##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



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



For the quarterly period ended January 31, 2004



OR



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



For the transition period from
 to



Commission file number 000-27071



---



AGILE SOFTWARE CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 77-0397905                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



6373 San Ignacio
Avenue, San Jose, California 95119-1200

(Address of principal executive office)



(408) 284-4000

(Registrants telephone number, including area code)



---



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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x    No ̈



The number of shares of Common Stock of the Registrant issued and
outstanding as of January 31, 2004 was 52,155,677.



---



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

FORM 10-Q

JANUARY 31, 2004



TABLE OF CONTENTS



|           |  |                                                                                                                         |  |     
|---------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                                         |  | Page
|           |  | PART I  FINANCIAL INFORMATION                                                                                          |  |     
|           |  |                                                                                                                        
|Item 1.    |  | Financial Statements                                                                                                    |  |     
|           |  |                                                                                                                        
|           |  | Unaudited Condensed Consolidated Balance Sheets at January 31, 2004 and April 30, 2003                                  |  | 3   
|           |  |                                                                                                                        
|           |  | Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended January 31, 2004 and 2003 |  | 4   
|           |  |                                                                                                                        
|           |  | Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended January 31, 2004 and 2003           |  | 5   
|           |  |                                                                                                                        
|           |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                          |  | 6   
|           |  |                                                                                                                        
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   |  | 18  
|           |  |                                                                                                                        
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                                                              |  | 43  
|           |  |                                                                                                                        
|Item 4.    |  | Controls and Procedures                                                                                                 |  | 44  
|           |  |                                                                                                                        
|           |  | PART II  OTHER INFORMATION                                                                                             |  |     
|           |  |                                                                                                                        
|Item 1.    |  | Legal Proceedings                                                                                                       |  | 45  
|           |  |                                                                                                                        
|Item 2.    |  | Changes In Securities, Use Of Proceeds and Issuer Purchases of Equity Securities                                        |  | 45  
|           |  |                                                                                                                        
|Item 3.    |  | Defaults Upon Senior Securities                                                                                         |  | 45  
|           |  |                                                                                                                        
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                                     |  | 46  
|           |  |                                                                                                                        
|Item 5.    |  | Other Information                                                                                                       |  | 46  
|           |  |                                                                                                                        
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                                                        |  | 46  
|           | 
|Signatures |  | 48                                                                                                                     



2



---

##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. |  | Financial Statements
|------- |  | --------------------



AGILE SOFTWARE CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                               |  |                  |          |   |                   |   |          |  
|---------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                               |  | January 31, 2004 |          |   | April 30, 2003(1) |  
|ASSETS                                                                                         |  |                  |          |   |                   |   |          |  
|Current assets:                                                                                |  |                  |          |   |                   |   |          |  
|Cash and cash equivalents                                                                      |  | $                | 109,149  |   |                   | $ | 154,852  |  
|Short-term investments                                                                         |  |                  | 100,516  |   |                   |   | 102,115  |  
|Accounts receivable, net of allowance for doubtful accounts of $1,432 and $1,158, respectively |  |                  | 17,773   |   |                   |   | 12,061   |  
|Other current assets                                                                           |  |                  | 5,948    |   |                   |   | 6,295    |  
|                                                                                               |  |                  |          |   |                   |   |          |  
|Total current assets                                                                           |  |                  | 233,386  |   |                   |   | 275,323  |  
|Long-term investments                                                                          |  |                  | 33,423   |   |                   |   |         |  
|Property and equipment, net                                                                    |  |                  | 9,430    |   |                   |   | 7,389    |  
|Goodwill                                                                                       |  |                  | 33,985   |   |                   |   | 5,150    |  
|Intangible assets, net                                                                         |  |                  | 6,290    |   |                   |   | 1,080    |  
|Other assets                                                                                   |  |                  | 2,555    |   |                   |   | 2,008    |  
|                                                                                               |  |                  |          |   |                   |   |          |  
|Total assets                                                                                   |  | $                | 319,069  |   |                   | $ | 290,950  |  
|                                                                                               |  |                  |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                           |  |                  |          |   |                   |   |          |  
|Current liabilities:                                                                           |  |                  |          |   |                   |   |          |  
|Accounts payable                                                                               |  | $                | 5,112    |   |                   | $ | 3,230    |  
|Accrued expenses and other current liabilities                                                 |  |                  | 23,681   |   |                   |   | 13,632   |  
|Deferred revenue                                                                               |  |                  | 20,055   |   |                   |   | 15,280   |  
|                                                                                               |  |                  |          |   |                   |   |          |  
|Total current liabilities                                                                      |  |                  | 48,848   |   |                   |   | 32,142   |  
|Accrued restructuring, non-current                                                             |  |                  | 3,387    |   |                   |   | 2,562    |  
|Other non-current liabilities                                                                  |  |                  | 5,848    |   |                   |   |         |  
|                                                                                               |  |                  |          |   |                   |   |          |  
|Total liabilities                                                                              |  |                  | 58,083   |   |                   |   | 34,704   |  
|                                                                                               |  |                  |          |   |                   |   |          |  
|Commitments and contingencies (Note 7)                                                         |  |                  |          |   |                   |   |          |  
|                                                                                               |  |                 
|Stockholders equity:                                                                          |  |                  |          |   |                   |   |          |  
|Common stock                                                                                   |  |                  | 52       |   |                   |   | 49       |  
|Additional paid-in capital                                                                     |  |                  | 543,046  |   |                   |   | 516,056  |  
|Notes receivable from stockholders                                                             |  |                  | (83      | ) |                   |   | (186     | )
|Unearned stock compensation                                                                    |  |                  | (1,563   | ) |                   |   | (2,030   | )
|Accumulated other comprehensive income (loss)                                                  |  |                  | (346     | ) |                   |   | 93       |  
|Accumulated deficit                                                                            |  |                  | (280,120 | ) |                   |   | (257,736 | )
|                                                                                               |  |                  |          |   |                   |   |          |  
|Total stockholders equity                                                                     |  |                  | 260,986  |   |                   |   | 256,246  |  
|                                                                                               |  |                  |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                     |  | $                | 319,069  |   |                   | $ | 290,950  |  
|                                                                                               |  |                  |          |   |                   |   |          |  

---

|(1) | Amounts as of April 30, 2003 have been derived from audited financial statements as of that
date.
|--- | -------------------------------------------------------------------------------------------------



The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.



3



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)



|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                             |  | Three Months EndedJanuary 31, |        |   | Nine Months EndedJanuary 31, |  
|                                             |  | 2004                          |        |   | 2003                         |   |        | 2004 |  |   | 2003    |  
|Revenues:                                    |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|License                                      |  | $                             | 9,527  |   |                              | $ | 7,324  |      |  | $ | 25,154  |   |  | $ | 21,792  |  
|Professional services and maintenance        |  |                               | 16,656 |   |                              |   | 10,554 |      |  |   | 43,960  |   |  |   | 29,613  |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                               |  |                               | 26,183 |   |                              |   | 17,878 |      |  |   | 69,114  |   |  |   | 51,405  |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Cost of revenues:                            |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|License                                      |  |                               | 988    |   |                              |   | 605    |      |  |   | 2,774   |   |  |   | 1,904   |  
|Professional services and maintenance        |  |                               | 8,461  |   |                              |   | 4,415  |      |  |   | 21,014  |   |  |   | 13,787  |  
|Stock compensation                           |  |                               | 95     |   |                              |   | 9      |      |  |   | 147     |   |  |   | 37      |  
|Acquisition-related compensation             |  |                               | 339    |   |                              |   |       |      |  |   | 595     |   |  |   |        |  
|Amortization of intangible assets            |  |                               | 212    |   |                              |   |       |      |  |   | 372     |   |  |   |        |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Total cost of revenues                       |  |                               | 10,095 |   |                              |   | 5,029  |      |  |   | 24,902  |   |  |   | 15,728  |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Gross margin                                 |  |                               | 16,088 |   |                              |   | 12,849 |      |  |   | 44,212  |   |  |   | 35,677  |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses:                          |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Sales and marketing:                         |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Other sales and marketing                    |  |                               | 9,828  |   |                              |   | 9,752  |      |  |   | 27,499  |   |  |   | 32,141  |  
|Stock compensation                           |  |                               | 315    |   |                              |   | 751    |      |  |   | 2,988   |   |  |   | 1,683   |  
|Research and development:                    |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Other research and development               |  |                               | 6,038  |   |                              |   | 5,613  |      |  |   | 17,214  |   |  |   | 20,777  |  
|Stock compensation                           |  |                               | 53     |   |                              |   | 51     |      |  |   | 165     |   |  |   | 175     |  
|General and administrative:                  |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Other general and administrative             |  |                               | 2,246  |   |                              |   | 1,825  |      |  |   | 6,507   |   |  |   | 5,203   |  
|Stock compensation                           |  |                               | 101    |   |                              |   | 27     |      |  |   | 592     |   |  |   | 101     |  
|Acquisition-related compensation             |  |                               | 529    |   |                              |   |       |      |  |   | 1,091   |   |  |   |        |  
|Amortization of intangible assets            |  |                               | 679    |   |                              |   |       |      |  |   | 1,435   |   |  |   |        |  
|Acquired in-process research and development |  |                               |       |   |                              |   | 300    |      |  |   | 500     |   |  |   | 300     |  
|Restructuring and other charges              |  |                               |       |   |                              |   |       |      |  |   | 9,201   |   |  |   | 7,836   |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                     |  |                               | 19,789 |   |                              |   | 18,319 |      |  |   | 67,192  |   |  |   | 68,216  |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Loss from operations                         |  |                               | (3,701 | ) |                              |   | (5,470 | )    |  |   | (22,980 | ) |  |   | (32,539 | )
|Other income (expense):                      |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Interest and other income, net               |  |                               | 754    |   |                              |   | 1,196  |      |  |   | 2,347   |   |  |   | 3,863   |  
|Loss from foreign currency translation       |  |                               | (743   | ) |                              |   |       |      |  |   | (743    | ) |  |   |        |  
|Impairment of investments                    |  |                               |       |   |                              |   | (1,113 | )    |  |   |        |   |  |   | (3,673  | )
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Loss before provision for income taxes       |  |                               | (3,690 | ) |                              |   | (5,387 | )    |  |   | (21,376 | ) |  |   | (32,349 | )
|Provision for income taxes                   |  |                               | 348    |   |                              |   | 301    |      |  |   | 1,008   |   |  |   | 740     |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                     |  | $                             | (4,038 | ) |                              | $ | (5,688 | )    |  | $ | (22,384 | ) |  | $ | (33,089 | )
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Net loss per share:                          |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted                            |  | $                             | (0.08  | ) |                              | $ | (0.12  | )    |  | $ | (0.45   | ) |  | $ | (0.68   | )
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares                      |  |                               | 51,947 |   |                              |   | 48,591 |      |  |   | 50,139  |   |  |   | 48,383  |  
|                                             |  |                               |        |   |                              |   |        |      |  |   |         |   |  |   |         |  



The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.



4



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                            |  |                              |          |   |      |   |          |  
|--------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                                            |  | Nine Months EndedJanuary 31, |         
|                                                                            |  | 2004                         |          |   | 2003 |  
|Cash flows from operating activities:                                       |  |                              |          |   |      |   |          |  
|Net loss                                                                    |  | $                            | (22,384  | ) |      | $ | (33,089  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |          |   |      |   |          |  
|Acquired in-process research and development                                |  |                              | 500      |   |      |   | 300      |  
|Provision for doubtful accounts                                             |  |                              | 390      |   |      |   | 100      |  
|Depreciation and amortization                                               |  |                              | 5,757    |   |      |   | 5,982    |  
|Stock compensation                                                          |  |                              | 3,892    |   |      |   | 1,996    |  
|Loss from foreign currency translation                                      |  |                              | 743      |   |      |   |         |  
|Impairment of investments                                                   |  |                              |         |   |      |   | 3,673    |  
|Non-cash portion of restructuring and other charges                         |  |                              | 2,043    |   |      |   | 3,179    |  
|Changes in operating assets and liabilities, net of acquisitions:           |  |                              |          |   |      |   |          |  
|Accounts receivable                                                         |  |                              | (3,078   | ) |      |   | (2,370   | )
|Other assets, current and non-current                                       |  |                              | 1,714    |   |      |   | (766     | )
|Accounts payable                                                            |  |                              | (4,138   | ) |      |   | (2,526   | )
|Accrued expenses and other liabilities, current and non-current             |  |                              | 2,702    |   |      |   | 2,678    |  
|Deferred revenue                                                            |  |                              | (169     | ) |      |   | 397      |  
|                                                                            |  |                              |          |   |      |   |          |  
|Net cash used in operating activities                                       |  |                              | (12,028  | ) |      |   | (20,446  | )
|                                                                            |  |                              |          |   |      |   |          |  
|Cash flows from investing activities:                                       |  |                              |          |   |      |   |          |  
|Purchases of investments                                                    |  |                              | (218,586 | ) |      |   | (127,537 | )
|Proceeds from maturities of investments                                     |  |                              | 186,805  |   |      |   | 177,455  |  
|Cash paid in business combinations, net of cash acquired                    |  |                              | (2,543   | ) |      |   | (1,783   | )
|Acquisition of property and equipment                                       |  |                              | (6,247   | ) |      |   | (3,652   | )
|                                                                            |  |                              |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                         |  |                              | (40,571  | ) |      |   | 44,483   |  
|                                                                            |  |                              |          |   |      |   |          |  
|Cash flows from financing activities:                                       |  |                              |          |   |      |   |          |  
|Payment of acquired capital lease obligations                               |  |                              | (718     | ) |      |   |         |  
|Proceeds from issuance of Common Stock, net of repurchases                  |  |                              | 7,933    |   |      |   | 2,018    |  
|Repayment of notes receivable from stockholders                             |  |                              | 103      |   |      |   | 31       |  
|                                                                            |  |                              |          |   |      |   |          |  
|Net cash provided by financing activities                                   |  |                              | 7,318    |   |      |   | 2,049    |  
|                                                                            |  |                              |          |   |      |   |          |  
|Effect of exchange rate changes on cash                                     |  |                              | (422     | ) |      |   |         |  
|                                                                            |  |                              |          |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                        |  |                              | (45,703  | ) |      |   | 26,086   |  
|Cash and cash equivalents at beginning of period                            |  |                              | 154,852  |   |      |   | 123,374  |  
|                                                                            |  |                              |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                  |  | $                            | 109,149  |   |      | $ | 149,460  |  
|                                                                            |  |                              |          |   |      |   |          |  
|Non-cash investing and financing activities:                                |  |                              |          |   |      |   |          |  
|Unearned stock compensation                                                 |  | $                            | 3,426    |   |      | $ | 806      |  
|Common Stock issued in business combination                                 |  | $                            | 15,634   |   |      | $ |         |  



The accompanying notes
are an integral part of these unaudited condensed consolidated financial statements.



5



---

##### Table of Contents

AGI
LESOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1Summary of Significant Accounting Policies:



Basis of presentation



The accompanying unaudited condensed consolidated financial statements of Agile Software Corporation and its subsidiaries (Agile) have been
prepared by us and reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the fiscal year ending April 30, 2004. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the Securities and Exchange Commissions rules and regulations. These unaudited condensed consolidated
financial statements and notes included herein should be read in conjunction with our audited consolidated financial statements and notes thereto for the fiscal year ended April 30, 2003, included in our Annual Report on Form 10-K filed on July 28,
2003 with the Securities and Exchange Commission.



Reclassifications



Certain reclassifications have been made to the prior
period unaudited condensed consolidated financial statements to conform to the current period presentation. These reclassifications have no impact on previously reported net loss or cash flows.



Concentrations of credit risk and significant customers



The following table sets forth the percentage of total revenue and net
accounts receivable generated by each of our customers who accounted for more than 10% of our total revenue and/or 10% of our net accounts receivable as of and for the periods indicated below:



|           |  |                               |  |      |                              |  |      |                                |      |   |  |                  |  |                |  
|---------- |  | ----------------------------- |  | ---- | ---------------------------- |  | ---- | ------------------------------ | ---- | - |  | ---------------- |  | -------------- | -
|           |  | % of Total Revenues           |  |      |                              | 
|           |  | Three Months EndedJanuary 31, |  |      | Nine Months EndedJanuary 31, |  |      | % of Net AccountsReceivable at |     
|           |  | 2004                          |  | 2003 |                              |  | 2004 |                                | 2003 |   |  | January 31, 2004 |  | April 30, 2003 |  
|Customer A |  |                              |  | 16   | %                            |  |     |                                |     |   |  |                 |  |               |  
|Customer B |  |                              |  | 10   | %                            |  |     |                                | 11   | % |  |                 |  |               |  
|Customer C |  |                              |  |     |                              |  |     |                                |     |   |  |                 |  | 22             | %



Stock compensation



We account for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations, and comply with the disclosure provisions of Statement of Financial Accounting
Standard, or SFAS, No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Under APB Opinion No. 25, unearned compensation is based
on the difference, if any, on the date of the grant, between the fair value of our Common Stock and the exercise price of the instrument granted. Unearned compensation is amortized and expensed in accordance with Financial Accounting Standards
Board, or FASB, Interpretation No., or FIN, 28 using the accelerated method of amortization. If a stock option is unvested and cancelled due to termination of employment, any excess amortization recorded using the accelerated method over what would
have been amortized on a straight-line basis is reversed in the period of cancellation, and classified as recovery.



6



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



We account for stock-based compensation issued to non-employees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force, or EITF, No. 96-18 Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.



Fair value disclosures



Pro forma information regarding net income and earnings per share is
required to be disclosed under SFAS No. 123. This information is required to be determined as if we had accounted for our stock-based compensation plans under the fair value method.



The fair value of shares and options issued pursuant to our stock-based compensation plans at the grant date were calculated
using the Black-Scholes option pricing model as prescribed by SFAS No. 123 with the following weighted average assumptions:



|                                |  |                                |   |  |                               |   |  |      |   |  |      |  
|------------------------------- |  | ------------------------------ | - |  | ----------------------------- | - |  | ---- | - |  | ---- | -
|                                |  | Stock Option Plans             |  
|                                |  | Three Months Ended January 31, |   |  | Nine Months Ended January 31, |  
|                                |  | 2004                           |   |  | 2003                          |   |  | 2004 |   |  | 2003 |  
|Dividend yield                  |  |                               |   |  |                              |   |  |     |   |  |     |  
|Expected volatility             |  | 54                             | % |  | 98                            | % |  | 66   | % |  | 101  | %
|Average risk-free interest rate |  | 3.17                           | % |  | 3.02                          | % |  | 3.27 | % |  | 2.92 | %
|Expected life (in years)        |  | 5                              |   |  | 5                             |   |  | 5    |   |  | 5    |  
|                                | 
|                                |  | Stock Purchase Plan            |  
|                                |  | Three Months EndedJanuary 31,  |   |  | Nine Months EndedJanuary 31,  |  
|                                |  | 2004                           |   |  | 2003                          |   |  | 2004 |   |  | 2003 |  
|Dividend yield                  |  |                               |   |  |                              |   |  |     |   |  |     |  
|Expected volatility             |  | 54                             | % |  | 98                            | % |  | 66   | % |  | 100  | %
|Average risk-free interest rate |  | 1.01                           | % |  | 1.19                          | % |  | 1.02 | % |  | 1.26 | %
|Expected life (in years)        |  | .5                             |   |  | .5                            |   |  | .5   |   |  | .5   |  



The Black-Scholes
option pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of assumptions, including the expected stock
price volatility. We use volatility rates based upon our historical volatility rates. Because our employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of our options. Based upon the above assumptions, the weighted average fair value
per share of options granted under the stock option plans during the three months ended January 31, 2004 and 2003 was $5.01 and $5.45, respectively. The weighted average fair value per share of options granted under the stock option plans during the
nine months ended January 31, 2004 and 2003 was $5.02 and $5.07, respectively. The weighted average fair value per share of shares subject to purchase under the employee stock purchase plan during the three months ended January 31, 2004 and 2003 was
$3.02 and $2.83, respectively. The weighted average fair value per share of shares subject to purchase under the employee stock purchase plan during the nine months ended January 31, 2004 and 2003 was $2.75 and $3.60, respectively.



7



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Had we recognized the fair value of our stock-based compensation plans under the provisions of SFAS
No. 123, our net loss would have been increased to the pro forma amounts below for the three and nine months ended January 31, 2004 and 2003, respectively (in thousands, except per share amounts):



|                                                                                              |  |                               |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                              |  | Three Months EndedJanuary 31, |         |   | Nine Months EndedJanuary 31, |  
|                                                                                              |  | 2004                          |         |   | 2003                         |   |         | 2004 |  |   | 2003    |  
|Net loss as reported                                                                          |  | $                             | (4,038  | ) |                              | $ | (5,688  | )    |  | $ | (22,384 | ) |  | $ | (33,089 | )
|Add: Stock-based employee compensation under APB Opinion No. 25 included in reported net loss |  |                               | 563     |   |                              |   | 662     |      |  |   | 3,676   |   |  |   | 1,273   |  
|Less: Stock-based employee compensation under SFAS No. 123                                    |  |                               | (7,529  | ) |                              |   | (6,691  | )    |  |   | (19,755 | ) |  |   | (25,788 | )
|                                                                                              |  |                               |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                            |  | $                             | (11,004 | ) |                              | $ | (11,717 | )    |  | $ | (38,463 | ) |  | $ | (57,604 | )
|                                                                                              |  |                               |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Net loss per basic and diluted share as reported                                              |  | $                             | (0.08   | ) |                              | $ | (0.12   | )    |  | $ | (0.45   | ) |  | $ | (0.68   | )
|                                                                                              |  |                               |         |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Pro forma net loss per basic and diluted share                                                |  | $                             | (0.21   | ) |                              | $ | (0.24   | )    |  | $ | (0.77   | ) |  | $ | (1.19   | )
|                                                                                              |  |                               |         |   |                              |   |         |      |  |   |         |   |  |   |         |  



Unearned stock compensation



We record unearned stock compensation when we issue
restricted Common Stock or options to purchase Common Stock with exercise prices below fair value at the date of grant. Stock compensation is recognized as an expense over the applicable vesting period of the related options, generally five years,
using the accelerated method of amortization. In addition, during the three and nine months ended January 31, 2004, we recorded $74,000 and $2.5 million, respectively, of stock compensation expense related to the modification of certain stock option
grants for employees we terminated.



Stock compensation related
to stock options granted to non-employees is recognized as an expense over the service period, generally five years. We will be required to remeasure the fair value of these options at each reporting period prior to vesting and then finally at the
vesting dates of these options. As a result, stock compensation for non-employees fluctuates with the movement in the fair value of our Common Stock.



During the three and nine months ended January 31, 2004 and 2003, we terminated employment of individuals for whom we had recorded unearned stock
compensation and had recognized related expense. Upon termination, we record as a recovery within the statements of operations the difference between the actual expense recorded using the accelerated method and the expense that would have been
recorded under the straight-line method. Accordingly, during the three months ended January 31, 2004 and 2003, we reduced unearned stock compensation, which would have been amortized to future expense, by $4,000 and $264,000, respectively. During
the nine months ended January 31, 2004 and 2003, we reduced unearned stock compensation by $272,000 and $809,000, respectively.



Amortization of employee and non-employee stock options, and recoveries due to cancellations were as follows (in thousands):



|                             |  |                               |     |   |                              |   |      |      |  |   |       |   |  |   |       |  
|---------------------------- |  | ----------------------------- | --- | - | ---------------------------- | - | ---- | ---- |  | - | ----- | - |  | - | ----- | -
|                             |  | Three Months EndedJanuary 31, |     |   | Nine Months EndedJanuary 31, |  
|                             |  | 2004                          |     |   | 2003                         |   |      | 2004 |  |   | 2003  |  
|Amortization  employees     |  | $                             | 564 |   |                              | $ | 915  |      |  | $ | 3,937 |   |  | $ | 1,937 |  
|Amortization  non-employees |  |                               | 1   |   |                              |   | 176  |      |  |   | 216   |   |  |   | 723   |  
|Recovery  employees         |  |                               | (1  | ) |                              |   | (253 | )    |  |   | (261  | ) |  |   | (664  | )
|                             |  |                               |     |   |                              |   |      |      |  |   |       |   |  |   |       |  
|Total stock compensation     |  | $                             | 564 |   |                              | $ | 838  |      |  | $ | 3,892 |   |  | $ | 1,996 |  
|                             |  |                               |     |   |                              |   |      |      |  |   |       |   |  |   |       |  



8



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 2Net Loss Per Share



Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of shares of
Common Stock outstanding during the period. Diluted net loss per share is the same as basic net loss per share because the calculation of diluted net loss per share excludes potential shares of Common Stock since their effect is anti-dilutive.
Potentially dilutive shares of Common Stock consist of unvested restricted Common Stock and incremental shares of Common Stock issuable upon the exercise of stock options and warrants.



The following table sets forth the computation of basic and diluted net loss per share for the periods indicated (in
thousands, except per share amounts):



|                                                                                  |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                  |  | Three Months Ended January 31, |        |   | Nine Months Ended January 31, |  
|                                                                                  |  | 2004                           |        |   | 2003                          |   |        | 2004 |  |   | 2003    |  
|Numerator:                                                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                                          |  | $                              | (4,038 | ) |                               | $ | (5,688 | )    |  | $ | (22,384 | ) |  | $ | (33,089 | )
|                                                                                  |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Denominator:                                                                      |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares                                                           |  |                                | 52,010 |   |                               |   | 48,786 |      |  |   | 50,261  |   |  |   | 48,614  |  
|Weighted average unvested shares of restricted Common Stock subject to repurchase |  |                                | (63    | ) |                               |   | (195   | )    |  |   | (122    | ) |  |   | (231    | )
|                                                                                  |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Denominator for basic and diluted calculation                                     |  |                                | 51,947 |   |                               |   | 48,591 |      |  |   | 50,139  |   |  |   | 48,383  |  
|                                                                                  |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Net loss per share:                                                               |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted                                                                 |  | $                              | (0.08  | ) |                               | $ | (0.12  | )    |  | $ | (0.45   | ) |  | $ | (0.68   | )
|                                                                                  |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  



The following table
sets forth potential shares of Common Stock that are not included in the diluted net loss per share calculation above because to do so would be anti-dilutive as of the dates indicated below (in thousands):



|                                            |  |                   |  |       
|------------------------------------------- |  | ----------------- |  | ------
|                                            |  | As of January 31,
|                                            |  | 2004              |  | 2003  
|Warrants to purchase Common Stock           |  |                  |  | 50    
|Unvested Common Stock subject to repurchase |  | 59                |  | 240   
|Options to purchase Common Stock            |  | 18,435            |  | 16,350
|                                            |  |                   |  |       
|Total shares excluded                       |  | 18,494            |  | 16,640
|                                            |  |                   |  |       



Note 3Comprehensive Loss:



Comprehensive loss, which is reflected as a component of
stockholders equity, includes net loss, unrealized gains or losses on investments, and foreign currency translation adjustments, as follows:



|                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------- |  | ------------------------------ | ------ | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                        |  | Three Months Ended January 31, |        |   | Nine Months Ended January 31, |  
|                                        |  | 2004                           |        |   | 2003                          |   |        | 2004 |  |   | 2003    |  
|Net loss                                |  | $                              | (4,038 | ) |                               | $ | (5,688 | )    |  | $ | (22,384 | ) |  | $ | (33,089 | )
|Other comprehensive income (loss):      |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Unrealized gains (loss) on investments  |  |                                | 205    |   |                               |   | (230   | )    |  |   | 43      |   |  |   | 50      |  
|Foreign currency translation adjustment |  |                                | (397   | ) |                               |   |       |      |  |   | (481    | ) |  |   |        |  
|                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Other comprehensive income (loss)       |  | $                              | (192   | ) |                               | $ | (230   | )    |  | $ | (438    | ) |  | $ | 50      |  
|                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  
|Total comprehensive loss                |  | $                              | (4,230 | ) |                               | $ | (5,918 | )    |  | $ | (22,822 | ) |  | $ | (33,039 | )
|                                        |  |                                |        |   |                               |   |        |      |  |   |         |   |  |   |         |  



9



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 4Business Combinations:



During the nine months ended January 31, 2004, we acquired Eigner US Inc. (Eigner) and TRADEC, Inc.
(Tradec). During fiscal 2003, we acquired oneREV, Inc. (oneREV) and ProductFactory, Inc. (ProductFactory). Each transaction was accounted for under the purchase method of accounting and, accordingly, the results
of operations of each acquisition are included in the accompanying unaudited condensed consolidated statements of operations since the acquisition date.



Eigner



On August 11, 2003, we acquired all of the outstanding capital stock of Eigner, a provider of complementary product lifecycle management solutions. The acquisition of Eigner allows us to have a stronger presence in
the automotive supply chain, industrial equipment, aerospace, and defense industries, as well as in certain geographic markets.



The total purchase price of $19.3 million consisted of $2.8 million in cash, the issuance of 1.8 million shares of Agile Common Stock valued at $15.6
million, and $894,000 in direct transaction costs. The value of the share consideration was based upon the average of the closing market prices of Agile Common Stock on the three trading days before and after the announcement of the acquisition on
August 5, 2003, which was $8.71.



In connection with the
acquisition of Eigner, we paid approximately $1.5 million in hiring bonuses to certain persons who were employees of Eigner at the date of the acquisition. We also implemented a plan to terminate approximately 10% of the combined company workforce,
for a total of 63 employees, to eliminate duplicative activities and reduce the cost structure of the combined company. The terminations included 30 Eigner employees and 33 Agile employees, and were made across all business functions and geographic
regions. Net of these terminations, our overall headcount increased by 89 employees, across all business functions, as a result of the Eigner acquisition. The estimated cost for related severance, benefits, payroll taxes and other associated costs
totaled $3.3 million, of which $2.2 million was related to the termination of the Eigner employees and $1.1 was related to the termination of the Agile employees. As of October 31, 2003, all employees identified in the plan had been notified. Both
the hiring bonuses and the severance related costs for the Eigner employees, totaling $3.7 million, were accrued for at the time of the acquisition and have been recognized as a liability assumed in the business combination. The severance related
costs for the Agile employees of $1.1 million were included in restructuring and other charges during the second quarter of fiscal 2004 (see Note 6Restructuring and Other Charges for additional information). The Eigner employee
termination obligations are expected to be paid through May 2004. The Agile employee termination obligations are expected to be paid through March 2004.



In addition, we agreed to pay approximately $1.7 million in retention bonuses to certain persons who were employees of Eigner at the date of the
acquisition and remain employees of Agile for six months. During the three and nine months ended January 31, 2004, we recorded $868,000 and $1.7 million, respectively, of acquisition-related compensation for these bonuses. These bonuses were paid in
February 2004.



10



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The aggregate purchase price for the Eigner acquisition has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition as follows (in thousands):



|                                         |  |   |         |  
|---------------------------------------- |  | - | ------- | -
|Tangible assets acquired:                |  |   |         |  
|Cash and cash equivalents                |  | $ | 3,015   |  
|Accounts receivable                      |  |   | 2,478   |  
|Property and equipment                   |  |   | 1,361   |  
|Other assets                             |  |   | 2,278   |  
|Liabilities assumed:                     |  |   |         |  
|Accounts payable                         |  |   | (5,670  | )
|Accrued expenses and other liabilities   |  |   | (12,590 | )
|Deferred revenue                         |  |   | (3,956  | )
|Identifiable intangible assets acquired: |  |   |         |  
|In-process research and development      |  |   | 500     |  
|Other identifiable intangible assets:    |  |   |         |  
|Existing technology                      |  |   | 1,300   |  
|Customer relationships                   |  |   | 4,000   |  
|Non-compete agreements                   |  |   | 1,200   |  
|Goodwill                                 |  |   | 25,369  |  
|                                         |  |   |         |  
|Total                                    |  | $ | 19,285  |  
|                                         |  |   |         |  



The tangible assets
acquired and liabilities assumed were recorded at their fair values, which approximated their carrying amounts at the acquisition date. We determined the valuation of the identifiable intangible assets using future revenue assumptions and a
valuation report from an independent appraiser. The amounts allocated to the identifiable intangible assets were determined through established valuation techniques accepted in the technology and software industries. In calculating the value of the
acquired in-process research and development (IPR&D), the independent appraiser gave consideration to relevant market size and growth factors, expected industry trends, the anticipated nature and timing of new product introductions
by us and our competitors, individual product sales cycles, and the estimated lives of each of the products derived from the underlying technology. The value of the acquired IPR&D reflects the relative value and contribution of the acquired
research and development. Consideration was given to the stage of completion, the complexity of the work completed to date, the difficulty of completing the remaining development, costs already incurred, and the expected cost to complete the project
in determining the value assigned to the acquired IPR&D. The projects have been subsequently completed within our estimates. The amounts allocated to the acquired IPR&D were immediately expensed in the period the acquisition was completed
because the projects associated with the IPR&D efforts had not yet reached technological feasibility and no future alternative uses existed for the technology. Research and development costs to bring the products acquired to technological
feasibility are not expected to be significant. The income approach, which includes an analysis of the cash flows and risks associated with achieving such cash flows, was the primary technique utilized in valuing the other identifiable intangible
assets. Key assumptions included discount factors ranging from 19% to 31%, and estimates of revenue growth, maintenance renewal rates, cost of sales, operating expenses and taxes. The purchase price in excess of the net liabilities assumed and the
identifiable intangible assets acquired was allocated to goodwill.



Tradec



On September 30, 2003, we acquired all of the outstanding
capital stock of Tradec, which develops cost management software solutions that enable manufacturing companies to reduce direct material costs, increase productivity and improve supplier performance. The acquisition enhances our current cost
management offering by leveraging Tradecs domain expertise for addressing key aspects of direct materials cost and performance management. We will be able to deliver increased analytics capabilities and supplier collaboration for our customers
to drive product profitability. The financial terms of the transaction were not material to our financial statements.



11



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



oneREV



On December 20, 2002, we acquired all of the outstanding capital stock of oneREV, a developer of supply chain management software and services. The
acquisition provides us with important enabling technology, which benefits our customers by speeding the exchange of information between our product and external information sources. The total purchase price of $1.9 million consisted of $1.7 million
in cash and $197,000 in direct transaction costs. Of the total purchase price, $82,000 was allocated to cash, accounts receivable, property and equipment, accounts payable and other liabilities, and notes payable, and the remainder was allocated to
in-process technology ($300,000), other identifiable intangible assets, consisting of developed technologies ($700,000), and goodwill ($840,000).



ProductFactory



On March 27, 2003, we acquired all of the outstanding capital stock of ProductFactory, a product development program and portfolio management company. The
acquisition reinforces our investment and commitment to our Product Portfolio Management offering, Program Execution, giving customers accelerated time-to-market, reduced costs and improved quality across the product lifecycle. The total purchase
price of $2.6 million consisted of $2.5 million in cash and $80,000 in direct transaction costs. Additional consideration of up to $2.5 million may be earned, based upon future net revenues from sales of the product, through no later than July 31,
2004. These additional amounts will be recorded as additional purchase price, if earned. Of the total purchase price, $1.9 million was allocated to net liabilities assumed, including accounts payable and other liabilities, and notes payable, and the
remainder was allocated to in-process technology ($100,000), other identifiable intangible assets, consisting of developed technologies ($400,000), and goodwill ($3.9 million).



Pro forma financial information



The following table presents the unaudited pro forma financial information for Eigner, Tradec, oneREV and us for the three and nine months ended January
31, 2004 and 2003, respectively, as if the acquisitions had occurred on May 1, 2002, after giving effect to certain purchase accounting adjustments (in thousands, except per share amounts):



|                                               |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                               |  | Three Months EndedJanuary 31, |        |   | Nine Months EndedJanuary 31, |  
|                                               |  | 2004                          |        |   | 2003                         |   |         | 2004 |  |   | 2003    |  
|Pro forma net revenue                          |  | $                             | 26,183 |   |                              | $ | 24,177  |      |  | $ | 76,903  |   |  | $ | 72,177  |  
|                                               |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Pro forma net loss                             |  | $                             | (2,790 | ) |                              | $ | (10,187 | )    |  | $ | (21,725 | ) |  | $ | (48,845 | )
|                                               |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Pro forma net loss per basic and diluted share |  | $                             | (0.05  | ) |                              | $ | (0.20   | )    |  | $ | (0.43   | ) |  | $ | (0.97   | )
|                                               |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  
|Pro forma shares outstanding                   |  |                               | 52,142 |   |                              |   | 50,520  |      |  |   | 50,802  |   |  |   | 50,312  |  
|                                               |  |                               |        |   |                              |   |         |      |  |   |         |   |  |   |         |  



These results are
presented for illustrative purposes only and are not necessarily indicative of the actual operating results or financial position that would have occurred if the transactions had been consummated on May 1, 2002.



Pro forma financial information giving effect to the acquisition of
ProductFactory has not been presented since the pro forma financial information would not differ materially from our historical results.



12



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 5Goodwill and Intangible Assets:



Goodwill



The change in carrying amount of goodwill for the nine months ended January 31, 2004, is as follows (in thousands):



|                                                              |  |   |       
|------------------------------------------------------------- |  | - | ------
|Balance as of April 30, 2003                                  |  | $ | 5,150 
|Earnout payments to the stockholders of acquired companies(1) |  |   | 1,189 
|Goodwill related to acquisitions(2)                           |  |   | 27,646
|                                                              |  |   |       
|Balance as of January 31, 2004                                |  | $ | 33,985
|                                                              |  |   |       

---

|(1) | During the nine months ended January 31, 2004, we paid $1.2 million of additional consideration to the former ProductFactory stockholders.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Goodwill related to our acquisition of Eigner and Tradec during the nine months ended January
31, 2004. See Note 4Business Combinations for additional information.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is no longer subject to amortization. Rather, we evaluate goodwill for
impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.



Intangible Assets



The components of acquired identifiable intangible assets are as follows (in thousands):



|                       |  |                     |       |                         |   |        |                   |  |                     |       |                         |   |       |                   |   |      |   |  |   |      
|---------------------- |  | ------------------- | ----- | ----------------------- | - | ------ | ----------------- |  | ------------------- | ----- | ----------------------- | - | ----- | ----------------- | - | ---- | - |  | - | -----
|                       |  | January 31, 2004    |       | April 30, 2003         
|                       |  | GrossCarryingAmount |       | AccumulatedAmortization |   |        | NetCarryingAmount |  | GrossCarryingAmount |       | AccumulatedAmortization |   |       | NetCarryingAmount
|Developed technologies |  | $                   | 2,600 |                         | $ | (542   | )                 |  | $                   | 2,058 |                         | $ | 1,190 |                   | $ | (110 | ) |  | $ | 1,080
|Customer relationships |  |                     | 4,482 |                         |   | (883   | )                 |  |                     | 3,599 |                         |   |      |                   |   |     |   |  |   |     
|Non-compete agreements |  |                     | 1,200 |                         |   | (567   | )                 |  |                     | 633   |                         |   |      |                   |   |     |   |  |   |     
|                       |  |                     |       |                         |   |        |                   |  |                     |       |                         |   |       |                   |   |      |   |  |   |      
|                       |  | $                   | 8,282 |                         | $ | (1,992 | )                 |  | $                   | 6,290 |                         | $ | 1,190 |                   | $ | (110 | ) |  | $ | 1,080
|                       |  |                     |       |                         |   |        |                   |  |                     |       |                         |   |       |                   |   |      |   |  |   |      



All of our acquired
identifiable intangible assets are subject to amortization and have approximate original estimated weighted-average useful lives as follows: Developed technologiesfour years; Customer relationshipsthree years; Non-compete
agreementsone year. No significant residual value is estimated for the intangible assets.



13



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



As of January 31, 2004, the estimated future amortization expense of acquired identifiable intangible
assets is as follows (in thousands):



|                              |  |   |      
|----------------------------- |  | - | -----
|Fiscal Years:                 |  |  
|2004 (remaining three months) |  | $ | 835  
|2005                          |  |   | 2,470
|2006                          |  |   | 2,137
|2007                          |  |   | 755  
|2008                          |  |   | 93   
|Thereafter                    |  |   |     
|                              |  |   |      
|                              |  | $ | 6,290
|                              |  |   |      



Note 6Restructuring and Other
Charges:



As a result of unfavorable global economic
conditions and a reduction in information technology spending around the world throughout fiscal 2002, during the fourth quarter of fiscal 2002, we announced a worldwide restructuring program to reduce expenses to align our operations and cost
structure with market conditions (the 2002 Restructuring). During the fourth quarter of fiscal 2002, we recorded restructuring and other charges of $6.3 million related to the 2002 Restructuring, which consisted primarily of a reduction
in personnel, the consolidation of excess facilities, abandonment of certain assets in connection with the consolidation of excess facilities, and a write-down of non-refundable prepaid software licenses. As of January 31, 2004, the amount remaining
of the 2002 Restructuring obligations was $205,000.



Throughout
the first half of fiscal 2003, we continued to evaluate the economic conditions and initiated a further restructuring of our operations (the 2003 Restructuring). During the second quarter of fiscal 2003, we recorded restructuring and
other charges of $7.8 million related to the 2003 Restructuring, which consisted primarily of the consolidation of excess facilities, abandonment of certain assets in connection with the consolidation of excess facilities, and a write-down of
non-refundable prepaid software licenses. As of January 31, 2004, the amount remaining of the 2003 Restructuring obligations was $2.8 million.



During the second quarter of fiscal 2004, we recorded total restructuring and other charges of $9.2 million (the 2004 Restructuring) as
follows:



In connection with our move to our new headquarters
in San Jose, California, during the second quarter of fiscal 2004, we recorded restructuring and other charges of $7.5 million, which was comprised of (i) $5.5 million related to the fair value of the remainder of our outstanding lease commitments
for properties that we vacated in September 2003, net of the fair value of estimated sublease income, and net of deferred rent of $581,000 related to the vacated properties, and (ii) $2.0 million related to the abandonment of certain long-lived
assets, including leasehold improvements, furniture and fixtures, and computer equipment.



In connection with our acquisition of Eigner during the second quarter of fiscal 2004, we recorded additional restructuring and other charges of $1.7 million. As discussed in Note 4Business
Combinations under Eigner, we terminated 33 Agile employees, across all business functions and geographic regions and recorded a restructuring and other charge of $1.1 million for the related severance, benefits, payroll taxes and
other associated costs. We recorded an additional $623,000 of other charges related to the write-down of certain other assets, including a $471,000 impairment of non-refundable prepaid software license fees for which we determined that the carrying
value exceeded its net realizable value as a result of our decision to discontinue selling the products in which the third party licensed software was embedded, due to a comparable product acquired from Eigner. As of January 31, 2004, the amount
remaining of the 2004 Restructuring obligations was $4.7 million.



14



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Our restructuring estimates will be reviewed and revised quarterly and may result in an increase to
restructuring and other charges.



Summary of Restructuring
Obligations



The significant activity within and
components of the restructuring and other charges as of and for the nine months ended January 31, 2004 are as follows (in thousands):



|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  
|---------------------------------------------------------- |  | ------------------------ | ------ | - | ---------------------- | - | ------ | --------------------- |  | - | ------------ | - |  | ----- | ---- | - |  | - | ------ | -
|                                                           |  | EmployeeTerminationCosts |        |   | Facility-Related Costs |   |        | AssetAbandonmentCosts |  |   | OtherCharges |   |  | Total |     
|Restructuring obligations at April 30, 2003(1)             |  | $                        |       |   |                        | $ | 4,251  |                       |  | $ |             |   |  | $     |     |   |  | $ | 4,251  |  
|2004 Restructuring charges(2)                              |  |                          | 1,092  |   |                        |   | 5,485  |                       |  |   | 2,001        |   |  |       | 623  |   |  |   | 9,201  |  
|Cash payments                                              |  |                          | (1,066 | ) |                        |   | (2,639 | )                     |  |   |             |   |  |       |     |   |  |   | (3,705 | )
|Non-cash charges                                           |  |                          |       |   |                        |   | 581    |                       |  |   | (2,001       | ) |  |       | (623 | ) |  |   | (2,043 | )
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  
|Restructuring obligations at January 31, 2004(3)           |  | $                        | 26     |   |                        | $ | 7,678  |                       |  | $ |             |   |  | $     |     |   |  | $ | 7,704  |  
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  
|Included in accrued expenses and other current liabilities |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  | $ | 4,317  |  
|Included in accrued restructuring, non-current             |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   | 3,387  |  
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  | $ | 7,704  |  
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  

---

|(1) | The 2002 Restructuring and 2003 Restructuring and related obligations through April 30, 2003 were recorded in an amount equal to the gross value of the obligation
without consideration to the net present value of such obligations, in accordance with EITF No. 94-3 and EITF No. 88-10.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The 2004 Restructuring charges and related obligations were recorded at fair value, after giving effect to the fair value of the related obligations, in accordance
with SFAS No. 146.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The remaining employee termination obligations are expected to be paid through March 2004. The remaining facility-related obligations are expected to be paid through
November 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 7Commitments and Contingencies:



Services commitments



In connection with our acquisition of Eigner in August 2003, we assumed a
commitment to purchase consulting services from a vendor to Eigner. As of January 31, 2004, our remaining commitment provides for quarterly payments through fiscal 2007 totaling approximately $1.6 million.



Indemnification obligations



Our software license agreements typically provide for indemnification of
customers for intellectual property infringement claims. To date, no such claims have been filed against us. We also warrant to customers that our software products operate substantially in accordance with specifications. Historically, minimal costs
have been incurred related to product warranties, and as such no accruals for warranty costs have been made. In addition, we are obligated to indemnify our officers and directors under the terms of indemnity agreements entered into with them, as
well as pursuant to our certificate of incorporation, bylaws, and applicable Delaware law. To date, we have not incurred any costs related to these indemnifications.



15



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Litigation



On or around October 25, 2001, a class action lawsuit was filed in the Southern District of New York against Agile Software Corporation, Bryan D. Stolle
and Thomas P. Shanahan (collectively the Agile Defendants) and several investment banking firms that served as underwriters of our initial public offering and secondary offering. The case is now captioned In re Agile Software, Inc.
Initial Public Offering Securities Litigation, 01 CIV 9413 (SAS), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). The operative amended complaint is brought purportedly on behalf of all persons who
purchased our Common Stock from August 19, 1999 through December 6, 2000. It alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the
registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had
arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed.



Similar allegations were made in other lawsuits challenging over 300 other
initial public offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes and all defendants moved to dismiss. On February 19, 2003, the Court dismissed the claims under the Securities Act of 1933
with respect to our initial public offering, but not the secondary offering. The Court denied the motion to dismiss the Section 10(a) claim against us, but granted the motion as to the individual defendants.



We have accepted a settlement proposal presented to all issuer defendants. In
this settlement, plaintiffs will dismiss and release all claims against the Agile Defendants, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases, and for the
assignment or surrender of certain claims we may have against the underwriters. The Agile Defendants will not be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement exceeds
the amount of the insurance coverage, a circumstance which we do not believe will occur. The settlement will require approval of the Court, which cannot be assured, after class members are given the opportunity to object to the settlement or opt out
of the settlement.



We are also subject to various other claims
and legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on our business, financial condition or results
of operations.



Note 8Segment and Geographic Information:



We have one operating segment, product lifecycle
management solutions. We market our products in the United States and in foreign countries through our direct sales force and indirect distribution channels.



During the three months ended January 31, 2004 and 2003, revenues from customers located outside of North America were approximately 42% and 18% of total
revenues, respectively. During the nine months ended January 31, 2004 and 2003, revenues from customers located outside of North America were approximately 37% and 23% of total revenues, respectively. Revenues from customers located outside of North
America during the three and nine months ended January 31, 2004 were derived primarily from sales to customers in Europe and, to a lesser extent, the Asia-Pacific region. Revenues from customers located outside of North America during the three and
nine months ended January 31, 2003 were derived primarily from sales to customers in the Asia-Pacific region and, to a lesser extent, Europe. The increase in sales to customers located outside of North America during the three- and nine-month
periods was primarily related to our acquisition of Eigner, whose customer base was largely located in Europe.



16



---

##### Table of Contents

AGILE SOFTWARE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 9Foreign Currency Translation:



In connection with our acquisition of Eigner during the nine months ended January 31, 2004, we assumed an obligation with a
vendor to Eigner, providing for quarterly payments denominated in Euros through fiscal 2007. As the obligation was denominated in Euros, and the functional currency of the subsidiary holding the obligation was the U.S. Dollar, we are required to
remeasure the value of the obligation at the end of each period. As a result of the Euro strengthening against the U.S. Dollar during the period, a remeasurement of the obligation at the end of such period to the functional currency, net of payments
made, resulted in an unrealized loss from foreign currency translation of $743,000.



17



---

##### Table of Contents

Item 2. Managements Discussion & Analysis of Financial Condition and Results of Operations



The information in this discussion contains forward-looking statements (within the meaning Section 21E of the Securities Exchange Act of 1934, as
amended). Such statements are based upon current expectations that involve risks and uncertainties, and we undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date
of this report. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, words such as may, will, should, estimates,
predicts, potential, continue, strategy, believes, anticipates, plans, expects, intends, and similar expressions are intended to identify
forward-looking statements. Our actual results and the timing of certain events may differ materially from those reflected in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited
to, those discussed below, as well as in the Risk Factors section included in our Annual Report on Form 10-K, filed on July 28, 2003 with the Securities and Exchange Commission. The following discussion should be read in conjunction with
the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. Our fiscal year ends on April 30 of each year.



Business Overview



We develop and sell an integrated suite of product lifecycle management (PLM) software products. Our solutions enable our customers to
accelerate their time-to-market and revenue, reduce costs, improve quality, ensure regulatory compliance and drive innovation throughout the product lifecycle.



At the core of the Agile PLM solution is the product record, the complex set of information that uniquely defines all aspects of a product at each
stage in its lifecycle. The product record includes all the information required by a company, its supply network and its customers to design, source, buy, build, sell service and dispose of products. Our products provide a single enterprise view of
the product record and enable our customers and their partners to manage the product record and the business processes that contribute to and utilize the product record.



We believe that understanding the following key developments is helpful to an understanding of our overall business.



Increased Product Breadth



We sold our first PLM product in 1996. At that time, our offering consisted
of a single product. Over time, we have added features, functionality and products to our offering both through internal development and acquisition. In January 2004, we began shipping Agile 9, our most comprehensive PLM product offering to date. As
of January 31, 2004, we have licensed products to nearly 1,200 companies worldwide.



Expanded Industry Focus



We were
initially focused on solutions targeted principally for customers in the high technology and, to a lesser extent, life sciences industries. As we have grown our business and expanded our product suite, we have also expanded our industry focus. While
Electronics & High Technology still represents the single largest industry for us, we now have significant customers and activities in all of the following industries:



| |  | Aerospace & Defense;
| | - | --------------------



| |  | Automotive Supply Chain;
| | - | ------------------------



| |  | Consumer Packaged Goods;
| | - | ------------------------



| |  | Electronics & High Technology;
| | - | ------------------------------



| |  | Industrial Products;
| | - | --------------------



| |  | Medical Device; and
| | - | -------------------



| |  | Pharmaceutical.
| | - | ---------------



18



---

##### Table of Contents

Improved Geographic Balance



We have made significant strides toward geographically balancing our business.



| |  | Revenues. For the three months ended January 31, 2004, revenues from customers located outside of North America represented 42% of total revenues, which compares to only 18%
for the prior year period. While we expect this mix to vary from period to period, we expect to continue to see a reasonably balanced geographic distribution of revenues in future periods.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Product Development. In addition to our development activities in San Jose, we established development centers in India and China in fiscal 2003 and, as a result of our
acquisition of Eigner (as discussed below), we now have a development center in Germany.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Acquisitions



Our strategy has been, and continues to be, to expand our business both organically and through acquisitions of complementary products, technologies and companies. We have made the following acquisitions over the past two years:



| |  | oneRev, Inc., acquired in December 2002;
| | - | ----------------------------------------



| |  | ProductFactory, Inc.,acquired in March 2003;
| | - | --------------------------------------------



| |  | Eigner US Inc., acquired in August 2003; and
| | - | --------------------------------------------



| |  | TRADEC, Inc., acquired in September 2003.
| | - | -----------------------------------------



The acquisition of Eigner US Inc. (Eigner) provided us with a stronger presence in the automotive supply chain, industrial equipment,
aerospace, and defense industries, as well as in certain geographic markets. The results of operations for Eigner are included in our statements of operations beginning as of the acquisition date. In connection with the acquisition of Eigner, we
implemented a plan to terminate approximately 10% of the combined company workforce, for a total of 63 employees, to eliminate duplicative activities and reduce the cost structure of the combined company. The terminations included 30 Eigner
employees and 33 Agile employees, and were made across all business functions and geographic regions. Net of these terminations, our overall headcount increased by 89 employees, across all business functions, as a result of the Eigner acquisition.
The estimated cost for related severance, benefits, payroll taxes and other associated costs totaled $3.3 million, of which $2.2 million was related to the termination of the Eigner employees and $1.1 was related to the termination of the Agile
employees. The severance related costs for the Eigner employees of $2.2 million were accrued for at the time of the acquisition and have been recognized as a liability assumed in the business combination. The severance related costs for the Agile
employees of $1.1 million were included in restructuring and other charges during the nine months ended January 31, 2004.



19



---

##### Table of Contents

Restructurings



We have taken a number of actions to reduce our expense levels to better align our operations and cost structure with current and anticipated market
conditions, as follows:



| |  | During the fourth quarter of fiscal 2002, we recorded restructuring and other charges of $6.3 million, primarily related to the reduction of 75 employees, the impairment of certain
non-refundable prepaid license fees, the abandonment of certain property and equipment, and the consolidation of excess facilities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Throughout the first half of fiscal 2003, we continued to evaluate the economic conditions and initiated a further restructuring of our operations. During the second quarter of
fiscal 2003, we recorded restructuring and other charges of $7.8 million, primarily related to the consolidation of additional excess facilities, the further impairment of certain non-refundable prepaid license fees, and the abandonment of
additional property and equipment.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the second quarter of fiscal 2004, in connection with our move to our new headquarters in San Jose, California, we recorded restructuring and other charges of $7.5 million,
primarily related our outstanding lease commitments for properties that we vacated in September 2003 and the abandonment of certain long-lived assets.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Also in the second quarter of fiscal 2004, in connection with our acquisition of Eigner, we recorded additional restructuring and other charges of $1.7 million primarily related to
a reduction of 33 employees, to eliminate duplicative activities and reduce the cost structure of the combined company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are continuing to closely monitor the market and our expense levels to determine if further actions may be needed.



Overview of Our Results



We derive revenues from the license of software products under software license agreements and from the delivery of
associated professional and maintenance services. Our license revenues are comprised of fees charged for the use of our products licensed under perpetual or term-based arrangements. Our professional services and maintenance revenues are comprised of
fees charged for implementation services and fees charged for post contract customer support (i.e., technical support and product updates). Our implementation services are typically provided over a period of three to six months subsequent to the
signing of a software license arrangement. Post-contract customer support is generally purchased at the time of initial license purchase, and renewed annually thereafter. Post-contract customer support revenue is recognized ratably over the support
period, generally 12 months.



Throughout fiscal 2003 and
continuing through the third quarter of fiscal 2004, the primary factor that has impacted our operations and financial performance has been weak demand for enterprise software resulting from the continuing weakness of the global and U.S. economies.
While there are some signs that the overall economic conditions are improving, demand for enterprise software continues to be weak, directly affecting our ability to increase our revenues.



Despite the difficult economic challenges we faced during the third quarter,
we were able to achieve the following results:



| |  | We recorded record quarterly total revenues of $26.2 million, a 6% increase from total revenues of $24.7 million in the second quarter of fiscal 2004, and a 46% increase from total
revenues of $17.9 million in the third quarter of the prior year.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We maintained a cash and investments balance as of January 31, 2004 of $243.1 million, a decrease of $1.6 million from $244.7 million at the end of the second quarter.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We completed our integration of Eigner operationally across all functional areas, and several of our customers have begun to implement integrated Agile/Eigner solutions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



20



---

##### Table of Contents

| |  | In January 2004, we delivered our most comprehensive product release to-date, Agile 9. This product release provides extensive new features and capabilities, as well as an
enterprise technology platform providing customers a broader, deeper PLM solution.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Critical Accounting Policies



We have identified the policies below as critical to our business operations and understanding of our financial condition and results of operations. A critical accounting policy is one that is both material to the presentation of our
financial statements and requires us to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. These policies may require us to make assumptions about matters that are
highly uncertain at the time of the estimate, and different estimates that we could have used, or changes in the estimate that are reasonably likely to occur, may have a material impact on our financial condition or results of operations.



| |  | Revenue Recognition
| | - | -------------------



| |  | Allowance for Doubtful Accounts
| | - | -------------------------------



| |  | Investments
| | - | -----------



| |  | Prepaid Software License Fees
| | - | -----------------------------



| |  | Restructuring Reserves
| | - | ----------------------



| |  | Stock Options and Warrants
| | - | --------------------------



| |  | Business Combinations and Acquired Intangible Assets
| | - | ----------------------------------------------------



Additional information about these critical accounting policies may be found in the Managements Discussion & Analysis of Financial
Condition and Results of Operations section included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2003. Other than the addition of our Business Combinations and Acquired Intangible Assets policy, as discussed below,
there have been no changes to these critical accounting policies subsequent to April 30, 2003.



Business Combinations and Acquired Intangible Assets



We account for our purchases of acquired companies in accordance with Statement of Financial Accounting Standards, or SFAS, No. 141, Business
Combinations, and account for the related acquired intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. In accordance with SFAS No. 141, we allocate the cost of the acquired companies to the
identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount being classified as goodwill. Certain intangible assets, such as developed technologies, are amortized to expense over time, while
in-process research and development costs (IPR&D), if any, are immediately expensed in the period the acquisition is completed. Identifiable intangible assets are currently amortized over a weighted-average of one to three years
using the straight-line method.



The majority of entities we
acquire do not have significant tangible assets and, as a result, a significant portion of the purchase price is typically allocated to intangible assets and goodwill. Our future operating performance will be impacted by the future amortization of
intangible assets, potential charges related to IPR&D for future acquisitions, and potential impairment charges related to goodwill. Accordingly, the allocation of the purchase price to intangible assets and goodwill has a significant impact on
our future operating results. The allocation of the purchase price of the acquired companies to intangible assets and goodwill requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be
generated by the acquired assets and the appropriate discount rate for these cash flows. Should different conditions prevail, material write-downs of intangible assets and/or goodwill could occur.



21



---

##### Table of Contents

Under SFAS No. 142, goodwill is no longer subject to amortization. Rather, we evaluate goodwill for
impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting units
carrying value, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes
comparable companies data. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and we then compare the implied fair value of the goodwill to its carrying amount to determine the
impairment loss, if any. Annual goodwill impairment testing will be performed, at a minimum, during the fourth quarter of each fiscal year.



22



---

##### Table of Contents

Results of Operations



The following table sets forth selected unaudited condensed consolidated financial data for the periods indicated, expressed as a percentage of total
revenues.



|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|-------------------------------------------- |  | ----------------------------- | -- |  | ---------------------------- | -- |  | ---- | -- |  | ---- | --
|                                             |  | Three Months EndedJanuary 31, |    |  | Nine Months EndedJanuary 31, |   
|                                             |  | 2004                          |    |  | 2003                         |    |  | 2004 |    |  | 2003 |   
|Revenues:                                    |  |                               |    |  |                              |    |  |      |    |  |      |   
|License                                      |  | 36                            | %  |  | 41                           | %  |  | 36   | %  |  | 42   | % 
|Professional services and maintenance        |  | 64                            |    |  | 59                           |    |  | 64   |    |  | 58   |   
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Total revenues                               |  | 100                           |    |  | 100                          |    |  | 100  |    |  | 100  |   
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Cost of revenues:                            |  |                               |    |  |                              |    |  |      |    |  |      |   
|License                                      |  | 4                             |    |  | 3                            |    |  | 4    |    |  | 4    |   
|Professional services and maintenance        |  | 32                            |    |  | 25                           |    |  | 30   |    |  | 27   |   
|Stock compensation                           |  | 1                             |    |  |                             |    |  |     |    |  |     |   
|Acquisition-related compensation             |  | 1                             |    |  |                             |    |  | 1    |    |  |     |   
|Amortization of intangible assets            |  | 1                             |    |  |                             |    |  | 1    |    |  |     |   
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Total cost of revenues                       |  | 39                            |    |  | 28                           |    |  | 36   |    |  | 31   |   
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Gross margin                                 |  | 61                            |    |  | 72                           |    |  | 64   |    |  | 69   |   
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Operating expenses:                          |  |                               |    |  |                              |    |  |      |    |  |      |   
|Sales and marketing:                         |  |                               |    |  |                              |    |  |      |    |  |      |   
|Other sales and marketing                    |  | 38                            |    |  | 55                           |    |  | 40   |    |  | 63   |   
|Stock compensation                           |  | 1                             |    |  | 4                            |    |  | 4    |    |  | 3    |   
|Research and development:                    |  |                               |    |  |                              |    |  |      |    |  |      |   
|Other research and development               |  | 23                            |    |  | 31                           |    |  | 25   |    |  | 40   |   
|Stock compensation                           |  |                              |    |  |                             |    |  |     |    |  |     |   
|General and administrative:                  |  |                               |    |  |                              |    |  |      |    |  |      |   
|Other general and administrative             |  | 9                             |    |  | 10                           |    |  | 9    |    |  | 10   |   
|Stock compensation                           |  |                              |    |  |                             |    |  | 1    |    |  |     |   
|Acquisition-related compensation             |  | 2                             |    |  |                             |    |  | 2    |    |  |     |   
|Amortization of intangible assets            |  | 2                             |    |  |                             |    |  | 2    |    |  |     |   
|Acquired in-process research and development |  |                              |    |  | 2                            |    |  | 1    |    |  | 1    |   
|Restructuring and other charges              |  |                              |    |  |                             |    |  | 13   |    |  | 15   |   
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Total operating expenses                     |  | 75                            |    |  | 102                          |    |  | 97   |    |  | 132  |   
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Loss from operations                         |  | (14                           | )  |  | (30                          | )  |  | (33  | )  |  | (63  | ) 
|Other income (expense):                      |  |                               |    |  |                              |    |  |      |    |  |      |   
|Interest and other income, net               |  | 3                             |    |  | 7                            |    |  | 3    |    |  | 8    |   
|Loss from foreign currency translation       |  | (3                            | )  |  |                             |    |  | (1   | )  |  |     |   
|Impairment of investments                    |  |                              |    |  | (6                           | )  |  |     |    |  | (7   | ) 
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Loss before provision for income taxes       |  | (14                           | )  |  | (29                          | )  |  | (31  | )  |  | (62  | ) 
|Provision for income taxes                   |  | 1                             |    |  | 2                            |    |  | 1    |    |  | 1    |   
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   
|Net loss                                     |  | (15                           | %) |  | (31                          | %) |  | (32  | %) |  | (63  | %)
|                                             |  |                               |    |  |                              |    |  |      |    |  |      |   



Comparison of the Three and Nine
Months Ended January 31, 2004 and 2003



Revenues



During the three and nine months ended January 31, 2004, no one customer
accounted for more than 10% of total revenues. During the three months ended January 31, 2003, one customer accounted for 16% of total revenues. During the three and nine months ended January 31, 2003, another customer accounted for 10% and 11% of
total revenues, respectively. During the three months ended January 31, 2004 and 2003, revenues from customers located



23



---

##### Table of Contents

outside of North America were approximately 42% and 18% of total revenues, respectively. During the nine months ended
January 31, 2004 and 2003, revenues from customers located outside of North America were approximately 37% and 23% of total revenues, respectively. Revenues from customers located outside of North America during the three and nine months ended
January 31, 2004 were derived primarily from sales to customers in Europe and, to a lesser extent, the Asia-Pacific region. Revenues from customers located outside of North America during the three and nine months ended January 31, 2003 were derived
primarily from sales to customers in the Asia-Pacific region and, to a lesser extent, Europe. The increases in sales to customers located outside of North America during the three and nine-month ended January 31, 2004 was primarily related to our
acquisition of Eigner, whose customer base was largely located in Europe.



For the three months ending April 30, 2004, we expect total revenues to remain comparable to our results for the three months ended January 31, 2004.



License Revenues



|                                  |  |                                    |       |   |          |   |       |                               |      |    |          |      |   |        |   |  |   |        |   |  |    |  
|--------------------------------- |  | ---------------------------------- | ----- | - | -------- | - | ----- | ----------------------------- | ---- | -- | -------- | ---- | - | ------ | - |  | - | ------ | - |  | -- | -
|                                  |  | Three Months Ended January 31,     |       |   | % Change |   |       | Nine Months Ended January 31, |      |    | % Change |     
|                                  |  | 2004                               |       |   | 2003     |   |       |                               | 2004 |    |          | 2003 |   |       
|                                  |  | (in thousands, except percentages) |      
|License revenues                  |  | $                                  | 9,527 |   |          | $ | 7,324 |                               |      | 30 | %        |      | $ | 25,154 |   |  | $ | 21,792 |   |  | 15 | %
|As a percentage of total revenues |  |                                    | 36    | % |          |   | 41    | %                             |      |    |          |      |   | 36     | % |  |   | 42     | % |  |    |  



The increase in
license revenues in absolute dollars during the three- and nine-month periods was primarily due to the addition of Eigner products and customers, as well as increases in sales of our newer products to new and existing customers. The decrease in
license revenues as a percentage of total revenues during the three- and nine-month periods was primarily due to a more significant increase in professional services and maintenance revenues as discussed below.



Professional Services and Maintenance Revenues



|                                               |  |                                    |        |   |          |   |        |                               |      |    |          |      |   |        |   |  |   |        |   |  |    |  
|---------------------------------------------- |  | ---------------------------------- | ------ | - | -------- | - | ------ | ----------------------------- | ---- | -- | -------- | ---- | - | ------ | - |  | - | ------ | - |  | -- | -
|                                               |  | Three Months Ended January 31,     |        |   | % Change |   |        | Nine Months Ended January 31, |      |    | % Change |     
|                                               |  | 2004                               |        |   | 2003     |   |        |                               | 2004 |    |          | 2003 |   |       
|                                               |  | (in thousands, except percentages) |       
|Professional services and maintenance revenues |  | $                                  | 16,656 |   |          | $ | 10,554 |                               |      | 58 | %        |      | $ | 43,960 |   |  | $ | 29,613 |   |  | 48 | %
|As a percentage of total revenues              |  |                                    | 64     | % |          |   | 59     | %                             |      |    |          |      |   | 64     | % |  |   | 58     | % |  |    |  



The increase in
professional services and maintenance revenues in absolute dollars and as a percentage of total revenues during the three- and nine-month periods was primarily due to our acquisition of Eigner, whose revenue mix was primarily professional services
and maintenance revenue, combined with an increase in our implementation services as we are now selling a more comprehensive solution. In addition, maintenance revenues increased due to year over year growth of our installed customer base.



Cost of Revenues



Cost of License Revenues



|                                    |  |                               |     |   |          |   |     |                               |      |    |          |      |   |       |   |  |   |       |   |  |    |  
|----------------------------------- |  | ----------------------------- | --- | - | -------- | - | --- | ----------------------------- | ---- | -- | -------- | ---- | - | ----- | - |  | - | ----- | - |  | -- | -
|                                    |  | Three Months EndedJanuary 31, |     |   | % Change |   |     | Nine Months Ended January 31, |      |    | % Change |     
|                                    |  | 2004                          |     |   | 2003     |   |     |                               | 2004 |    |          | 2003 |   |      
|Cost of license revenues            |  | $                             | 988 |   |          | $ | 605 |                               |      | 63 | %        |      | $ | 2,774 |   |  | $ | 1,904 |   |  | 46 | %
|As a percentage of license revenues |  |                               | 10  | % |          |   | 8   | %                             |      |    |          |      |   | 11    | % |  |   | 9     | % |  |    |  



24



---

##### Table of Contents

Our cost of license revenues includes license fees due to third parties for technology integrated into or
sold with our products, and the cost of order fulfillment.



The
increase in cost of license revenues in absolute dollars during the three- and nine-month periods was primarily due to our overall increase in license revenues, resulting in an increase in license fees paid to third parties on third-party software
integrated into our products. The increase in cost of license revenues as a percentage of license revenues in each period was due to a higher component of third-party software embedded in the products shipped during the period. The products acquired
in our acquisition of Eigner generally include more third-party software and therefore carry a higher cost of license revenues as a percentage of license revenues.



For the three months ending April 30, 2004, we expect cost of license revenues in absolute dollars to track with our overall
license revenues. For such period, we expect cost of license revenues as a percentage of license revenues to either remain comparable to or decrease slightly when compared with our results for the three months ended January 31, 2004, due to a lower
cost of third-party software on our Agile 9 product.



Cost of
Professional Services and Maintenance Revenues



|                                                                  |  |                               |       |   |          |   |       |                              |      |    |          |      |   |        |   |  |   |        |   |  |    |  
|----------------------------------------------------------------- |  | ----------------------------- | ----- | - | -------- | - | ----- | ---------------------------- | ---- | -- | -------- | ---- | - | ------ | - |  | - | ------ | - |  | -- | -
|                                                                  |  | Three Months EndedJanuary 31, |       |   | % Change |   |       | Nine Months EndedJanuary 31, |      |    | % Change |     
|                                                                  |  | 2004                          |       |   | 2003     |   |       |                              | 2004 |    |          | 2003 |   |       
|Cost of professional services and maintenance revenues            |  | $                             | 8,461 |   |          | $ | 4,415 |                              |      | 92 | %        |      | $ | 21,014 |   |  | $ | 13,787 |   |  | 52 | %
|As a percentage of professional services and maintenance revenues |  |                               | 51    | % |          |   | 42    | %                            |      |    |          |      |   | 48     | % |  |   | 47     | % |  |    |  



Our cost of
professional services and maintenance revenues includes salaries and related expenses for the implementation, training services, and customer support organizations, costs of third parties contracted to provide implementation services to customers
and an allocation of our overhead expenses, including rent, information technology and other overhead expenses. In addition, cost of professional services and maintenance revenues includes support fees and upgrade fees paid to third parties with
respect to the third-party software integrated into or sold with our products.



The increase in cost of professional services and maintenance revenues in absolute dollars during the three- and nine-month periods was primarily related to: (a) $2.8 million and $5.7 million, respectively, in
increased personnel-related costs (including compensation and benefits, travel-related expenditures, and facilities and depreciation expense) resulting from an increase in professional services and maintenance organization headcount, primarily due
to the addition of the Eigner employees; and (b) $644,000 and $1.5 million, respectively, in incremental costs associated with third-party service providers we relied on to meet increased demand, particularly in regions where we have limited
professional services resources. These increases in expenses during each period were partially offset by reduced discretionary spending. The increase in cost of professional services and maintenance revenues as a percentage of related revenues
during each period was primarily a result of increased reliance on third-party service providers, which provide lower margins than internal resources.



For the three months ending April 30, 2004, we expect cost of professional services and maintenance revenues in absolute dollars and as a percentage of
professional services and maintenance revenues to decrease slightly when compared with our results for the three months ended January 31, 2004.



Operating Expenses



We classify all charges to operating expense categories based on the nature of the expenditures. Although each category includes expenses that are unique
to the category type, there are common recurring expenditures that are typically included in all operating expense categories, such as salaries, employee benefits, incentive compensation, bonuses, travel costs, communication, rent and other
allocated facilities costs, information technology, and professional fees. Also included in our operating expenses is the amortization of stock compensation, that is included in each of the sales and marketing, research and development, and general
and administrative categories.



25



---

##### Table of Contents

As a result of our prior period restructuring efforts, as discussed further under Restructuring and
Other Charges below, we have realized significant costs savings to our operating expenses during each of the periods presented. Specifically, during the three- and nine-month periods ended January 31, 2004, our aggregate facilities and
depreciation expenses decreased $814,000 and $2.4 million, respectively, when compared to our facilities and depreciation expenses during the same period in the prior year. Significant portions of these costs savings, therefore, are reflected in the
Sales and Marketing, Research and Development and General and Administrative operating expenses through decreased facilities and depreciation expenses.



Sales and Marketing



|                                                  |  |                                |       |   |      |   |       |                               |  |   |      |  |   |        |   |  |        |        |   |  |     |   
|------------------------------------------------- |  | ------------------------------ | ----- | - | ---- | - | ----- | ----------------------------- |  | - | ---- |  | - | ------ | - |  | ------ | ------ | - |  | --- | --
|                                                  |  | Three Months Ended January 31, |       |   | %    |   |       | Nine Months Ended January 31, |  |   | %    | 
|                                                  |  | 2004                           |       |   | 2003 |   |       | Change                        |  |   | 2004 |  |   | 2003   |   |  | Change |       
|Sales and marketing, excluding stock compensation |  | $                              | 9,828 |   |      | $ | 9,752 |                               |  | 1 | %    |  | $ | 27,499 |   |  | $      | 32,141 |   |  | (14 | %)
|As a percentage of total revenues                 |  |                                | 38    | % |      |   | 55    | %                             |  |   |      |  |   | 40     | % |  |        | 63     | % |  |     |   



In addition to the
common recurring expenditures mentioned above, our sales and marketing expenses include expenditures specific to the sales group, such as sales related commissions and bonuses, and expenditures specific to the marketing group, such as public
relations and advertising, trade shows, marketing collateral materials, and customer user group meetings, net of fees assessed, if any, for attendance.



The increase in sales and marketing expenses, excluding stock compensation, in absolute dollars during the three-month period was primarily related to
$425,000 in increased personnel-related costs, primarily due to increased commissions as a result of increased revenues, and an increase in the number of sales and marketing employees, primarily due to the addition of the Eigner employees. These
increases in expenses were partially offset by $394,000 in decreased facilities and depreciation expenses, as well as reductions in discretionary spending.



The decrease in sales and marketing expenses, excluding stock compensation, in absolute dollars during the nine-month period was primarily related to: (a)
$3.5 million in decreased personnel-related costs (including facilities and depreciation expense, and compensation and benefits) as a result of our restructurings discussed above; and (b) $961,000 in decreased marketing and advertising program
expenditures, as we continued to monitor our discretionary spending.



For the three months ending April 30, 2004, we expect sales and marketing expenses, excluding stock compensation, in absolute dollars to increase slightly when compared with our results for the three months ended January 31, 2004. If our
revenues increase substantially period over period, our sales and marketing expenses, in absolute dollars, will likely increase as a result of increased commissions and incentives payable on the increased revenue.



Research and Development



|                                                       |  |                                |       |   |      |   |       |                               |  |   |      |  |   |        |   |  |        |        |   |  |     |   
|------------------------------------------------------ |  | ------------------------------ | ----- | - | ---- | - | ----- | ----------------------------- |  | - | ---- |  | - | ------ | - |  | ------ | ------ | - |  | --- | --
|                                                       |  | Three Months Ended January 31, |       |   | %    |   |       | Nine Months Ended January 31, |  |   | %    | 
|                                                       |  | 2004                           |       |   | 2003 |   |       | Change                        |  |   | 2004 |  |   | 2003   |   |  | Change |       
|Research and development, excluding stock compensation |  | $                              | 6,038 |   |      | $ | 5,613 |                               |  | 8 | %    |  | $ | 17,214 |   |  | $      | 20,777 |   |  | (17 | %)
|As a percentage of total revenues                      |  |                                | 23    | % |      |   | 31    | %                             |  |   |      |  |   | 25     | % |  |        | 40     | % |  |     |   



In addition to the
common recurring expenditures mentioned above, our research and development expenses consists of costs associated with the development of new products, enhancements of existing products, and quality assurance procedures. To date, all software
development costs in research and development have been expensed as incurred.



26



---

##### Table of Contents

The increase in research and development expenses, excluding stock compensation, in absolute dollars
during the three-month period was primarily related to $716,000 in increased compensation and benefits resulting from an increase in the number of research and development employees, primarily due to the addition of the Eigner employees. These
increases in expenses were partially offset by $228,000 in decreased facilities and depreciation expenses, as a result of our restructurings discussed above. In addition, we continued to monitor our discretionary spending.



The decrease in research and development expenses, excluding stock
compensation, in absolute dollars during the nine-month period was primarily related to: (a) $3.0 million in decreased personnel-related costs (including facilities and depreciation expense, compensation and benefits, and recruiting and relocation
costs); (b) $677,000 in decreased outside consulting services, all as a result of our restructurings discussed above; and (c) an additional full period of benefits from the shift of some our development activities to our offshore
development centers in India and China during fiscal 2003. These decreases in expenses were partially offset by increases in travel-related expenditures, associated with our offshore development centers.



For the three months ending April 30, 2004, we expect research and
development expenses, excluding stock compensation, in absolute dollars to remain comparable with our results for the three months ended January 31, 2004.



General and Administrative



|                                                         |  |                                |       |   |      |   |       |                               |  |    |      |  |   |       |   |  |          |       |   |  |    |  
|-------------------------------------------------------- |  | ------------------------------ | ----- | - | ---- | - | ----- | ----------------------------- |  | -- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | -- | -
|                                                         |  | Three Months Ended January 31, |       |   |      |   |       | Nine Months Ended January 31, |  |    |      | 
|                                                         |  | 2004                           |       |   | 2003 |   |       | % Change                      |  |    | 2004 |  |   | 2003  |   |  | % Change |      
|General and administrative, excluding stock compensation |  | $                              | 2,246 |   |      | $ | 1,825 |                               |  | 23 | %    |  | $ | 6,507 |   |  | $        | 5,203 |   |  | 25 | %
|As a percentage of total revenues                        |  |                                | 9     | % |      |   | 10    | %                             |  |    |      |  |   | 9     | % |  |          | 10    | % |  |    |  



In addition to the
common recurring expenditures mentioned above, our general and administrative expenses consist primarily of compensation and benefits costs for executive, finance, human resources, legal and administrative personnel, bad debt expense, and other
costs associated with being a publicly held company, including SEC and Sarbanes-Oxley compliance, directors and officers insurance, director compensation, and listing fees.



The increase in general and administrative expenses, excluding stock compensation, in absolute dollars during the
three-month period was primarily related to: (a) $324,000 in increased compensation and benefits, resulting from an increase in the number of general and administrative employees, primarily due to the addition of the Eigner employees; and (b)
$100,000 in increased provisions for doubtful accounts, as a result of an increase in accounts receivable associated with increased revenue.



The increase in general and administrative expenses, excluding stock compensation, in absolute dollars during the nine-month period was primarily related
to: (a) $818,000 in increased personnel-related costs (including compensation and benefits, and travel-related expenditures), due to an increase in the number of general and administrative employees, primarily due to the addition of the Eigner
employees; and (b) $373,000 in increased provisions for doubtful accounts, as a result of an increase in accounts receivable associated with increased revenue.



For the three months ending April 30, 2004, we expect general and administrative expenses, excluding stock compensation, in absolute dollars to
increase slightly when compared with our results for the three months ended January 31, 2004.



27



---

##### Table of Contents

Stock Compensation



|                                  |  |                               |     |   |      |   |     |                               |  |     |      |  |   |       |   |  |          |       |   |  |     |   
|--------------------------------- |  | ----------------------------- | --- | - | ---- | - | --- | ----------------------------- |  | --- | ---- |  | - | ----- | - |  | -------- | ----- | - |  | --- | --
|                                  |  | Three Months EndedJanuary 31, |     |   |      |   |     | Nine Months Ended January 31, |  |     |      | 
|                                  |  | 2004                          |     |   | 2003 |   |     | % Change                      |  |     | 2004 |  |   | 2003  |   |  | % Change |      
|Stock compensation:               |  |                               |     |   |      |   |     |                               |  |     |      |  |   |       |   |  |          |       |   |  |     |   
|Cost of revenues                  |  | $                             | 95  |   |      | $ | 9   |                               |  | 956 | %    |  | $ | 147   |   |  | $        | 37    |   |  | 297 | % 
|Sales and marketing               |  |                               | 315 |   |      |   | 751 |                               |  | (58 | %)   |  |   | 2,988 |   |  |          | 1,683 |   |  | 78  | % 
|Research and development          |  |                               | 53  |   |      |   | 51  |                               |  | 4   | %    |  |   | 165   |   |  |          | 175   |   |  | (6  | %)
|General and administrative        |  |                               | 101 |   |      |   | 27  |                               |  | 274 | %    |  |   | 592   |   |  |          | 101   |   |  | 486 | % 
|                                  |  |                               |     |   |      |   |     |                               |  |     |      |  |   |       |   |  |          |       |   |  |     |   
|Total stock compensation          |  | $                             | 564 |   |      | $ | 838 |                               |  | (33 | %)   |  | $ | 3,892 |   |  | $        | 1,996 |   |  | 95  | % 
|As a percentage of total revenues |  |                               | 2   | % |      |   | 4   | %                             |  |     |      |  |   | 5     | % |  |          | 3     | % |  |     |   



Stock compensation
expenses includes the amortization of unearned employee stock compensation, stock compensation as a result of modifications to the terms of certain stock option grants, and options issued to non-employees, offset by recoveries associated with the
impact of the reversal of accelerated amortization on unvested and cancelled options held by terminated employees. Stock options granted to non-employees are recognized as an expense as the underlying stock options are earned. We will be required to
remeasure the fair value of these options at each reporting period prior to vesting and then finally at the vesting dates of these options. As a result, the stock compensation for non-employees fluctuates with the movement in the fair value of our
Common Stock.



The decrease in stock compensation expense in
absolute dollars during the three-month period was primarily related to: (a) $351,000 in decreased employee-related stock compensation, primarily as a result of lower amortization amounts in later periods using the accelerated method of
amortization; and (b) $175,000 in decreased stock compensation recognized on stock options granted to non-employees in prior periods, as the fair value for the unvested portion of these stock options has decreased. These amounts were partially
offset by a decrease of $252,000 in recoveries recognized from the reversal of accelerated amortization on cancelled options that had been held by terminated employees.



The increase in stock compensation expense in absolute dollars during the nine-month period was primarily related to: (a)
$2.0 million in increased employee-related stock compensation, primarily related to the modification of certain stock option grants to employees we terminated during the nine months ended January 31, 2004; and (b) $403,000 in decreased recoveries
recognized from the reversal of accelerated amortization on cancelled options that had been held by terminated employees. These amounts were offset by a decrease of $507,000 in stock compensation recognized on stock options granted to non-employees
in prior periods, as the fair value for the unvested portion of these stock options has decreased.



Acquisition-Related Compensation



|                                       |  |                               |     |          |      |   |                               |      |          |   |      |   |       |   |  |   |   |  |     |  
|-------------------------------------- |  | ----------------------------- | --- | -------- | ---- | - | ----------------------------- | ---- | -------- | - | ---- | - | ----- | - |  | - | - |  | --- | -
|                                       |  | Three Months EndedJanuary 31, |     | % Change |      |   | Nine Months Ended January 31, |      | % Change |  
|                                       |  | 2004                          |     |          | 2003 |   |                               | 2004 |          |   | 2003 |  
|Acquisition-related compensation:      |  |                               |     |          |      |   |                               |      |          |   |      |   |       |   |  |   |   |  |     |  
|Cost of revenues                       |  | $                             | 339 |          |      | $ |                              |      | 100      | % |      | $ | 595   |   |  | $ |  |  | 100 | %
|Operating expenses                     |  |                               | 529 |          |      |   |                              |      | 100      | % |      |   | 1,091 |   |  |   |  |  | 100 | %
|                                       |  |                               |     |          |      |   |                               |      |          |   |      |   |       |   |  |   |   |  |     |  
|Total acquisition-related compensation |  | $                             | 868 |          |      | $ |                              |      | 100      | % |      | $ | 1,686 |   |  | $ |  |  | 100 | %
|As a percentage of total revenues      |  |                               | 3   | %        |      |   |                              |      |          |   |      |   | 3     | % |  |   |  |  |     |  



In connection with our
acquisition of Eigner, we agreed to pay approximately $1.7 million in retention bonuses to certain persons who were employees of Eigner at the date of the acquisition and remain employees of Agile for six months. The retention bonuses are recorded
as acquisition-related compensation in the unaudited condensed consolidated statements of operations. During the three and nine months ended January 31, 2004, we recorded $868,000 and $1.7 million of acquisition-related compensation, respectively.
We paid these bonuses in February 2004.



28



---

##### Table of Contents

Amortization of Intangible Assets



|                                        |  |                               |     |          |      |   |                               |      |          |   |      |   |       |   |  |   |   |  |     |  
|--------------------------------------- |  | ----------------------------- | --- | -------- | ---- | - | ----------------------------- | ---- | -------- | - | ---- | - | ----- | - |  | - | - |  | --- | -
|                                        |  | Three Months EndedJanuary 31, |     | % Change |      |   | Nine Months Ended January 31, |      | % Change |  
|                                        |  | 2004                          |     |          | 2003 |   |                               | 2004 |          |   | 2003 |  
|Amortization of intangible assets:      |  |                               |     |          |      |   |                               |      |          |   |      |   |       |   |  |   |   |  |     |  
|Cost of revenues                        |  | $                             | 212 |          |      | $ |                              |      | 100      | % |      | $ | 372   |   |  | $ |  |  | 100 | %
|Operating expenses                      |  |                               | 679 |          |      |   |                              |      | 100      | % |      |   | 1,435 |   |  |   |  |  | 100 | %
|                                        |  |                               |     |          |      |   |                               |      |          |   |      |   |       |   |  |   |   |  |     |  
|Total amortization of intangible assets |  | $                             | 891 |          |      | $ |                              |      | 100      | % |      | $ | 1,807 |   |  | $ |  |  | 100 | %
|As a percentage of total revenues       |  |                               | 3   | %        |      |   |                              |      |          |   |      |   | 3     | % |  |   |  |  |     |  



Intangible assets
consist of developed technologies, customer relationships, and non-compete agreements acquired. Intangible assets are subject to amortization and have original estimated weighted-average useful lives ranging from one to four years. No significant
residual value is estimated for the intangible assets.



During
the three and nine months ended January 31, 2004, we recognized amortization expense of $891,000 and $1.8 million, respectively, related to our intangible assets. There was no such amortization during the three and nine months ended January 31,
2003.



We may continue purchasing assets or businesses to
accelerate industry or geographic expansion, or increase the features and functions of our products available to our customers. These purchase transactions may result in the creation of additional intangible assets that leads to a corresponding
increase in our amortization expense in future periods. Our future operating performance could be impacted by the future amortization of intangible assets.



Acquired In-Process Research and Development



|                                             |  |                                |   |      |          |     |   |                               |      |    |          |   |     |   |  |   |     |   |  |    |  
|-------------------------------------------- |  | ------------------------------ | - | ---- | -------- | --- | - | ----------------------------- | ---- | -- | -------- | - | --- | - |  | - | --- | - |  | -- | -
|                                             |  | Three Months Ended January 31, |   |      | % Change |     |   | Nine Months Ended January 31, |      |    | % Change |  
|                                             |  | 2004                           |   | 2003 |          |     |   | 2004                          |      |    | 2003     |   |    
|Acquired in-process research and development |  | $                              |  |      | $        | 300 |   |                               | (100 | %) |          | $ | 500 |   |  | $ | 300 |   |  | 67 | %
|As a percentage of total revenues            |  |                                |  |      |          | 2   | % |                               |      |    |          |   | 1   | % |  |   | 1   | % |  |    |  



In connection with our
acquisition of Eigner, we allocated $500,000 of the purchase price to acquired in-process research and development (IPR&D). The amounts allocated to the acquired IPR&D were immediately expensed in the period the acquisition was
completed because the projects associated with the acquired IPR&D efforts had not yet reached technological feasibility and no future alternative uses existed for the technology. We used an independent appraiser to calculate the amount allocated
to acquired IPR&D. In calculating the value of the acquired IPR&D, the independent appraiser used established valuation techniques accepted in the technology and software industries. This calculation gave consideration to relevant market
size and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by us and our competitors, individual product sales cycles, and the estimated lives of each of the products derived from the underlying
technology. The value of the acquired IPR&D reflects the relative value and contribution of the acquired research and development. Consideration was given to the stage of completion, the complexity of the work completed to date, the difficulty
of completing the remaining development, costs already incurred, and the expected cost to complete the project in determining the value assigned to the acquired IPR&D. The projects have been subsequently completed within our estimates. During
the nine months ended January 31, 2004, we recognized a $500,000 charge for acquired IPR&D related to our acquisition of Eigner. During the three and nine months ended January 31, 2003, we recognized a $300,000 charge for acquired IPR&D
related to our acquisition of oneREV, Inc. in December 2002.



29



---

##### Table of Contents

Restructuring and Other Charges



|                                  |  |                                |   |          |   |                               |      |   |          |      |       |   |  |   |       |   |  |    |  
|--------------------------------- |  | ------------------------------ | - | -------- | - | ----------------------------- | ---- | - | -------- | ---- | ----- | - |  | - | ----- | - |  | -- | -
|                                  |  | Three Months Ended January 31, |   | % Change |   | Nine Months Ended January 31, |      |   | % Change |     
|                                  |  | 2004                           |   | 2003     |   |                               | 2004 |   |          | 2003 |       |  
|Restructuring and other charges   |  | $                              |  |          | $ |                              |      |  |          | $    | 9,201 |   |  | $ | 7,836 |   |  | 17 | %
|As a percentage of total revenues |  |                                |  |          |   |                              |      |   |          |      | 13    | % |  |   | 15    | % |  |    |  



As a result of
unfavorable global economic conditions and a reduction in information technology spending around the world throughout fiscal 2002, during the fourth quarter of fiscal 2002, we announced a worldwide restructuring program to reduce expenses to align
our operations and cost structure with market conditions (the 2002 Restructuring). During the fourth quarter of fiscal 2002, we recorded restructuring and other charges of $6.3 million related to the 2002 Restructuring, which consisted
primarily of a reduction in personnel, the consolidation of excess facilities, abandonment of certain assets in connection with the consolidation of excess facilities, and a write-down of non-refundable prepaid software licenses. As of January 31,
2004, the amount remaining of the 2002 Restructuring obligations was $205,000.



Throughout the first half of fiscal 2003, we continued to evaluate the economic conditions and initiated a further restructuring of our operations (the 2003 Restructuring). During the second quarter of
fiscal 2003, we recorded restructuring and other charges of $7.8 million related to the 2003 Restructuring, which consisted primarily of the consolidation of excess facilities, abandonment of certain assets in connection with the consolidation of
excess facilities, and a write-down of non-refundable prepaid software licenses. As of January 31, 2004, the amount remaining of the 2003 Restructuring obligations was $2.8 million.



During the second quarter for fiscal 2004, we recorded total restructuring and other charges of $9.2 million (the 2004
Restructuring) as follows:



In connection with our move
to our new headquarters in San Jose, California, during the second quarter of fiscal 2004, we recorded restructuring and other charges of $7.5 million, which was comprised of (i) $5.5 million related to the fair value of the remainder of our
outstanding lease commitments for properties that we vacated in September 2003, net of the fair value of estimated sublease income, and net of deferred rent of $581,000 related to the vacated properties, and (ii) $2.0 million related to the
abandonment of certain long-lived assets, including leasehold improvements, furniture and fixtures, and computer equipment.



In connection with our acquisition of Eigner during the second quarter of fiscal 2004, we recorded additional restructuring and other charges of $1.7
million. As discussed in Business Overview above, we terminated 33 Agile employees, across all business functions and geographic regions and recorded a restructuring and other charge of $1.1 million for the related severance, benefits,
payroll taxes and other associated costs. We recorded an additional $623,000 of other charges related to the write-down of certain other assets, including a $471,000 impairment of non-refundable prepaid software license fees for which we determined
that the carrying value exceeded its net realizable value as a result of our decision to discontinue selling the products in which the third party licensed software was embedded, due to a comparable product acquired from Eigner. As of January 31,
2004, the amount remaining of the 2004 Restructuring obligations was $4.7 million.



Our restructuring estimates will be reviewed and revised quarterly and may result in an increase to restructuring and other charges.



30



---

##### Table of Contents

Summary of Restructuring Obligations



The significant activity within and components of the restructuring and other charges as of and for the nine months ended
January 31, 2004 are as follows (in thousands):



|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  
|---------------------------------------------------------- |  | ------------------------ | ------ | - | ---------------------- | - | ------ | --------------------- |  | - | ------------ | - |  | ----- | ---- | - |  | - | ------ | -
|                                                           |  | EmployeeTerminationCosts |        |   | Facility-Related Costs |   |        | AssetAbandonmentCosts |  |   | OtherCharges |   |  | Total |     
|Restructuring obligations at April 30, 2003(1)             |  | $                        |       |   |                        | $ | 4,251  |                       |  | $ |             |   |  | $     |     |   |  | $ | 4,251  |  
|2004 Restructuring charges(2)                              |  |                          | 1,092  |   |                        |   | 5,485  |                       |  |   | 2,001        |   |  |       | 623  |   |  |   | 9,201  |  
|Cash payments                                              |  |                          | (1,066 | ) |                        |   | (2,639 | )                     |  |   |             |   |  |       |     |   |  |   | (3,705 | )
|Non-cash charges                                           |  |                          |       |   |                        |   | 581    |                       |  |   | (2,001       | ) |  |       | (623 | ) |  |   | (2,043 | )
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  
|Restructuring obligations at January 31, 2004(3)           |  | $                        | 26     |   |                        | $ | 7,678  |                       |  | $ |             |   |  | $     |     |   |  | $ | 7,704  |  
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  
|Included in accrued expenses and other current liabilities |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  | $ | 4,317  |  
|Included in accrued restructuring, non-current             |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   | 3,387  |  
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  | $ | 7,704  |  
|                                                           |  |                          |        |   |                        |   |        |                       |  |   |              |   |  |       |      |   |  |   |        |  

---

|(1) | The 2002 Restructuring and 2003 Restructuring and related obligations through April 30, 2003 were recorded in an amount equal to the gross value of the obligation
without consideration to the net present value of such obligations, in accordance with EITF No. 94-3 and EITF No. 88-10.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | The 2004 Restructuring charges and related obligations were recorded at fair value, after giving effect to the fair value of the related obligations, in accordance
with SFAS No. 146.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | The remaining employee termination obligations are expected to be paid through March 2004. The remaining facility-related obligations are expected to be paid through
November 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest and Other Income (Expense), Net



|                                  |  |                                |     |   |          |   |       |                               |      |     |          |      |   |       |   |  |   |       |   |  |     |   
|--------------------------------- |  | ------------------------------ | --- | - | -------- | - | ----- | ----------------------------- | ---- | --- | -------- | ---- | - | ----- | - |  | - | ----- | - |  | --- | --
|                                  |  | Three Months Ended January 31, |     |   | % Change |   |       | Nine Months Ended January 31, |      |     | % Change |     
|                                  |  | 2004                           |     |   | 2003     |   |       |                               | 2004 |     |          | 2003 |   |      
|Interest and other income, net    |  | $                              | 754 |   |          | $ | 1,196 |                               |      | (37 | %)       |      | $ | 2,347 |   |  | $ | 3,863 |   |  | (39 | %)
|As a percentage of total revenues |  |                                | 3   | % |          |   | 7     | %                             |      |     |          |      |   | 3     | % |  |   | 8     | % |  |     |   



Interest and other
income, net consists of interest earned on cash, cash equivalents, and investments, as well as foreign exchange transaction gains and losses and other miscellaneous non-operating transactions.



The decrease in interest and other income, net during the three and nine
-month periods was due principally to declining interest rates and, to a lesser extent, lower average cash and investment balances.



Loss from Foreign Currency Translation



|                                       |  |                               |     |          |      |   |                              |      |          |   |      |   |     |   |  |   |   |  |     |  
|-------------------------------------- |  | ----------------------------- | --- | -------- | ---- | - | ---------------------------- | ---- | -------- | - | ---- | - | --- | - |  | - | - |  | --- | -
|                                       |  | Three Months EndedJanuary 31, |     | % Change |      |   | Nine Months EndedJanuary 31, |      | % Change |  
|                                       |  | 2004                          |     |          | 2003 |   |                              | 2004 |          |   | 2003 |  
|Loss from foreign currency translation |  | $                             | 743 |          |      | $ |                             |      | 100      | % |      | $ | 743 |   |  | $ |  |  | 100 | %
|As a percentage of total revenues      |  |                               | 3   | %        |      |   |                             |      |          |   |      |   | 1   | % |  |   |  |  |     |  



In connection with our
acquisition of Eigner, we assumed an obligation with a vendor to Eigner, providing for quarterly payments denominated in Euros through fiscal 2007. As the obligation was denominated in Euros, and the



31



---

##### Table of Contents

functional currency of the subsidiary holding the obligation was the U.S. Dollar, we are required to remeasure the value
of the obligation at the end of each period. As a result of the Euro strengthening against the U.S. Dollar during the period, a remeasurement of the obligation at the end of such period to the functional currency, net of payments made, resulted in
an unrealized loss from foreign currency translation of $743,000.



Impairment of Investments



|                                  |  |                                |   |      |          |       |   |                               |      |      |          |   |   |  |   |       |   |  |      |   
|--------------------------------- |  | ------------------------------ | - | ---- | -------- | ----- | - | ----------------------------- | ---- | ---- | -------- | - | - |  | - | ----- | - |  | ---- | --
|                                  |  | Three Months Ended January 31, |   |      | % Change |       |   | Nine Months Ended January 31, |      |      | % Change |  
|                                  |  | 2004                           |   | 2003 |          |       |   | 2004                          |      | 2003 |          |  
|Impairment of investments         |  | $                              |  |      | $        | 1,113 |   |                               | (100 | %)   |          | $ |  |  | $ | 3,673 |   |  | (100 | %)
|As a percentage of total revenues |  |                                |  |      |          | 6     | % |                               |      |      |          |   |  |  |   | 7     | % |  |      |   



During the three and
nine months ended January 31, 2003, we determined that certain investments that we had made in privately held companies and a venture fund had incurred a decline in value that, based upon the deterioration of the financial condition of the issuers
and portfolio companies of the venture fund, was considered other-than-temporary. Accordingly, we recorded impairment charges of $1.1 million and $3.7 million, respectively, to write down the investments to their estimated fair values. As of January
31, 2004, our investments in privately held companies and the venture fund were written down to zero.



Provision for Income Taxes



|                                  |  |                               |     |   |          |   |     |                               |      |    |          |      |   |       |   |  |   |     |   |  |    |  
|--------------------------------- |  | ----------------------------- | --- | - | -------- | - | --- | ----------------------------- | ---- | -- | -------- | ---- | - | ----- | - |  | - | --- | - |  | -- | -
|                                  |  | Three Months EndedJanuary 31, |     |   | % Change |   |     | Nine Months Ended January 31, |      |    | % Change |     
|                                  |  | 2004                          |     |   | 2003     |   |     |                               | 2004 |    |          | 2003 |   |      
|Provision for income taxes        |  | $                             | 348 |   |          | $ | 301 |                               |      | 16 | %        |      | $ | 1,008 |   |  | $ | 740 |   |  | 36 | %
|As a percentage of total revenues |  |                               | 1   | % |          |   | 2   | %                             |      |    |          |      |   | 1     | % |  |   | 1   | % |  |    |  



Our provision for
income taxes is primarily attributable to taxes associated with our international subsidiaries. The increase in the provision for income taxes, in absolute dollars, during the three and nine-month periods is primarily related to an increase in
revenues with our international subsidiaries during each of those periods. Other than the provision for foreign taxes, no provision for income taxes has been recorded since our inception because we have incurred net losses in all periods. We have
recorded a valuation allowance for the full amount of our net deferred tax assets, including our net operating loss carryforwards and tax credits, as sufficient uncertainty exists regarding our ability to realize the deferred tax asset balance.



32



---

##### Table of Contents

Liquidity and Capital Resources



Overview



Our principal source of liquidity consists of cash, cash equivalents and investments, as follows (in thousands):



|                                     |  |                 |         |               |   |        
|------------------------------------ |  | --------------- | ------- | ------------- | - | -------
|                                     |  | As of          
|                                     |  | January 31,2004 |         | April 30,2003
|Cash and cash equivalents            |  | $               | 109,149 |               | $ | 154,852
|Short-term and long-term investments |  |                 | 133,939 |               |   | 102,115
|                                     |  |                 |         |               |   |        
|                                     |  | $               | 243,088 |               | $ | 256,967
|                                     |  |                 |         |               |   |        



Our cash, cash
equivalents, and investments are placed with high credit quality financial institutions, commercial companies and government agencies in order to limit the amount of credit exposure. As of January 31, 2004, our working capital was $184.5 million and
our days sales outstanding (DSO) was 62 days.



Cash Flows



In summary, our cash flows were as follows (in
thousands):



|                                                    |  |                               |         |   |      |   |         |  
|--------------------------------------------------- |  | ----------------------------- | ------- | - | ---- | - | ------- | -
|                                                    |  | Nine Months Ended January 31, |        
|                                                    |  | 2004                          |         |   | 2003 |  
|Net cash used in operating activities               |  | $                             | (12,028 | ) |      | $ | (20,446 | )
|Net cash provided by (used in) investing activities |  |                               | (40,571 | ) |      |   | 44,483  |  
|Net cash provided by financing activities           |  |                               | 7,318   |   |      |   | 2,049   |  



Cash used in operating
activities during the nine months ended January 31, 2004 was primarily due to our net loss for the period of $22.4 million, adjusted for non-cash items of $13.3 million, and a net decrease of approximately $3.0 million in working capital. Non-cash
items include acquired IPR&D, provision for doubtful accounts, depreciation and amortization, stock compensation, loss on foreign currency translation, and the non-cash portion of restructuring and other charges. The net decrease in working
capital primarily consisted of increases in accounts receivable (as a result of increased revenues) and accrued expenses and other liabilities (primarily related to accrued restructuring costs, offset by payments of bonuses and severance benefits
resulting from our acquisitions during the period) and decreases in accounts payable (primarily related to liabilities assumed in acquisitions). Cash used in operating activities during the nine months ended January 31, 2003 was primarily due to our
net loss for the period of $33.1 million, adjusted for non-cash items of $15.2 million, and a net decrease of approximately $2.6 million in working capital. The net decrease in working capital primarily consisted of increases in accounts receivable
(as a result of increased maintenance renewals) and accrued expenses and other liabilities (primarily related to accrued restructuring costs), and decreases in accounts payable.



Cash used in investing activities during the nine months ended January 31, 2004 resulted from $31.8 million of net purchases
of short-term and long-term investments, $6.2 million of purchases of property and equipment, primarily related to the build-out of our new corporate headquarters in San Jose, California, and $2.5 million of net cash paid in business combinations.
Cash provided by investing activities during the nine months ended January 31, 2003 resulted from $49.9 million of net maturities of short-term investments, offset by $3.7 million of purchases of property and equipment, primarily for computer
hardware and software and furniture and fixtures, and $1.8 million of net cash paid in business combinations.



Cash provided by financing activities in each period was primarily due to the issuance of Common Stock associated with the exercise of stock options and
our employee stock purchase plan totaling $7.9 million and $2.0 million, respectively. During the nine months ended January 31, 2004, cash provided from financing activities was offset slightly by the settlement of certain capital lease obligations
acquired totaling $718,000.



33



---

##### Table of Contents

We anticipate that our operating expenses, particularly in sales and marketing and research and
development expenses will constitute a material use of our cash resources over the next quarter, partially offset by anticipated collections of accounts receivable. In addition, we may utilize cash resources to fund acquisitions of investments in
complementary businesses, technologies or product lines. We believe that our existing cash, cash equivalents and investments, together with our anticipated cash flows from operations will be sufficient to meet our working capital and operating
resource expenditure requirements for at least the next twelve months.



Contractual Obligations and Commitments



We lease facilities under non-cancelable operating leases that expire through July 2011. In connection with our acquisition of Eigner, we assumed a commitment to purchase consulting services from a vendor to Eigner, which provides for
quarterly payments through fiscal 2007 totaling approximately $1.6 million.



In connection with our acquisition of ProductFactory, Inc. in March 2003, additional consideration of up to $2.5 million may be earned, based upon net revenues from sales of the acquired product through July 31, 2004.
During the nine months ended January 31, 2004, we paid $1.2 million of additional consideration to the former ProductFactory stockholders.



We do not have any off-balance-sheet arrangements with unconsolidated entities or related parties and, accordingly, our liquidity and capital resources
are not subject to off-balance-sheet risks from unconsolidated entities.



34



---

##### Table of Contents

RISK FACTORS



This report contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 that involve risks and uncertainties. Our actual results could differ materially from those anticipated or projected in these forward-looking statements as a result of certain factors, including those set forth in the following
cautionary statements and elsewhere in this report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently know to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks were to occur, our business, financial condition or results of operations would likely suffer. In that event, the trading price of our Common Stock would decline. Any forward-looking statements
should be considered in light of the factors discussed below.



Our
Quarterly Operating Results Fluctuate and Are Difficult to Predict. The Timing of Large Orders is More Unpredictable. Our Expenses are Relatively Fixed in the Short Term. Unpredicted Revenue Shortfalls Could Disproportionately and Adversely Affect
Operating Results. If Our Future Results Are Below the Expectations of Public Market Analysts or Investors, the Price of Our Common Stock May Decline Significantly



Our quarterly operating results have varied significantly in the past and are likely to vary significantly in the future.
Our products have an unpredictable sales cycle. The timing of large orders, which continue to account for a significant percentage of our total license revenues, remains unpredictable as a result of the overall economic conditions and cautious
capital spending by businesses. If any large order anticipated for a particular quarter is not realized in that quarter, we may experience an unplanned shortfall in revenues. In contrast, our expense levels are relatively fixed in the near term and
are based in part on expectations of future revenues. As a result, a revenue shortfall from estimated levels can cause a disproportionately adverse impact on our operating results for the quarter in which the revenue shortfall occurs.



Due to these and other factors, we believe that period-to-period comparisons
of our results of operations are not meaningful and should not be relied upon as indicators of our future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and
investors. If this were to occur, the price of our Common Stock would likely decline significantly.



Defects in Our Software Products, Including the Newly Released Agile 9 Product Suite, Could Diminish Demand For Our Products, and If We Become Subject to Product Liability Litigation, It Could Be Time Consuming
and Costly to Defend



We recently began shipping Agile
9, our new product lifecycle management (PLM) product. Our software products are complex and may contain errors that may be detected at any point in the life of the product. This risk is more significant as it relates to new products
such as Agile 9, where there is limited experience with the product in customer environments. We cannot be sure that, despite testing by us, our implementation partners and our current and potential customers, that errors will not be found in Agile
9 or other new products or releases after shipment. Such errors, if significant, could result in loss of revenue, delay in market acceptance and sales, diversion of development resources, injury to our reputation and increased service and warranty
costs.



Since our products are used for mission critical
applications in the supply chain, errors, defects or other performance problems could result in financial or other harm to our customers. For example, our products are designed to communicate information relating to changes in product specifications
during the manufacturing process. If a supplier or other participant receives inaccurate or erroneous data, it is possible that it could claim it incurred damages based on its reliance on that data. Although our license agreements generally contain
provisions designed to limit our exposure to product liability damages, existing or future laws or unfavorable judicial decisions could negate such limitation of liability provisions. While we carry product liability insurance, our insurance may not
fully cover these claims. Product liability litigation, even if successfully defended, would be time-consuming and costly to defend and could harm our business.



35



---

##### Table of Contents

We May Experience Difficulties in Introducing New Products and Upgrades Which Could Result in Lost or Delayed Sales



In addition to Agile 9, our future financial
performance also depends on our successful and timely development, introduction and market acceptance of other new and enhanced products, including products that we may introduce using technology that we acquire from other companies. The lifecycles
of our products are difficult to predict because the market for our products is characterized by rapid technological change, changing customer needs and evolving industry standards.



Although our software products can be used with a variety of popular industry standard relational database management system
platforms, there may be future or existing platforms that achieve popularity in the marketplace that may not be architecturally compatible with our software product design. It may be necessary for us to invest significant resources to adapt our
software if new or different platforms or operating environments become widely adopted in our current and prospective customer base.



If we are unable to offer new and enhanced products as the market and technology evolve we may find it difficult to sell products to existing and
prospective customers. Moreover, customers may delay purchasing decisions if they are aware that new or enhanced products are soon to be released. If we experience difficulties or delays in releasing new and enhanced products that customers are
expecting, we may experience lost or delayed sales. Delays in releasing new and enhanced products could have a material negative impact on our results of operations, particularly in the periods when the new or enhanced products were expected to
become available.



We Have Recently Made Several Acquisitions and Expect
to Make Additional Acquisitions in the Future. If We Fail to Successfully Integrate the Acquired Companies, We May Not Achieve the Anticipated Benefits of the Acquisitions. If We Fail to Identify and Successfully Acquire Additional Products,
Technologies and Companies, Our Long-Term Competitive Position May Be Adversely Affected.



During fiscal 2003, we acquired oneREV, Inc. and ProductFactory, Inc., and in the second quarter of fiscal 2004, we acquired Eigner US Inc. and TRADEC,
Inc. While each of these acquisitions has resulted in benefits to us as a combined company, achieving the full benefits of each of theseand any futureacquisitions depends on many factors, including the successful and timely integration
of the products, technologies and operations of the acquired companies. These integration efforts are difficult and time consuming, especially considering the highly technical and complex nature of each companys products. We may encounter
risks to our business during our integration of acquired products, technologies or companies including:



| |  | Difficulties in integration of acquired personnel, operations, technologies or products;
| | - | ----------------------------------------------------------------------------------------



| |  | Unanticipated costs associated with acquisitions. For example, in fiscal 2001 we recorded a $55.2 million impairment charge relating to goodwill and other intangible assets as a
result of our decision in February 2001 to discontinue the further development of the products acquired in our acquisition of Digital Market, Inc. (DMI) in fiscal 2000;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Diversion of managements attention from other business concerns;
| | - | -----------------------------------------------------------------



| |  | Adverse effects on our existing business relationships with our customers or the customers of acquired companies; and
| | - | ---------------------------------------------------------------------------------------------------------------------



| |  | Inability to retain key employees of acquired companies.
| | - | --------------------------------------------------------



If we are unable to successfully and timely integrate acquired businesses, products or technologies, or to train, retain and motivate personnel from
acquired companies, we may not receive the intended benefits of acquisitions.



Going forward, we believe that acquiring additional products, technologies and/or companies will be important to remaining competitive in the PLM marketplace. There can be no assurance that we will be able to identify
complementary acquisition targets or that, once identified, we will be able to reach agreement on the terms of acquisition or complete the acquisitions. Acquisitions could cause us to issue dilutive equity securities, incur debt or contingent
liabilities, amortize goodwill and other intangibles, write off in-process research and development and other acquisition-related expenses, any of which could adversely affect our financial condition and operating results.



36



---

##### Table of Contents

We Have a New Senior Sales Management Team and Many New Sales Representatives Who May Take Time to Reach
Productivity, Resulting in Lost or Delayed Sales



We
sell our products primarily through our direct sales force, which we have recently reorganized. Moreover, our senior sales management team has only been performing in its current function for a short period of time. In addition, many of our account
executives have been in their positions for less than six months. It takes three to six months for a new account executive to become productive and could take nine to twelve months to become fully productive. Changes in account executives can also
result in the need to reestablish relationships with existing customers. This can result in dissatisfaction, and lost or delayed sales as customers become accustomed to their new account executives. In addition, a significant number of Eigner sales
personnel joined Agile as a result of the Eigner acquisition. Training these individuals on the Agile products and the Agile sales personnel on the products acquired with Eigner is a substantial undertaking. The ability of our entire sales force to
effectively sell our full suite of products will be critical to our growth. If the new members of our sales team are unable to quickly become fully productive, or if we cannot successfully cross-train our expanded sales force in our full suite of
products, it may be difficult for us to sell our products, we may lose sales opportunities and market share, take longer to close anticipated sales, and experience a shortfall in revenues.



A High Level of Customer Satisfaction is Important to Our Success



The size of a new customers initial order is often relatively small
and may include a limited number of user licenses. In subsequent orders, customers typically add user licenses or additional products. We depend, to a significant extent, on sales of additional user licenses and products to our existing customers to
grow our revenues. Therefore, it is important that our customers are satisfied with their initial product implementations and that they believe that expanded use of the product they purchased will provide them with additional benefits.



Our products integrate with many disparate systems operated by our
customers. As a result, although we do not typically perform special or custom coding or connections to other systems, data migrations and integration with our customers systems require integration with the existing computer systems and
software programs used by our customers. If this integration proves to be complex, time consuming or expensive, or causes delays in the deployment of our products, customers may become dissatisfied with our products and may not place orders for
additional licenses or products.



In addition, we believe that
our software must be able to accommodate substantial numbers of users to achieve the level of customer satisfaction that we believe is critical to our success. If our customers cannot successfully implement large-scale deployments, or if they
determine that our products cannot accommodate large-scale deployments, we could experience customer dissatisfaction and find it more difficult to obtain new customers or to sell additional products to our existing customers.



Failure to maintain customer satisfaction for any reason could mean that
follow-on orders would be delayed or may not occur at all, either of which would have a materially adverse effect on our results of operations.



Competition Among Providers of Product Lifecycle Management Software May Increase, Which Could Cause Us to Reduce Prices, and Result in Reduced Gross Margins or
Loss of Market Share



We believe that the market for
product lifecycle management solutions is becoming increasingly competitive due to a number of factors, including: (i) entry of new competitors; (ii) alliances among existing competitors; (iii) alliances between our competitors and systems
integrators; and (iv) consolidation in the product lifecycle management software industry. In addition, we have recently experienced some pricing pressure on sales of our products, where competitors have offered sales of licenses at much lower cost
in exchange for customer purchases of maintenance or other services from the competitor. In some situations, we believe, competitors may have offered initial sales of licenses at no cost in order to establish a relationship with the customer. We
expect that these pressures will continue, particularly with the constraint in the capital budgets for purchases of enterprise software that our customers are operating under. In order to remain competitive, and retain or expand our market share,
and to expand into new industries, we may have to meet some of these demands for lower prices on our license fees, and offer initial licenses at low, or even no cost, to the customer.



37



---

##### Table of Contents

We may not be able to maintain our competitive position against current and potential competition,
particularly competitors that have longer operating histories and significantly greater financial, technical, marketing, sales and other resources than we do and therefore may be able to respond more quickly than us to new or changing opportunities,
technologies and customer requirements. Also, many current and potential competitors have greater name recognition and more extensive customer bases that could be leveraged to gain market share to our detriment. These competitors may be able to
undertake more extensive promotional activities, adopt more aggressive pricing policies, and offer more attractive terms to purchasers than we can. In addition, current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to enhance their products.



These and other competitive factors could result in price reductions, reduced revenues and gross margins and lost market share and an inability to expand into new markets and industries, any one of which could
materially and adversely affect our results of operations.



We Have
Significantly Expanded Our International Operations. This Exposes Us to Risks Inherent in International Business Activities.



In May 2002, we began establishing research and development operations in India and China and in August 2003, through our acquisition of Eigner, we began
significant operations in Germany. We also have sales offices located in many additional locations. In addition to the increase in our international operations, we also are beginning to derive an increasing portion of our revenues from customers
located outside of the United States. For example, during the three months ended January 31, 2004, revenues from customers located outside of North America were approximately 42% of total revenues. In contrast, revenues from customers outside of the
North America in the prior year period represented only 18% of total revenues. We expect both our operations and revenues from outside of North America to continue to represent an increasing portion of our overall operations and revenues,
respectively.



Our recent and expected international expansion
subjects us to a number of risks associated with conducting operations internationally, including:



| |  | Difficulties in managing geographically disparate operations;
| | - | -------------------------------------------------------------



| |  | Longer sales cycles associated with educating foreign customers on the benefits of using our products;
| | - | ------------------------------------------------------------------------------------------------------



| |  | Greater difficulty and longer time in collecting accounts receivable from customers located abroad;
| | - | ---------------------------------------------------------------------------------------------------



| |  | Difficulty in providing customer support for our software in multiple time zones;
| | - | ---------------------------------------------------------------------------------



| |  | The need to develop our software in multiple foreign languages;
| | - | ---------------------------------------------------------------



| |  | Difficulties in enforcing agreements through non-U.S. legal systems;
| | - | --------------------------------------------------------------------



| |  | Unexpected changes in regulatory requirements that may limit our ability to export our software or sell into particular jurisdictions or impose multiple conflicting tax laws and
regulations;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Political and economic instability; civil unrest or war; and terrorist activities, particularly in Asia;
| | - | --------------------------------------------------------------------------------------------------------



| |  | Difficulties in protecting our intellectual property rights, particularly in countries where the laws and practices do not protect proprietary rights to as great an extent as do the
laws and practices of the United States;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changing laws and policies affecting economic liberalization, foreign investment, currency convertibility or exchange rates, taxation or employment; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nationalization of foreign owned assets, including intellectual property.
| | - | -------------------------------------------------------------------------



38



---

##### Table of Contents

In addition, prior to the acquisition of Eigner, most of our revenues have been denominated in United
States dollars. In both Europe and Japan, we are now realizing an increasing the portion of our revenues is denominated in local currencies (Euro and Yen, respectively). As a result, we are exposed to greater risks in currency fluctuations. We
currently do not engage in foreign exchange hedging activities, and therefore our international revenues and expenses are currently subject to the risks of foreign currency fluctuations. For example, we assumed a Euro-denominated obligation in
connection with our acquisition of Eigner. As a result of the Euro strengthening against the U.S Dollar during the three months ended January 31, 2004, we recorded an unrealized loss from foreign currency translation of $743,000.



We believe that continued expansion of our international operations will be
necessary for our future success, and a key aspect to our business strategy has been and is to expand our sales and support organizations internationally. Therefore, we believe that we will need to commit additional significant resources to expand
our international operations. If we are unable to successfully expand further in international markets on a timely basis, or if this expansion is more difficult than expected, we may not be able to achieve anticipated revenue growth.



If Our Professional Services Revenues Continues to Increase As a Percentage of Total
Revenues, Our Gross Margins Could Decrease, Adversely Affecting Our Operating Results; We Currently Perform Some of Our Implementations on a Fixed-Price Basis, Which Could Cause Us to Incur More Costs Than We Expect



We realize lower margins on professional services revenues than on license
revenues. As a result, if, as has happened recently, professional services revenues increase as a percentage of total revenue, or, if we increase our use of third parties to provide such services, our gross margins may continue to decline and our
operating results may be adversely affected.



In addition, we
may at times charge customers a fixed fee for installation services. We have at times in the past underestimated and may in the future underestimate the amount of time or resources required to install our products, resulting in installation costs
that are in excess of the fees charged to our customers for the work performed. If we do not correctly estimate the amount of time or resources required for a large number of installations, our gross margins could decline, adversely impacting our
operating results.



Our Efforts to Expand Sales of Our Products to Other
Industries May Not Succeed



We currently sell our
products primarily to companies in the high technology and life sciences industries. We also market products to customers in additional industries, including automotive, aerospace and industrial equipment. Although we have targeted enterprises in
these other markets as potential customers, these potential customers may not be as willing to purchase our products as our customers in the high technology and life sciences industries have been. Targeting additional industries requires us to
invest significant amounts in sales and marketing activities. If we are unable to expand into other industries and markets, we may not recover this investment. In addition, if we are not able to expand into other industries, we may be unable to
maintain or increase sales of our software.



We Have a History of Losses,
We Expect to Incur Losses in the Future, We May Not Achieve or Maintain Profitability



Since inception, we have funded our business primarily through selling our stock, not from cash generated from our business. We have incurred quarterly and annual losses in each of the years since we were formed and
we expect to continue to incur quarterly and annual losses in the near term. We incurred losses of $4.0 million and $5.7 million for the three months ended January 31, 2004 and 2003, respectively. As of January 31, 2004, we had an accumulated
deficit of approximately $280.1 million. We expect to continue to incur significant sales and marketing, research and development and general and administrative expenses, as well as substantial non-cash costs relating to the amortization of
intangible assets and stock compensation which will contribute to our net losses. We will need to reach and maintain higher revenue levels to achieve and maintain profitability, and we may not be able to do so. Even if we do achieve profitability,
we may not be able to sustain or increase profitability on a quarterly or annual basis in the future.



39



---

##### Table of Contents

The Impact of Changes in Global Economic Conditions on Our Current and Potential Customers May Adversely Affect our
Revenues and Results of Operations



Our operating
results have been adversely affected ever the past few years by the reduced levels of capital spending and by the overall weak economic conditions affecting our current and potential customers. The economic environment that we are facing in fiscal
2004 continues to remain uncertain. Because customers and potential customers are deferring and may continue to defer major infrastructure investments until general economic conditions improve, we may be especially prone to this weak economy,
particularly as it relates to large license transactions. We expect the weak economic conditions to continue to adversely impact our business for at least the new few quarters.



We Depend on Licensed Technology That if Lost, Could Result in Increased Cost or Delays in Sales of Our Products



We license technology on a non-exclusive basis from several companies for
use with our products. We utilize database management software from Oracle. Our customers can purchase this software directly from Oracle or from us. In addition, we integrate software into our products licensed from BEA and Oracle for application
server technology, from Actuate for reporting capabilities, Cimmetry Systems and Spicer for document viewing and Cognos for analytics, as well as products from several other providers. We anticipate that we will continue to license technology from
third parties in the future. Some of the software we license from third parties would be difficult to replace and may not continue to be available on commercially reasonable terms, if at all. The loss or inability to maintain any of these technology
licenses could result in delays in the licensing of our products until equivalent technology is identified, licensed, and integrated. The increased use of third-party software could result in higher royalty payments and a loss of product
differentiation and lower product gross margins.



The Market For Our
Products Is Still Developing and Customers May Not Adopt Our Products



The market for PLM software products is still developing. Our customers and potential customers have not traditionally automated product lifecycle management solutions like we offer throughout their supply chains. As
this is a relatively new market, we cannot be certain that this market will continue to develop and grow.



Many customers and prospective customers have already invested substantial resources in other methods of sharing product information during the
manufacturing and supply process, most notably internally developed applications. These customers and prospective customers may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems or methods.



We expect that we will continue to need to pursue intensive
marketing and sales efforts to educate prospective customers about the uses and benefits of our products. Along with our direct efforts in these areas, we also rely upon relationships with consulting and integration partners to increase the market
awareness of the existence and benefits of our PLM solutions. Currently, only a limited number of companies provide this type of market support for our products. These companies are not contractually obligated to promote our products, and they may
have similar or more established relationships with our competitors. If these service providers reduce or discontinue their relationships with us, market acceptance of our products could be harmed.



As a result of these factors, demand for and market acceptance of our
products is subject to a high level of uncertainty. If the PLM market fails to develop as we anticipate, or if our products do not receive wide acceptance, our ability to grow would be limited.



40



---

##### Table of Contents

If We Are Unable to Protect Our Intellectual Property We May Lose a Valuable Asset, Experience Reduced Market Share
or Incur Costly Litigation to Protect Our Rights; We May Also Be Subject to Intellectual Property Infringement Claims That, With or Without Merit, Could Be Costly to Defend or Settle



Our success and ability to compete depend upon our proprietary technology,
particularly the technology underlying our products. We rely on patent, trademark, trade secret and copyright laws to protect our intellectual property. Despite our efforts to protect our intellectual property, a third party could copy or otherwise
obtain our software or other proprietary information without authorization.



We may have to resort to litigation to enforce our intellectual property rights, to protect our patents, trade secrets or know-how or to determine their scope, validity or enforceability. Enforcing or defending
intellectual property rights is expensive, could cause the diversion of our resources, and may not prove successful. Our protective measures may prove inadequate to protect our proprietary rights, and any failure to enforce or protect our rights
could cause us to lose a valuable asset. In addition, the laws of some countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and we expect that it will become more difficult to monitor the use of
our products as we increase our international presence.



We may
from time to time be subject to claims of infringement of other parties proprietary rights or claims that our own intellectual property rights are invalid. There has been a substantial amount of litigation in the software 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 grows and the functionality of products in industry segments overlaps. Any infringement claims made against us,
with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or negative publicity. In addition, if our products were found to infringe a third partys proprietary rights, we could be required to
enter into royalty or licensing agreements in order to continue to be able to sell our products. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or acceptable at all.



The Market Price of our Common Stock Has Been and May Continue to Be Volatile, Which
Could Result in Substantial Losses for Individual Security Holders



The market price for our Common Stock has been, and is likely to continue to be, highly volatile. For the nine months ended January 31, 2004, the high and low closing sales prices of our Common Stock were $12.19 and
$6.40, respectively. Our stock price is subject to wide fluctuations in response to factors, some of which will be beyond our control.



In the past, following periods of volatility in the market price of their securities, many companies have been the subject of securities class action
litigation. If, in addition to the pending litigation discussed elsewhere in which we are currently involved, we are involved in any additional securities class action suits, it could result in further, significant costs and diversion of our
managements attention and resources, and could cause the prices of our securities to fall.



Legislative Action and Potential New Accounting Pronouncements are Likely to Cause our General and Administrative Expenses to Increase



In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as recent changes to listing standards by
Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to hire additional personnel and utilize additional outside legal, accounting and advisory services, all of which will cause our general and
administrative costs to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense among others, could materially increase the expenses that we report
under generally accepted accounting principles and adversely affect our operating results.



41



---

##### Table of Contents

If Requirements Relating to Accounting Treatment For Employee Stock Options Are Changed, We May Be Forced to Change
Our Business Practices



We currently account for the
issuance of stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees. If proposals currently under consideration by accounting standards organizations and governmental authorities are adopted, we may be required
to treat the value of the stock options granted to employees as a compensation expense. As a result, we could decide to reduce the number of stock options granted to employees or to grant options to fewer employees. This could affect our ability to
retain existing employees and attract qualified candidates, and increase the cash compensation we would have to pay to them. In addition, such a change could have a negative effect on our earnings.



Provisions Contained in Our Charter Documents and in Certain Anti-Takeover Measures
Adopted By Us May Delay or Prevent a Change in Our Control



Provisions of our Delaware certificate of incorporation and bylaws and of Delaware law could make it more difficult for a third party to acquire us, even if a change in control would be beneficial to our stockholders. These provisions also
may prevent changes in our management. We are subject to the provision of Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders. The combination of these provisions may
inhibit a non-negotiated merger or other business combination.



In addition, our Board of Directors has the authority to issue up to 10 million shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the stockholders.
The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of shares of Preferred Stock, while potentially providing
desirable flexibility in connection with possible acquisitions and for other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. We have no present intentions
to issue shares of Preferred Stock. Further, in March 2001, our Board of Directors adopted a Preferred Stock purchase rights plan intended to guard against certain takeover tactics. The existence of this plan could also have the effect of making it
more difficult for a third party to acquire a majority of our outstanding voting stock.



42



---

##### Table of Contents

|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk
|------- |  | ----------------------------------------------------------



Foreign Currency Risk



We develop products in the United States, India, and China, and market our products in North America, Europe, and the Asia-Pacific region. As a result,
our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets, and there is no assurance that exchange rate fluctuations will not harm our business in the future.
Because a significant portion of our revenue is currently denominated in U.S. dollars, a change in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in foreign markets. Although we will continue to
monitor our exposure to currency fluctuations, and, where appropriate, may use financial hedging techniques in the future to minimize the effect of these fluctuations, we are not currently engaged in any financial hedging transactions.



In connection with our acquisition of Eigner, we assumed an obligation
with a vendor to Eigner, providing for quarterly payments denominated in Euros through fiscal 2007. As the obligation was denominated in Euros, and the functional currency of the subsidiary holding the obligation was the U.S. Dollar, we are required
to remeasure the value of the obligation at the end of each period. As a result of the Euro strengthening against the U.S. Dollar during the period, a remeasurement of the obligation at the end of such period to the functional currency, net of
payments made, resulted in an unrealized loss from foreign currency translation of $743,000.



Interest Rate Risk



Our
interest income is sensitive to changes in the general level of U.S. interest rates, particularly since all of our investments are in instruments with maturities of less than two years. The primary objective of our investment activities is to
preserve principal while at the same time maximize the income we receive from our investments without significantly increasing risk. Some of the securities that we have invested in may be subject to market risk. This means that a change in
prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk, we maintain our entire portfolio of cash in money market funds and investments classified as available-for-sale. In general, money market funds and
investments with maturities of less than two years are not subject to significant market risk because the interest paid on such funds fluctuates with the prevailing interest rate. Because some of our debt arrangements are based on variable rates of
interest, our interest expense is sensitive to changes in the general level of U.S. interest rates. Since these obligations represent a small percentage of our total capitalization, we believe that there is not a material risk exposure.



The table below represents principal (or notional) amounts and related
weighted-average interest rates by year of maturity of our investment portfolio (in thousands, except interest rates).



|                               |  |                           |         |   |                                |   |            |  |       |   |  |   |         |  
|------------------------------ |  | ------------------------- | ------- | - | ------------------------------ | - | ---------- |  | ----- | - |  | - | ------- | -
|                               |  | Maturing within 12 months |         |   | Maturing between 1 and 2 years |   | Thereafter |  | Total |  
|Cash equivalents               |  | $                         | 30,615  |   |                                |   |           |  |       |  |  | $ | 30,615  |  
|Weighted average interest rate |  |                           | 1.14    | % |                                |   |           |  |       |  |  |   | 1.14    | %
|Investments                    |  | $                         | 100,516 |   |                                | $ | 33,424     |  |       |  |  | $ | 133,940 |  
|Weighted average interest rate |  |                           | 1.33    | % |                                |   | 2.06       |  |       |  |  |   | 1.51    | %
|                               |  |                           |         |   |                                |   |            |  |       |   |  |   |         |  
|Total investment securities    |  | $                         | 131,131 |   |                                | $ | 33,424     |  | $     |  |  | $ | 164,555 |  
|                               |  |                           |         |   |                                |   |            |  |       |   |  |   |         |  



Other Investments



In the past, we have invested in equity instruments of privately held
companies for business and strategic purposes. These investments are included in other long-term assets and are accounted for under the cost method when ownership is less than 20% and we do not have the ability to exercise significant influence over
operations. For these investments, our policy is to regularly review the assumptions underlying the operating performance and



43



---

##### Table of Contents

cash flow forecasts in assessing the carrying values. We identify and record impairment losses when events and
circumstances indicate that such assets might be impaired. During the three and nine months ended January 31, 2003, we determined that these investments had incurred a decline in value that was other-than-temporary and reduced their carrying amounts
to the estimated fair value by a charge to our results of operations of $1.1 million and $3.7 million, respectively. As of January 31, 2004, our investments in privately held companies and the venture fund are written down to zero.



|Item 4. |  | Controls and Procedures
|------- |  | -----------------------



Evaluation of Our Disclosure Controls and Internal Controls



Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as of the end of the period covered by this report
(the Evaluation Date). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, to their knowledge and belief, our disclosure controls and procedures were effective.



There have been no significant changes (including corrective
actions with regard to significant deficiencies or material weaknesses) in our internal controls or to our knowledge in other factors that could significantly affect these controls subsequent to the Evaluation Date.



CEO and CFO Certifications



Attached, as Exhibits 31 and 32, are two separate forms of certifications of
the CEO and the CFO. The certifications attached as Exhibits 31.1 and 31.2 are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certification). The information contained in this Item 4 relates to
the Controls Evaluation referred to in the Section 302 Certifications, and should be read with the Section 302 Certifications for a more complete understanding of the topics presented.



Disclosure Controls and Internal Controls



Our management, including the CEO and CFO, has a responsibility for establishing and maintaining adequate disclosure and internal controls over our
financial reporting. Disclosure Controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Quarterly Report on Form
10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our
management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Internal Controls are procedures that are designed with the objective of providing reasonable assurance that our transactions are properly
authorized, our assets are safeguarded against unauthorized or improper use, and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with GAAP.



Limitations on the Effectiveness of Controls



Our management, including the CEO and CFO, does not expect that our
disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. In addition, over time, controls may
become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.



44



---

##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. |  | Legal Proceedings
|------- |  | -----------------



On or around October 25, 2001, a class action lawsuit was filed in the Southern District of New York against Agile Software Corporation, Bryan D. Stolle
and Thomas P. Shanahan (collectively the Agile Defendants) and several investment banking firms that served as underwriters of our initial public offering and secondary offering. The case is now captioned In re Agile Software, Inc.
Initial Public Offering Securities Litigation, 01 CIV 9413 (SAS), related to In re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). The operative amended complaint is brought purportedly on behalf of all persons who
purchased our Common Stock from August 19, 1999 through December 6, 2000. It alleges liability under Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, on the grounds that the
registration statement for the offerings did not disclose that: (1) the underwriters had agreed to allow certain customers to purchase shares in the offerings in exchange for excess commissions paid to the underwriters; and (2) the underwriters had
arranged for certain customers to purchase additional shares in the aftermarket at predetermined prices. The amended complaint also alleges that false analyst reports were issued. No specific damages are claimed.



Similar allegations were made in other lawsuits challenging over 300 other
initial public offerings and follow-on offerings conducted in 1999 and 2000. The cases were consolidated for pretrial purposes and all defendants moved to dismiss. On February 19, 2003, the Court dismissed the claims under the Securities Act of 1933
with respect to our initial public offering, but not the secondary offering. The Court denied the motion to dismiss Section 10(a) claim against us, but granted the motion as to the individual defendants.



We have accepted a settlement proposal presented to all issuer defendants. In
this settlement, plaintiffs will dismiss and release all claims against the Agile Defendants, in exchange for a contingent payment by the insurance companies collectively responsible for insuring the issuers in all of the IPO cases, and for the
assignment or surrender of certain claims we may have against the underwriters. The Agile Defendants will not be required to make any cash payments in the settlement, unless the pro rata amount paid by the insurers in the settlement exceeds
the amount of the insurance coverage, a circumstance which we do not believe will occur. The settlement will require approval of the Court, which cannot be assured, after class members are given the opportunity to object to the settlement or opt out
of the settlement.



We are also subject to various other claims
and legal actions arising in the ordinary course of business. In our opinion, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on our business, financial condition or results
of operations.



|Item 2. |  | Changes In Securities, Use Of Proceeds, And Issuer Purchases Of Equity Securities
|------- |  | ---------------------------------------------------------------------------------



Not Applicable



|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------



Not Applicable



45



---

##### Table of Contents

|Item 4. |  | Submission Of Matters To A Vote Of Security Holders
|------- |  | ---------------------------------------------------



Not Applicable



|Item 5. |  | Other Information
|------- |  | -----------------



Not Applicable



|Item 6. |  | Exhibits And Reports On Form 8-K
|------- |  | --------------------------------



| | (a) | Exhibits
| | --- | --------



|     |   |  |                                                                                                                                                                                                                                                                                                                                                      
|---- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  
|3.1  |   |  | Certificate of Incorporation of Agile Software Corporation, as amended to date. (1)                                                                                                                                                                                                                                                                  
|     |  
|3.2  |   |  | Certificate of Elimination and Certificate of Amendment. (1)                                                                                                                                                                                                                                                                                         
|     |  
|3.3  |   |  | Amended and Restated Bylaws of Agile Software Corporation. (2)                                                                                                                                                                                                                                                                                       
|     |  
|4.1  |   |  | Specimen Common Stock Certificate. (1)                                                                                                                                                                                                                                                                                                               
|     |  
|4.2  |   |  | Form of Rights Agreement between Agile Software Corporation and Fleet National Bank, as Rights Agent (including as Exhibit A the form of Certificate of Designation, Preferences and Rights of
the Terms of the Series A Preferred Stock, as Exhibit B the form of Right Certificate, and as Exhibit C the Summary of Terms of Rights Agreement). (2)
|     |  
|10.1 | * |  | Amended and Restated 1995 Stock Option Plan. (1)*                                                                                                                                                                                                                                                                                                    
|     |  
|10.2 | * |  | 1999 Employee Stock Purchase Plan. (1)*                                                                                                                                                                                                                                                                                                              
|     |  
|10.3 | * |  | 2000 Nonstatutory Stock Option Plan. (3)*                                                                                                                                                                                                                                                                                                            
|     |  
|10.4 | * |  | Form of Indemnity Agreement between Agile Software Corporation and its directors and officers. (1)                                                                                                                                                                                                                                                   
|     |  
|10.5 | * |  | Executive Retention and Severance Plan adopted by the Company on October 17, 2002 and entered into with its executive officers and certain key employees, together with forms of Participation
Agreement and Release of Claims Agreement. (4)*                                                                                                       
|     |  
|10.6 |   |  | Sublease dated May 9, 2003 made by and between Nortel Networks Inc. (as successor in interest to Alteon Web Systems), as sublandlord, and Agile Software Corporation as subtenant.
(5)                                                                                                                                                               
|     |  
|31.1 |   |  | Certification of Chief Executive Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                          
|     |  
|31.2 |   |  | Certification of Chief Financial Officer Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14, As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                          
|     |  
|32.1 |   |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                   
|     |  
|32.2 |   |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                   

---

|(1) | Incorporated by reference to Agiles Registration Statement on Form S-1 (Reg. No. 333-81387), declared effective on August 19, 1999.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to Agiles Current Report on Form 8-K (file No. 000-27071), filed on April 26, 2001.
|--- | --------------------------------------------------------------------------------------------------------------



46



---

##### Table of Contents

|(3) | Incorporated by reference to Agiles Registration Statement on Form S-8 (Reg. No. 333-35416), filed on April 21, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to Agiles Quarterly Report on Form 10-Q (file No. 000-27071), filed on December 13, 2002.
|--- | --------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to Agiles Annual Report on Form 10-K (file No. 000-27071), filed on July 28, 2003.
|--- | -------------------------------------------------------------------------------------------------------------



|* | Management contract or compensatory plan.
|- | -----------------------------------------



| | (b) | We filed or furnished the following reports on Form 8-K during the quarter ended January 31, 2004:
| | --- | --------------------------------------------------------------------------------------------------



| | (i) | Form 8-K furnished on November 20, 2003 reporting that we issued a press release announcing financial results for our second quarter ended October 31, 2003.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------



Available Information



We make available, free of charge, by link from our website at
www.agile.com our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports as soon as reasonably practicable after we have electronically filed or furnished such materials to
the Securities and Exchange Commission. Information contained on our website is not part of this report.



47



---

##### Table of Contents

SIGNATURES



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



AGILE SOFTWARE CORPORATIONBy:

/s/    CAROLYN V.
AVERCarolyn V. Aver Executive Vice President and Chief Financial Officer (Principal Accounting Officer)Date: March 12, 2004




48