEs) acquired prior to
February 1, 2003. We currently have no contractual
relationship or other business relationship with a variable
interest entity and therefore the adoption of FIN No. 46
will not have a material effect on our consolidated financial
position, results of operations or cash flows. However, if we
enter into any such arrangement with a variable interest entity
in the future, our consolidated financial position or results of
operations may be adversely effected.

In May 2003, the FASB issued Statement of
Financial Accounting Standards No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and EquitySFAS 150 requires that certain
financial instruments, which under previous guidance were
accounted for as equity, must now be accounted for as
liabilities. The financial instruments affected include
mandatory redeemable stock, certain financial instruments that
require or may require the issuer to buy back some of its shares
in exchange for cash or other assets and certain obligations
that can be settled with shares of stock. SFAS 150 is
effective for all financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS 150 did not have a
material impact on our consolidated financial position, results
of operations or cash flows.

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 the year ended December 31, 2003, the
calculation of diluted loss per share excludes the impact of the
potential exercise of 11,650,224 stock options and a warrant to
purchase 750,000 shares of our common stock because the
effect would be antidilutive. For the year ended
December 31, 2002 and 2001, the calculation of diluted loss
per share excludes the impact of the potential exercise of
9,821,289 and 8,843,956 stock options, respectively, as well as
a warrant outstanding as of December 31, 2002 and 2001 to
purchase 750,000 shares of our common stock because the
effect would be antidilutive.

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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,
|                                     |          |             
|                                     |          | 2003         |        | 2002  
|                                     |          |              |        |       
|Accounts receivable, net:            |          |              |        |        |  |   |        |       
|                                     | Billed   |              | $      | 31,936 |  |   | $      | 43,906 | 
|                                     | Unbilled |              |        | 5,304  |  |   |        | 4,954  | 
|                                     |          |              |        |        |  |   |        |       
|                                     |          |              | 37,240 |        |  |   | 48,860 |       
|Less allowance for doubtful accounts |          |              | (3,541 | )      |  |   | (5,675 | )     
|                                     |          |              |        |        |  |   |        |       
|                                     |          | $            | 33,699 |        |  | $ | 43,185 |       
|                                     |          |              |        |        |  |   |        |       

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,
|                               |  |             
|                               |  | 2003         |        | 2002 |  | 2001
|                               |  |              |        |      |  |     
|Balance at beginning of period |  | $            | 5,675  |      |  | $    | 5,124  |   |  | $ | 5,216  |  
|Provisions                     |  |              | 1,600  |      |  |      | 2,500  |   |  |   | 2,808  |  
|Write-offs                     |  |              | (3,734 | )    |  |      | (1,949 | ) |  |   | (2,900 | )
|                               |  |              |        |      |  |      |        |   |  |   |        |  
|Balance at end of period       |  | $            | 3,541  |      |  | $    | 5,675  |   |  | $ | 5,124  |  
|                               |  |              |        |      |  |      |        |   |  |   |        |  

|                             |                                                |              |        |         |   |   |        |         |  
|---------------------------- | ---------------------------------------------- | ------------ | ------ | ------- | - | - | ------ | ------- | -
|                             |                                                |             
|                             |                                                | December 31,
|                             |                                                |             
|                             |                                                | 2003         |        | 2002   
|                             |                                                |              |        |        
|Other current assets:        |                                                |              |        |         |   |   |        |        
|                             | Other receivables                              |              | $      | 572     |   |   | $      | 1,734   |  
|                             | Prepaid expenses                               |              |        | 5,255   |   |   |        | 6,277   |  
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                | $            | 5,827  |         |   | $ | 8,011  |        
|                             |                                                |              |        |         |   |   |        |        
|Property and equipment, net: |                                                |              |        |         |   |   |        |        
|                             | Computer equipment                             |              |        | 24,363  |   |   | $      | 23,245  |  
|                             | Furniture and fixtures                         |              |        | 11,377  |   |   |        | 12,283  |  
|                             | Leasehold improvements                         |              |        | 3,920   |   |   |        | 4,377   |  
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                |              | 39,660 |         |   |   | 39,905 |        
|                             | Less accumulated depreciation and amortization |              |        | (27,433 | ) |   |        | (20,392 | )
|                             |                                                |              |        |         |   |   |        |        
|                             |                                                | $            | 12,227 |         |   | $ | 19,513 |        
|                             |                                                |              |        |         |   |   |        |        

Total depreciation expense was $8,809, $13,783
and $15,246 in 2003, 2002 and 2001, respectively.

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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:

|                      |       |                   |        |              |        |          |         |          |         |              |        |          |        |   |        |       |        |   |         |        |         |   |        |     |        | 
|--------------------- | ----- | ----------------- | ------ | ------------ | ------ | -------- | ------- | -------- | ------- | ------------ | ------ | -------- | ------ | - | ------ | ----- | ------ | - | ------- | ------ | ------- | - | ------ | --- | ------ | 
|                      |       |                   |        |             
|                      |       | 2003              |        | 2002        
|                      |       |                   |        |             
|                      |       | Gross             |        |              |        | Net      |         | Gross    |         |              |        | Net     
|                      |       | Carrying          |        | Accumulated  |        | Carrying |         | Carrying |         | Accumulated  |        | Carrying
|                      |       | Amount            |        | Amortization |        | Amount   |         | Amount   |         | Amortization |        | Amount  
|                      |       |                   |        |              |        |          |         |          |         |              |        |         
|Purchased software    |       | $                 | 22,175 |              |        | $        | (18,782 | )        |         | $            | 3,393  |          |        | $ | 22,175 |       |        | $ | (15,237 | )      |         | $ | 6,938  |    
|Intellectual property |       |                   | 30,198 |              |        |          | (15,621 | )        |         |              | 14,577 |          |        |   | 30,198 |       |        |   | (9,562  | )      |         |   | 20,636 |    
|                      | Other |                   |        | 3,775        |        |          |         | (3,537   | )       |              |        | 238      |        |   |        | 3,775 |        |   |         | (3,062 | )       |   |        | 713 |       
|                      |       |                   |        |              |        |          |         |          |         |              |        |          |        |   |        |       |        |   |         |        |         |   |        |    
|                      |       | Intangible assets |        | $            | 56,148 |          |         | $        | (37,940 | )            |        | $        | 18,208 |   |        | $     | 56,148 |   |         | $      | (27,861 | ) |        | $   | 28,287 | 
|                      |       |                   |        |              |        |          |         |          |         |              |        |          |        |   |        |       |        |   |         |        |         |   |        |    

Total amortization of intangibles was $10,079,
$14,308 and $9,510 in 2003, 2002 and 2001, respectively. Based
on the intangibles in service as of December 31, 2003,
estimated amortization expense for each of the next five years
ending December 31 is as follows:

|     |  |  |        | 
|---- |  |  | ------ | 
|2004 |  |  | 8,984  | 
|2005 |  |  | 6,710  | 
|2006 |  |  | 2,514  | 
|     |  |  |        | 
|     |  |  | 18,208 | 
|     |  |  |        | 

The following intangible assets were acquired
during the years indicated:

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

There were no intangible assets acquired in 2003.

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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,
|                                                                               |                                          |             
|                                                                               |                                          | 2003         |        | 2002  
|                                                                               |                                          |              |        |       
|Accrued liabilities:                                                           |                                          |              |        |        |   |   |        |       
|                                                                               | Payroll and related benefits             |              | $      | 7,696  |   |   | $      | 7,987  | 
|                                                                               | Other                                    |              |        | 2,714  |   |   |        | 5,358  | 
|                                                                               |                                          |              |        |        |   |   |        |       
|                                                                               |                                          | $            | 10,410 |        |   | $ | 13,345 |       
|                                                                               |                                          |              |        |        |   |   |        |       
|Deferred revenue:                                                              |                                          |              |        |        |   |   |        |       
|                                                                               | Maintenance                              |              | $      | 23,054 |   |   | $      | 20,273 | 
|                                                                               | License                                  |              |        | 21,872 |   |   |        | 24,433 | 
|                                                                               | Service                                  |              |        | 3,691  |   |   |        | 4,499  | 
|                                                                               |                                          |              |        |        |   |   |        |       
|                                                                               |                                          | $            | 48,617 |        |   | $ | 49,205 |       
|                                                                               |                                          |              |        |        |   |   |        |       
|Accumulated other comprehensive income (loss)
    foreign currency translation |                                          | $            | 2,326  |        |   | $ | 493    |       
|                                                                               | Unrealized gain on marketable securities |              |        | (16    | ) |   |        | 11     | 
|                                                                               |                                          |              |        |        |   |   |        |       
|                                                                               |                                          | $            | 2,310  |        |   | $ | 504    |       
|                                                                               |                                          |              |        |        |   |   |        |       

License and maintenance revenues were comprised
of the following as of December 31, 2003.

|                    |                                       |              |        |        |  |      |         |         |  |   |         |         | 
|------------------- | ------------------------------------- | ------------ | ------ | ------ |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                    |                                       |             
|                    |                                       | December 31,
|                    |                                       |             
|                    |                                       | 2003         |        | 2002   |  | 2001
|                    |                                       |              |        |        |  |     
|License revenue     |                                       | $            | 59,907 |        |  | $    | 101,438 |         |  | $ | 109,147 |        
|Maintenance revenue |                                       |              | 30,288 |        |  |      | 31,169  |         |  |   | 22,535  |        
|                    |                                       |              |        |        |  |      |         |         |  |   |         |        
|                    | Total license and maintenance revenue |              | $      | 90,195 |  |      | $       | 132,607 |  |   | $       | 131,682 | 
|                    |                                       |              |        |        |  |      |         |         |  |   |         |        



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

At December 31, 2003, we were obligated
through 2015 under non-cancelable operating leases for our
facilities and certain equipment as follows:

|           |  |                |        | 
|---------- |  | -------------- | ------ | 
|           |  | Future Minimum
|           |  | Lease Payments
|           |  |               
|2004       |  | $              | 6,950  | 
|2005       |  |                | 5,854  | 
|2006       |  |                | 5,406  | 
|2007       |  |                | 5,293  | 
|2008       |  |                | 5,029  | 
|Thereafter |  |                | 28,903 | 

Rent expense under operating leases for the years
ended December 31, 2003, 2002 and 2001 was approximately
$7,790 $9,109, and $10,849, respectively, net of sublease income
of $305, $1,313, and $1,349 for the corresponding periods,
respectively.

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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 connection with our restructuring plan (See
Note 8) we abandoned 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
sublessee, 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, 2003, the Company
had an accrual of approximately $1.1 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, 2003, 2002 and 2001, was approximately $3,129,
$3,188 and $1,918, respectively.

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



|         |                                
|-------- | -------------------------------
|Note 4  | 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 5  | Strategic Alliance with IBM

On September 5, 2000, we entered into a
strategic relationship with International Business Machines
Corporation (IBM). Pursuant to this relationship,
Retek and IBM agreed to jointly market, sell, and service a
comprehensive retail e-business solution consisting of Retek
applications and IBM software and hardware technologies. In
connection with entering into this relationship, we and IBM
entered into a Common Stock Purchase Agreement pursuant to which
we issued 300,000 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. While the strategic relationship
continues, the fully amortized assets were returned in 2003 and
accumulated amortization for these assets was $10.2 and
$5.7 million, respectively as of December 31, 2002 and
2001.

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. The
revenue targets for the years ended December 31, 2003, 2002
and 2001 were not met by IBM; therefore, no amounts were paid to
IBM under this agreement with respect to sales in 2003, 2002 and
2001.

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)




|         |                     
|-------- | --------------------
|Note 6  | 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 had 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 during the third quarter of 2002. 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 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. During 2002, 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 2003, 2002 or 2001.



|         |                                  
|-------- | ---------------------------------
|Note 7  | 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

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)


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 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, 2003 and 2002, were not met by Accenture;
therefore, no warrants were issued to Accenture under this
agreement.

On February 6, 2003, we entered into several
additional long-term agreements with Accenture. Under these
agreements 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. Our minimum payments in 2004 are
$2.2 million. 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.



|         |                        
|-------- | -----------------------
|Note 8  | 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 included 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 in the fourth quarter of
2002. We recorded an additional charge of $0.3 million in
2003 to reflect adjustments to final severance benefits paid. As
of December 31, 2003, all payments had been made to the
severed individuals.

We also recorded a net loss on lease abandonment
of $17.0 million in the fourth quarter of 2002. In the
third quarter of 2003 we recorded a $0.1 reduction to the
estimated lease abandonment charges. The lease abandonment loss
recorded in the fourth quarter of 2002 consisted of the payments
to be made for the remaining lease term of the abandoned space
aggregating $31.1 million, net of estimated sublease income
of $14.1 million. Lease terms of the leased space abandoned
range 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 be paid by the
sublessors. 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. As of December 31, 2003, the remaining accrual
for lease obligations and terminations is $14.5 million.

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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 following table sets forth a summary of the
restructuring charges, adjustments to the provision, payment
made against those charges and the remaining liabilities as of
December 31, 2003.

|                                   |  |               |        |            |  |                   |      |              |  |       |        |                   |  |   |      |   |  |   |        |   |  |   |        | 
|---------------------------------- |  | ------------- | ------ | ---------- |  | ----------------- | ---- | ------------ |  | ----- | ------ | ----------------- |  | - | ---- | - |  | - | ------ | - |  | - | ------ | 
|                                   |  | Restructuring |        |            |  | Balance as of     |      | Adjustments  |  | Cash  |        | Balance as of    
|                                   |  | Charges       |        | Cash Usage |  | December 31, 2003 |      | to provision |  | Usage |        | December 31, 2003
|                                   |  |               |        |            |  |                   |      |              |  |       |        |                  
|Lease obligations and terminations |  | $             | 17,019 |            |  | $                 |     |              |  | $     | 17,019 |                   |  | $ | (113 | ) |  | $ | (2,432 | ) |  | $ | 14,474 | 
|Severance and related benefits     |  |               | 2,623  |            |  |                   | (940 | )            |  |       | 1,683  |                   |  |   | 281  |   |  |   | (1,964 | ) |  |   |       | 
|                                   |  |               |        |            |  |                   |      |              |  |       |        |                   |  |   |      |   |  |   |        |   |  |   |        | 
|Total                              |  | $             | 19,642 |            |  | $                 | (940 | )            |  | $     | 18,702 |                   |  | $ | 168  |   |  | $ | (4,396 | ) |  | $ | 14,474 | 
|                                   |  |               |        |            |  |                   |      |              |  |       |        |                   |  |   |      |   |  |   |        |   |  |   |        | 

Related to the lease abandonment charge, we
recorded $1.9 million of accelerated depreciation on
equipment and leasehold improvements to be abandoned in 2003,
which is recorded as general and administrative expense.



|         |                                                      
|-------- | -----------------------------------------------------
|Note 9  | 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 leased space
to be abandoned related to our 2001 move to our new corporate
headquarters (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 10  | 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, 2003, 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, 2003 and 2002, we had
standby letters of credit totaling $10.9 and $7.7 million,
respectively, and there were no balances drawn against those
letters of credit.

In addition we had notes payable outstanding of
$78 as of December 31, 2003, which beard interest at 7.0%
and is due in monthly installments of $8 though November 2004



|          |             
|--------- | ------------
|Note 11  | Income Taxes

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

|         |  |                         |         |      |  |      |         |   |  |   |         |  
|-------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  |                        
|         |  | Year Ended December 31,
|         |  |                        
|         |  | 2003                    |         | 2002 |  | 2001
|         |  |                         |         |      |  |     
|Domestic |  | $                       | (21,706 | )    |  | $    | (45,453 | ) |  | $ | (23,282 | )
|Foreign  |  |                         | 2,944   |      |  |      | 825     |   |  |   | 1,791   |  
|         |  |                         |         |      |  |      |         |   |  |   |         |  
|         |  | $                       | (18,762 | )    |  | $    | (44,628 | ) |  | $ | (21,491 | )
|         |  |                         |         |      |  |      |         |   |  |   |         |  

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)


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

|          |         |                         |       |       |   |      |        |        |  |   |        |        |  
|--------- | ------- | ----------------------- | ----- | ----- | - | ---- | ------ | ------ |  | - | ------ | ------ | -
|          |         |                        
|          |         | Year Ended December 31,
|          |         |                        
|          |         | 2003                    |       | 2002  |   | 2001
|          |         |                         |       |       |   |     
|Current:  |         |                         |       |       |   |      |        |        |  |   |        |       
|          | Federal |                         | $     |      |   |      | $      |       |  |   | $      |       |  
|          | State   |                         |       | (180  | ) |      |        |       |  |   |        |       |  
|          | Foreign |                         |       | 1,951 |   |      |        | 1,026  |  |   |        | 779    |  
|Deferred: |         |                         |       |       |   |      |        |        |  |   |        |       
|          | Federal |                         |       |       |   |      |        | 66,933 |  |   |        | (5,377 | )
|          | State   |                         |       |       |   |      |        | 10,996 |  |   |        | (2,583 | )
|          | Foreign |                         |       |      |   |      |        |       |  |   |        |       |  
|          |         |                         |       |       |   |      |        |        |  |   |        |       
|          |         | $                       | 1,771 |       |   | $    | 78,955 |        |  | $ | (7,181 | )     
|          |         |                         |       |       |   |      |        |        |  |   |        |       

Deferred tax assets are summarized as follows:

|                                              |                        |              |          |      |  |   |         |   | 
|--------------------------------------------- | ---------------------- | ------------ | -------- | ---- |  | - | ------- | - | 
|                                              |                        |             
|                                              |                        | December 31,
|                                              |                        |             
|                                              |                        | 2003         |          | 2002
|                                              |                        |              |          |     
|Net operating loss carryforwards              |                        | $            | 70,585   |      |  | $ | 57,433  |  
|Taxable pooling-of-interests basis difference |                        |              | 9,971    |      |  |   | 11,216  |  
|Tax credit carryforwards                      |                        |              | 7,981    |      |  |   | 6,044   |  
|Allowance for doubtful accounts               |                        |              | 1,198    |      |  |   | 2,270   |  
|Depreciation                                  |                        |              | (526     | )    |  |   | (591    | )
|Intangible assets                             |                        |              | 4,112    |      |  |   | 4,876   |  
|Deferred revenue                              |                        |              | 6,679    |      |  |   | 5,376   |  
|Accrued restructuring                         |                        |              | 5,787    |      |  |   | 6,785   |  
|Accrued liabilities and other                 |                        |              | 995      |      |  |   | 1,884   |  
|                                              |                        |              |          |      |  |   |         |  
|Total deferred tax assets                     |                        |              | 106,782  |      |  |   | 95,293  |  
|Valuation allowance                           |                        |              | (106,782 | )    |  |   | (95,293 | )
|                                              | Net deferred tax asset |              | $        |     |  |   | $       |  | 
|                                              |                        |              |          |      |  |   |         |  

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. We believe full deferred tax valuation
allowance is appropriate in light of our operating losses and
the uncertainty of generating future taxable income. Despite the
full valuation allowance, the income tax benefits related to
these deferred tax assets will remain available to offset future
taxable income.

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Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

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


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,
|                                           |                                                                        |                        
|                                           |                                                                        | 2003                    |        | 2002   |   | 2001
|                                           |                                                                        |                         |        |        |   |     
|Amounts computed at statutory federal rate |                                                                        | $                       | (6,567 | )      |   |      | (15,620 | )      |   | $ | (7,522 | )     
|                                           | State income taxes, net of federal benefit                             |                         |        | (1,248 | ) |      |         | (2,526 | ) |   |        | (1,204 | )
|                                           | Tax credit carryforwards generated                                     |                         |        | (1,937 | ) |      |         | (2,686 | ) |   |        | (1,250 | )
|                                           | Non-deductible goodwill and other non-deductible
    acquisition costs |                         |        |       |   |      |         |       |   |   |        | 1,599  |  
|                                           | Foreign income taxes                                                   |                         |        | 1,951  |   |      |         | 1,026  |   |   |        |       |  
|                                           | Stock based compensation                                               |                         |        | 171    |   |      |         | 701    |   |   |        | 1,423  |  
|                                           | Other, net                                                             |                         |        | (2,088 | ) |      |         | 2,767  |   |   |        | (227   | )
|Valuation allowance                        |                                                                        |                         | 11,489 |        |   |      | 95,293  |        |   |   |       |       
|                                           |                                                                        |                         |        |        |   |      |         |        |   |   |        |       
|Income tax provision (benefit)             |                                                                        | $                       | 1,771  |        |   | $    | 78,955  |        |   | $ | (7,181 | )     
|                                           |                                                                        |                         |        |        |   |      |         |        |   |   |        |       

At December 31, 2003, we had federal and
state net operating loss carryforwards of approximately
$151,617. Substantially all carryforwards begin to expire in
2020.

We also had approximately $5,412 of federal
research and development credit carryforwards expiring at
various dates through 2023, $2,234 of state research and
development credit carryforwards expiring at various dates
through 2023, and $335 of foreign tax credit carryforwards,
which expire at various dates through 2006.



|          |                                            
|--------- | -------------------------------------------
|Note 12  | 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, 2003, 2002 and 2001 are as follows:

|                            |                |                         |   |         |         |      |   |         |         |  |   |         |         | 
|--------------------------- | -------------- | ----------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                            |                |                        
|                            |                | Year Ended December 31,
|                            |                |                        
|                            |                | 2003                    |   | 2002    |         | 2001
|                            |                |                         |   |         |         |     
|Revenue by geographic area: |                |                         |   |         |         |      |   |         |         |  |   |        
|                            | United States  |                         | $ | 101,706 |         |      | $ | 117,153 |         |  | $ | 118,476 |        
|                            | United Kingdom |                         |   | 26,215  |         |      |   | 45,614  |         |  |   | 49,009  |        
|                            | Other          |                         |   | 40,408  |         |      |   | 29,065  |         |  |   | 11,989  |        
|                            |                |                         |   |         |         |      |   |         |         |  |   |        
|                            |                | Total revenue           |   | $       | 168,329 |      |   | $       | 191,832 |  |   | $       | 179,474 | 
|                            |                |                         |   |         |         |      |   |         |         |  |   |        

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

|                                      |               |                         |   |        |        |      |   |        |        |  |   |        |        | 
|------------------------------------- | ------------- | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                      |               |                        
|                                      |               | December 31,           
|                                      |               |                        
|                                      |               | 2003                    |   | 2002   |        | 2001
|                                      |               |                         |   |        |        |     
|Long-lived assets by geographic area: |               |                         |   |        |        |      |   |        |        |  |   |       
|                                      | United States |                         | $ | 43,378 |        |      | $ | 60,400 |        |  | $ | 84,800 |       
|                                      | Foreign       |                         |   | 874    |        |      |   | 1,217  |        |  |   | 1,271  |       
|                                      |               |                         |   |        |        |      |   |        |        |  |   |       
|                                      |               | Total long-lived assets |   | $      | 44,252 |      |   | $      | 61,617 |  |   | $      | 86,071 | 
|                                      |               |                         |   |        |        |      |   |        |        |  |   |       

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Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

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


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 $44,754, $60,947 and
$52,590 for the years ended December 31, 2003, 2002 and
2001, respectively.

We had one significant customer that represented
29% of accounts receivable at December 31, 2003 and one
customer representing 15% of accounts receivable at
December 31, 2002.

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

|         |            |                          |  |      |   |      |  |    |   |  |  |    |  
|-------- | ---------- | ------------------------ |  | ---- | - | ---- |  | -- | - |  |  | -- | -
|         |            |                         
|         |            | Year Ending December 31,
|         |            |                         
|         |            | 2003                     |  | 2002 |   | 2001
|         |            |                          |  |      |   |     
|Revenue: |            |                          |  |      |   |      |  |    |   |  |  |   
|         | Customer A |                          |  |     |   |      |  |   |   |  |  | 11 | %
|         | Customer B |                          |  |     |   |      |  | 10 | % |  |  | 22 | %
|         | Customer C |                          |  | 14   | % |      |  | 12 | % |  |  |   |  



|          |                       
|--------- | ----------------------
|Note 13  | Employee Benefit Plans

Retek Inc. Sponsored Plans

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

The Incentive Plan provides for the Compensation
Committee of the Board of Directors to award up to
16,926,416 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, 2003, 4,440,054 options were
exercisable.

The Purchase Plan provides for the issuance of a
maximum of 3,011,239 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 $3,738 during
the year ended December 31, 2003. In total,
1,278,276 shares were issued to employees during the year
ended December 31, 2003.

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,

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Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

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


at our discretion, implement a different vesting
schedule with respect to any new stock option grant. At
December 31, 2003, 659,182 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, 2003, 180,000 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 $1,356, $3,141 and $5,344 in
the years ending December 31, 2003, 2002 and 2001,
respectively.

Transactions relating to our employees and
directors under our Stock Option Plans during the years ended
December 31, 2003, 2002 and 2001, respectively, are
summarized as follows (shares in thousands):

|                                                                   |                                           |              |        |                |   |        |       |                |  |        |       |                |   |   |       |       |  |   |       |        |   |   |       |       | 
|------------------------------------------------------------------ | ----------------------------------------- | ------------ | ------ | -------------- | - | ------ | ----- | -------------- |  | ------ | ----- | -------------- | - | - | ----- | ----- |  | - | ----- | ------ | - | - | ----- | ----- | 
|                                                                   |                                           |             
|                                                                   |                                           | December 31,
|                                                                   |                                           |             
|                                                                   |                                           |              |        |                |   |       
|                                                                   |                                           | 2003         |        | 2002           |   | 2001  
|                                                                   |                                           |              |        |                |   |       
|                                                                   |                                           |              |        | Weighted       |   |        |       | Weighted       |  |        |       | Weighted      
|                                                                   |                                           |              |        | Average        |   |        |       | Average        |  |        |       | Average       
|                                                                   |                                           | Shares       |        | Exercise Price |   | Shares |       | Exercise Price |  | Shares |       | Exercise Price
|                                                                   |                                           |              |        |                |   |        |       |                |  |        |       |               
|Outstanding at beginning of year                                   |                                           |              | 9,821  |                |   | $      | 18.44 |                |  |        | 8,845 |                |   | $ | 17.27 |       |  |   | 8,406 |        |   | $ | 13.60 |      
|                                                                   | Options granted at market value           |              |        | 6,758          |   |        |       | 4.33           |  |        |       | 2,751          |   |   |       | 21.01 |  |   |       | 3,303  |   |   |       | 22.78 | 
|                                                                   | Options granted at less than market value |              |        | 0              |   |        |       | 0.00           |  |        |       | 0              |   |   |       | 0.00  |  |   |       | 25     |   |   |       | 1.00  | 
|                                                                   | Options exercised                         |              |        | (203           | ) |        |       | 5.39           |  |        |       | (772           | ) |   |       | 11.44 |  |   |       | (2,212 | ) |   |       | 10.56 | 
|                                                                   | Options canceled                          |              |        | (4,726         | ) |        |       | 17.56          |  |        |       | (1,003         | ) |   |       | 20.60 |  |   |       | (677   | ) |   |       | 19.91 | 
|                                                                   |                                           |              |        |                |   |        |       |                |  |        |       |                |   |   |       |       |  |   |       |        |   |   |       |      
|Outstanding at end of year                                         |                                           |              | 11,650 |                |   |        | 10.84 |                |  |        | 9,821 |                |   |   | 18.44 |       |  |   | 8,845 |        |   |   | 17.27 |      
|                                                                   |                                           |              |        |                |   |        |       |                |  |        |       |                |   |   |       |       |  |   |       |        |   |   |       |      
|Options exercisable at end of year                                 |                                           |              | 5,279  |                |   |        |       |                |  |        | 4,116 |                |   |   |       |       |  |   | 1,885 |        |   |   |       |      
|Weighted average fair value of options granted
    during the year |                                           | $            | 3.47   |                |   |        |       |                |  | $      | 19.19 |                |   |   |       |       |  | $ | 17.27 |        |   |   |       |      

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)


|                |  |                     |        |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 
|--------------- |  | ------------------- | ------ | ------------------- |  | -------------- | ---- | -------------- |  | -------------- | ----- |  |  |  | ----- |  |  | - | ----- | 
|                |  |                     |        |                     |  |               
|                |  | 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, 2003   |        | Life (in years)     |  | Exercise Price |      | 2003           |  | Exercise Price
|                |  |                     |        |                     |  |                |      |                |  |               
|$0.01 to 1.62   |  |                     | 6      |                     |  |                | 8.77 |                |  | $              | 1.62  |  |  |  | 1     |  |  | $ | 1.62  | 
|1.65 to 3.49    |  |                     | 3,457  |                     |  |                | 9.09 |                |  |                | 3.46  |  |  |  | 59    |  |  |   | 3.22  | 
|3.60 to 8.11    |  |                     | 2,119  |                     |  |                | 6.10 |                |  |                | 5.48  |  |  |  | 515   |  |  |   | 5.33  | 
|8.50 to 10.00   |  |                     | 2,831  |                     |  |                | 6.11 |                |  |                | 9.93  |  |  |  | 2,632 |  |  |   | 10.00 | 
|10.01 to 25.50  |  |                     | 2,583  |                     |  |                | 7.57 |                |  |                | 19.21 |  |  |  | 1,634 |  |  |   | 18.74 | 
|25.69 to 74.13  |  |                     | 654    |                     |  |                | 7.20 |                |  |                | 38.12 |  |  |  | 438   |  |  |   | 41.51 | 
|                |  |                     |        |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 
|                |  |                     | 11,650 |                     |  |                | 7.38 |                |  |                | 10.84 |  |  |  | 5,279 |  |  |   | 14.78 | 
|                |  |                     |        |                     |  |                |      |                |  |                |       |  |  |  |       |  |  |   |       | 

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, 2003, 2002 and
2001, respectively: dividend yield of 0.0% for all three years;
risk-free interest rates of 1.64%, 2.64% and 3.94%; expected
volatilities of 133%, 165%, and 106%; and expected lives of
1.8 year past the vesting date for 2003 and 2.0 years
past the vesting date for 2002 and 2001, respectively. 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 2003, 2002 and 2001, respectively:
dividend yield of 0.0% for all three years; risk-free interest
rates of 1.02%, 1.72%, and 3.64%; expected volatilities of 71%,
165%, and 106%; and an expected life of six months for all three
years. The weighted average fair value of those purchase rights
granted in 2003, 2002 and 2001 for our stock was $1.63, $12.76
and $15.07, respectively.



|          |                
|--------- | ---------------
|Note 14  | 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 15  | 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, as amended (the Exchange Act) 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 Exchange Act. 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

64



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##### Table of Contents



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

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


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,
2000, 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.

On June 30, 2003, a Special Litigation
Committee of the Board of Directors of the Company approved a
Memorandum of Understanding (the MOU) reflecting a
tentative settlement in which the plaintiffs agreed to dismiss
the case against the Company with prejudice in return for the
assignment by the Company of claims that the Company might have
against its underwriters. The same offer of settlement was made
to all issuer defendants involved in the litigation. No payment
to the plaintiffs by the Company is required under the MOU.
There can be no assurance that the MOU will result in a formal
settlement or that the Court will approve the settlement that
the MOU sets forth.

The Company believes that it and the individual
defendants have meritorious defenses to the claims made in the
complaint and, if the MOU does not result in a formal settlement
approved by the Court, intends to contest the lawsuit
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 federal court in
Minnesota appointed a lead plaintiff and lead plaintiffs
counsel on February 14, 2003. The consolidated complaint
(the Consolidated Complaint) alleges, among other
things, violations of Sections 10(b) and 20(a) of the
Exchange Act against us and certain of our current and former
officers and directors. Specifically, the Consolidated Complaint
alleges that, among other things, between July 19, 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 Consolidated Complaint
alleges 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. On May 30, 2003, the Company and the individual
defendants served a motion to dismiss the Consolidated
Complaint. On January 27, 2004, the Court heard arguments
on the motion to dismiss, and the parties are currently awaiting
a ruling by the Court.

We dispute plaintiffs allegations in the
consolidated 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

65



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##### Table of Contents



Retek Inc.


Notes to Consolidated Financial
Statements  (Continued)

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


be predicted with certainty, our management
currently believes that the ultimate outcome of the consolidated
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
consolidated federal class action is without merit, it is
possible that the litigation 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 the State of
Minnesota, District Court, Hennepin County

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 consolidate their respective actions, although the
derivative plaintiffs have not yet filed a consolidated
derivative complaint. 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 16  | Retek Inc. Sponsored 401(k) Plan

Our employees participate in a Retek Inc.
sponsored 401(k) plan. We match employee contributions up to 40%
of the first 6% employee contribution or 50% of the first
sixteen hundred dollars, whichever is greater. Company matching
contributions were $1,242, $1,361 and $1,441 for the years ended
December 31 2003, 2002 and 2001, respectively.

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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 17  | Selected Quarterly Financial Data
    (Unaudited)

|                                 |  |        |        |         |  |        |        |        |  |       |        |   |  |   |        |   |  |   |         |  
|-------------------------------- |  | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|2003                             |  | Mar 31 |        | June 30 |  | Sep 30 |        | Dec 31 |  | Total
|                                 |  |        |        |         |  |        |        |        |  |      
|Revenues                         |  | $      | 37,558 |         |  | $      | 42,894 |        |  | $     | 43,797 |   |  | $ | 44,080 |   |  | $ | 168,329 |  
|Gross profit                     |  |        | 17,084 |         |  |        | 19,687 |        |  |       | 21,408 |   |  |   | 21,478 |   |  |   | 79,657  |  
|Net loss                         |  |        | (9,380 | )       |  |        | (6,123 | )      |  |       | (2,741 | ) |  |   | (2,289 | ) |  |   | (20,533 | )
|Basic and diluted loss per share |  | $      | (0.18  | )       |  | $      | (0.11  | )      |  | $     | (0.05  | ) |  | $ | (0.04  | ) |  | $ | (0.38   | )

|                                          |  |        |        |         |  |        |        |        |  |       |         |   |  |   |         |   |  |   |          |  
|----------------------------------------- |  | ------ | ------ | ------- |  | ------ | ------ | ------ |  | ----- | ------- | - |  | - | ------- | - |  | - | -------- | -
|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    | )

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.

67



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##### Table of Contents



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/ MARTIN J. LEESTMA

| |                                      
| | -------------------------------------
| |                                      
| | Martin J. Leestma                    
| | President and Chief Executive Officer

We, the undersigned directors and executive
officer of the Registrant, hereby severally constitute Martin J.
Leestma 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, 2004 by the following persons on behalf of the
Registrant and in the capacities indicated.

|                                         |  |                                                                                                                                                                          |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 
|                                         |  |                                                                                                                                                                         
|Signature                                |  | Title (Capacity)                                                                                                                                                        
|                                         |  |                                                                                                                                                                         
|                                        
|/s/ MARTIN J. LEESTMAMartin J. Leestma   |  | 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 AND PRINCIPAL ACCOUNTING OFFICER)
|                                        
|/s/ JOHN BUCHANANJohn Buchanan           |  | Chairman of the Board of Directors                                                                                                                                      
|                                        
|/s/ N. ROSS BUCKENHAMN. Ross Buckenham   |  | Director                                                                                                                                                                
|                                        
|/s/ WARD CAREYWard Carey                 |  | Director                                                                                                                                                                
|                                        
|/s/ CHRIS SANGChris Sang                 |  | Director                                                                                                                                                                
|                                        
|/s/ GLEN A. TERBEEKGlen A. Terbeek       |  | Director                                                                                                                                                                

68



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##### Table of Contents



|                                       |  |                  |  | 
|-------------------------------------- |  | ---------------- |  | 
|                                       |  |                 
|Signature                              |  | Title (Capacity)
|                                       |  |                 
|                                      
|/s/ STEPHEN E. WATSONStephen E. Watson |  | Director        
|                                      
|/s/ WILLIAM J. WALSHWilliam J. Walsh   |  | Director        

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##### Table of Contents



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                            
|        | 10 | .21             |  | Offer letter by and between the Registrant and
    Martin J. Leestma                            
|        | 21 | .1               |  | Schedule of Subsidiaries                                                                        
|        | 23 | .1                  |  | Consent of PricewaterhouseCoopers LLP                                                           
|        | 24 | .1                  |  | Power of Attorney (contained on signature page)                                                 
|        | 31 | .1                  |  | Rule 13a-14(a)/15d-14(a) Certification of CEO                                                   
|        | 31 | .2                  |  | Rule 13a-14(a)/15d-14(a) Certification of CFO                                                   
|        | 32 |                     |  | Section 1350 Certification of CEO and CFO                                                       



---



| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | 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.

70



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##### Table of Contents





| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.



| |     |                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Filed as an exhibit of our Annual Report of
    Form 10-K files with the Securities and Exchange Commission
    on March 12, 2003, and incorporated herein by reference.



|     |                                                                                                                                                                                                                    
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Filed as an exhibit to our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2003, filed
    with the Securities and Exchange Commission on May 14,
    2003, and incorporated herein by reference.

71