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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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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 October 31, 2002





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





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AGILE SOFTWARE CORPORATION


(Exact name of
registrant as specified in its charter)





Delaware (State of
incorporation)

77-0397905 (IRS Employer
Identification Number)





One Almaden Boulevard, San Jose, Ca 95113-2253


(Address of principal executive offices, including ZIP code)





(408) 975-3900


(Registrants telephone number, including area code)





None


(Former name, former address and former fiscal year, if changed since last
report)





---




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  ̈





The number of shares outstanding of the Registrants Common
Stock as of October 31, 2002 was 48,656,433.





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##### Table of Contents

AGILE SOFTWARE CORPORATION





INDEX





Page No.Part I.

Financial InformationItem 1.

Financial Statements (unaudited)Condensed Consolidated Balance Sheets at October 31, 2002 and April 30, 2002

3Condensed Consolidated Statements of Operations for the Three and Six Months Ended October 31, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows for the Six Months Ended October 31, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

13Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37Item 4.

Controls and Procedures

38Part II.

Other InformationItem 1.

Legal Proceedings

38Item 2.

Changes in Securities and Use of Proceeds

39Item 3.

Defaults Upon Senior Securities

39Item 4.

Submission of Matters to a Vote of Security Holders

39Item 5.

Other Information

39Item 6.

Exhibits and Reports on Form 8-K

39Signature and Certifications

40Exhibit Index

42




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##### Table of Contents

PART 1FINANCIAL INFORMATION





Item 1. Financial Statements





AGILE SOFTWARE CORPORATION


CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)


(unaudited)





October 31, 2002


April 30, 2002ASSETS






(1)Current assets:Cash and cash equivalents

$
94,885


$
123,374Short-term investments


173,198



162,175Accounts receivable, net of allowance for doubtful accounts of $987 and $1,112 as of October 31, 2002 and April 30,
2002, respectively


8,710



6,538Other current assets


7,568



8,052Total current assets


284,361



300,139Property and equipment, net


9,429



10,887Other assets


3,462



8,038$
297,252


$
319,064LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable

$
3,423


$
5,113Accrued expenses and other liabilities


14,994



14,120Deferred revenue


13,600



13,200Total current liabilities


32,017



32,433Accrued restructuring, non-current


3,413



35,430



32,433Stockholders' equity:Common Stock


49



48Additional paid-in capital


513,538



512,349Notes receivable from stockholders


(228
)


(249
)Unearned stock compensation


(2,903
)


(4,004
)Accumulated other comprehensive income


372



92Accumulated deficit


(249,006
)


(221,605
)Total stockholders' equity


261,822



286,631$
297,252


$
319,064





(1)  The April 30, 2002 consolidated balance sheet information has been derived
from the audited financial statements at that date.





See accompanying notes to these condensed
consolidated financial statements.




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AGILE SOFTWARE CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(in thousands, except per share data)


(unaudited)





Three Months Ended October 31,


Six Months Ended October 31,2002


2001


2002


2001Revenues:License

$
7,613


$
13,063


$
14,468


$
29,070Professional services and maintenance


9,890



8,145



19,059



15,463Total revenues


17,503



21,208



33,527



44,533Cost of revenues:License


648



690



1,299



1,652Professional services and maintenance


4,710



3,631



9,372



7,336Stock compensation (recovery)


4



(15
)


28



12Total cost of revenues


5,362



4,306



10,699



9,000Gross profit


12,141



16,902



22,828



35,533Operating expenses:Sales and marketing:Other sales and marketing


10,716



14,288



22,389



29,356Stock compensation


477



31



932



466Research and development:Other research and development


7,099



7,968



15,164



16,316Stock compensation (recovery)


19



(71
)


124



67General and administrative:Other general and administrative


1,741



1,850



3,378



4,050Stock compensation (recovery)


115



(106
)


74



(292
)Amortization of goodwill and other intangible assets






189







378Merger related benefit














(835
)Restructuring and other charges


7,836







7,836



Total operating expenses


28,003



24,149



49,897



49,506Loss from operations


(15,862
)


(7,247
)


(27,069
)


(13,973
)Interest and other income, net


1,152



2,808



2,667



6,067Impairment of equity investments










(2,560
)


(1,446
)Loss before income taxes


(14,710
)


(4,439
)


(26,962
)


(9,352
)Provision for income taxes


343



50



439



157Net loss

$
(15,053
)

$
(4,489
)

$
(27,401
)

$
(9,509
)Net loss per share:Basic and diluted

$
(0.31
)

$
(0.09
)

$
(0.57
)

$
(0.20
)Weighted average shares


48,381



47,294



48,265



47,073





See accompanying notes to these condensed consolidated financial statements.




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AGILE SOFTWARE CORPORATION


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


(unaudited)





Six Months Ended October 31,2002


2001Cash flows from operating activities:Net loss

$
(27,401
)

$
(9,509
)Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Provision for doubtful accounts






599Depreciation and amortization


4,131



5,055Amortization of stock compensation


1,158



253Impairment of equity investments


2,560



1,446Restructuring and other charges


7,836



Changes in operating assets and liabilities:Accounts receivable, net


(2,172
)


6,900Other assets, current and non-current


(194
)


(1,027
)Accounts payable


(1,690
)


(7,321
)Accrued expenses and other liabilities


(370
)


(738
)Deferred revenue


400



(4,610
)Net cash used in operating activities


(15,742
)


(8,952
)Cash flows from investing activities:Purchases of investments


(99,098
)


(182,462
)Proceeds from maturities and sales of investments


88,355



148,700Purchases of privately-held investments






(150
)Acquisition of property and equipment


(3,158
)


(5,286
)Net cash used in investing activities


(13,901
)


(39,198
)Cash flows from financing activities:Repayment of capital lease obligations






(371
)Proceeds from issuance of common stock, net of repurchases


1,133



2,806Repayment of notes receivable from stockholders


21



183Net cash provided by financing activities


1,154



2,618Net decrease in cash and cash equivalents


(28,489
)


(45,532
)Cash and cash equivalents at beginning of period


123,374



139,917Cash and cash equivalents at end of period

$
94,885


$
94,385Non-cash investing and financing activities:Additions (reductions) in unearned stock compensation

$
57



(3,106
)





See accompanying notes to these condensed
consolidated financial statements.




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AGILE SOFTWARE CORPORATION





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





1.    Basis of Presentation





The accompanying unaudited condensed consolidated financial statements of Agile Software Corporation and its subsidiaries
(Agile or the Company) have been prepared by the Company 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, 2003. 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 the Companys audited consolidated financial statements and notes thereto for the
fiscal year ended April 30, 2002, included in the Companys Annual Report on Form 10-K filed on July 26, 2002 with the Securities and Exchange Commission.





Certain reclassifications have been made to prior year balances in order to conform to the current period presentation. These classifications had no impact on previously reported net loss or cash flows.





2.    Concentrations of Credit Risk and Significant Customers





Revenues and accounts receivable comprising of more than 10% of total amounts by customer is as follows:





% of Total Revenues

% of Accounts Receivable as ofThree Months Ended October 31,


Six Months Ended October 31,2002

2001



2002



2001

October 31, 2002


April 30,  2002Customer A






12
%






Customer B











10
%

Customer C



12
%









Customer D



12
%















3.    Revenue Recognition





The Company recognizes revenues in accordance with SOP 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions.





The Company derives revenues from the license of software products
under software license agreements and from the delivery of professional services and maintenance services. When contracts contain multiple elements, and vendor-specific objective evidence of fair value exists for all undelivered elements, the
Company accounts for the delivered elements in accordance with the residual method prescribed by SOP 98-9. Multiple element arrangements generally include post-contract customer support (PCS or maintenance), software products, and in some cases,
services. Vendor-specific objective evidence of fair value is generally determined by sales of the individual element or service to other customers, or with respect to PCS, through a renewal rate specified in the related arrangement or by sales of
the element when sold separately.





License revenues are recognized when persuasive evidence of an arrangement exists, the fee is fixed or
determinable, collectibility is probable, and delivery and customer acceptance (including the expiration of an acceptance period), if required under the terms of the contract, of the software products have occurred. In the event the Company grants
its customers the right to specified upgrades, license revenue is deferred until delivery of the specified upgrade. If vendor-specific objective evidence of fair value exists for the specified upgrade, then an




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amount equal to this fair value is deferred. If vendor-specific objective evidence of fair value does
not exist, then the entire license fee is deferred until the delivery of the specified upgrade. Allowances for estimated returns are provided upon product delivery, based upon the Companys historical return rates. In instances where vendor
obligations remain, revenues are deferred until the obligation has been satisfied.





Revenues from professional services consist of
training and implementation services. Training revenues are recognized as the services are performed. Professional services are not essential to the functionality of the other elements of the arrangement and are accounted for as a separate element.
Professional services are recognized as the services are performed for time and materials contracts or upon achievement of milestones on fixed price contracts. A provision for estimated losses on fixed-price professional services contracts is
recognized in the period in which the loss becomes known.





Maintenance revenues are recognized ratably over the term of the maintenance
contract, which is generally twelve months. Maintenance contracts include the right to unspecified upgrades on a when-and-if available basis, and ongoing support.





4.    Net Loss Per Share





Basic net loss per share is computed
by dividing the net loss attributable to holders of Common Stock for the period by the weighted average number of shares of Common Stock outstanding during the period less unvested restricted Common Stock. 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 antidilutive. Potential shares of Common Stock consist of unvested restricted Common Stock, incremental
common shares issuable upon the exercise of stock options and a warrant.





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 October 31,


Six Months Ended October 31,2002


2001


2002


2001Numerator:Net loss

$
(15,053
)

$
(4,489
)

$
(27,401
)

$
(9,509
)Denominator:Weighted average shares


48,595



47,887



48,514



47,767Weighted average unvested shares of Common Stock subject to repurchase


(214
)


(593
)


(249
)


(694
)Denominator for basic and diluted calculation


48,381



47,294



48,265



47,073Net loss per share:Basic and diluted

$
(0.31
)

$
(0.09
)

$
(0.57
)

$
(0.20
)





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):




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As of October 31,2002

2001Warrant to purchase Common Stock

50

50Unvested Common Stock subject to repurchase

198

503Options to purchase Common Stock

16,354

16,20716,602

16,760





5.    Comprehensive Loss





The Companys comprehensive loss, which encompasses net loss and unrealized gains or losses on available-for-sale securities, is as follows:





Three Months Ended October 31,


Six Months Ended October 31,2002


2001


2002


2001Net loss

$
(15,053
)

$
(4,489
)

$
(27,401
)

$
(9,509
)Unrealized gains on available-for-sale securities


28



530



280



627Comprehensive loss

$
(15,025
)

$
(3,959
)

$
(27,121
)

$
(8,882
)





6.    Segment Information





The Company operates in a single business segment. Revenues from foreign customers were approximately 25% and 16% of total revenues during the three months ended
October 31, 2002 and 2001, respectively, and approximately 26% and 12% of total revenues during the six months ended October 31, 2002 and 2001, respectively. The Companys international revenues were derived primarily from sales to customers
located in Japan, Europe and Asia Pacific. Revenues are attributed to geographic locations based upon the location of the customer.





7.    Stock Compensation





Stock compensation expense is being recognized over the applicable
vesting period of the options, generally five years, using the accelerated method of amortization prescribed by Financial Accounting Standards Board (FASB) Interpretation No. 28. Amortization (recovery) of stock compensation for
employees was $192,000 and ($261,000) for the three months ended October 31, 2002 and 2001, respectively, and $611,000 and $231,000 for the six months ended October 31, 2002 and 2001, respectively.





Stock compensation expense related to stock options granted to consultants is recognized as earned, over the applicable vesting period of the options, using the
accelerated method of amortization prescribed by FASB Interpretation No. 28. At each reporting date, the Company recalculates the value of the stock option using the Black-Scholes option pricing model and the Company records changes in fair value
for the vested portion of the option. As a result, the stock compensation expense fluctuates with the movement in the fair market value of the Companys common stock. Amortization of stock compensation for consultants was $423,000 and $100,000
for the three months ended October 31, 2002 and 2001, respectively, and $547,000 and $22,000 for the six months ended October 31, 2002 and 2001, respectively.




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During the three and six months ended October 31, 2002 and 2001, respectively, we terminated employment
of individuals for whom we had recognized deferred stock composition and had recognized related expense on unvested options using an accelerated method. Accordingly, during the three months ended October 31, 2002 and 2001, respectively, the Company
reduced unearned stock compensation, which would have been amortized to future expense, of $327,000 and $1.1 million for the three months ended October 31, 2002 and 2001, respectively. We reduced amortization to expense of unearned stock
compensation by $445,000 and $1.6 million for the six months ended October 31, 2002 and 2001, respectively, to record the benefit of previously recognized expense on unvested options.





8.    Marketable Investments





The Companys marketable
investments are comprised of U.S., state, and municipal government obligations; corporate debt securities; and foreign debt securities. Investments with maturities of less than one year are considered short-term and are carried at fair value. All
investments are held in the Companys name and custodied with one major financial institution. The specific identification method is used to determine the cost of securities. At October 31, 2002 and April 30, 2002, all of the Companys
investments were classified as current and available for sale. Unrealized gains and losses on these investments are included in accumulated other comprehensive income . Realized gains and losses and declines in value considered to be other than
temporary are included in interest and other income.





9.    Other Assets





Other assets include investments in equity instruments of privately held companies, which amounted to $1.1 million and $3.5 million at October 31, 2002 and April
30, 2002, respectively. These investments, accounted for using the cost method and consisting primarily of investments in a venture fund and preferred stock, are reviewed each reporting period for declines considered other-than-temporary, and, if
appropriate, written down to their estimated fair value.





During each of the three months ended July 31, 2002 and 2001, the Company
determined that such investments had incurred a decline in value that was other-than-temporary and, accordingly, their carrying amounts were reduced to their estimated fair value by a charge to other income (expense) of $2.6 million and $1.4 million
in the three months ended July 31, 2002 and 2001, respectively.





Other assets also include prepaid software license fees paid to third
party software developers for technology integrated into our products. These prepaid software license feesamounted to $1.9 million and $4.7 million as of October 31, 2002 and April 30, 2002, respectively. The Company evaluates the future realization
of such costs quarterly and charges to operations any amounts that the Company deems unlikely to be fully realized through future sales. Such prepaid software license fees are classified as current and noncurrent assets based upon estimated product
release date.





During the three months ended October 31, 2002, the Company determined that the carrying value of certain prepaid software
license fees exceeded their net realizable value. The determination was based upon a revised forecast of future revenues prepared during the quarter showing lower than anticipated sales for the products in which the third party licenses were
embedded. Accordingly, a charge of approximately $2.7 million was included in the statement of operations under restructuring and other charges for the three months ended October 31, 2002 to reflect the write-down of the prepaid license fees to
their estimated net realizable value.





10.    Restructuring





During the three months ended April 30, 2002, the Company restructured its operations in order to reduce expenses and align its operations and cost structure
with existing market conditions. The actions taken included a reduction of approximately 15% of worldwide headcount, or 75 employees, across all functions. The restructuring charge incurred as a result of the actions taken included facility and
lease costs related to the closure of certain excess facilities and activities that the Company exited.




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During the three months ended October 31, 2002, we recorded a restructuring charge of $7.8 million,
which consisted of $4.6 million for the consolidation of excess leased space, $485,000 related to the write-down of excess fixed assets, and $2.7 million of charges related to the write down of additional prepaid software license fees used in our
products.





The significant activity within and components of the restructuring and other charges as of October 31, 2002 are as follows
(in thousands):





Actual at April 30, 2002

Restructuring Charge Three months ended October 31, 2002

Non-cash Charges


Cash Payments


Accrual at October 31, 2002Workforce reductions

$
1,982

$


$



$
(1,483
)

$
499Facilities costs


729


4,657






(187
)


5,199Equipment and other asset write-offs





485


(485
)






Subtotal


2,711


5,142


(485
)


(1,670
)


5,698Other charges - Prepaid license fees





2,694


(2,694
)






Total

$
2,711

$
7,836

$
(3,179
)

$
(1,670
)

$
5,698Included in accrued expenses and other liabilities















$
2,285Included in accrued restructuring, non-current
















3,413$
5,698





The remaining cash payments relating to employee severance and fringe benefits are
expected to be paid by January 31, 2003, and the remaining cash payments relating to facilities and leases are expected to be paid through March 2007.





Facilities costs of approximately $4.7 million that were included in the restructuring charge above generally represent lease commitment costs for office space that the Company no longer intends to occupy. Also included in the
restructuring charge during the three months ended October 31, 2002 is a revision of estimated sublease income related to excess facilities identified in the three months ended April 30, 2002, due to further deterioration of the real estate market
in the San Jose area.





Equipment and other write-offs of $485,000 related principally to write-off of excess fixed assets resulting from
the restructuring plan.





Other charges of $2.7 million related to the impairment of certain prepaid software license fees for which the
Company determined that the carrying value of the non-refundable prepaid license fees exceeded its net realizable value as a result of revised forecasts of future revenues showing lower than anticipated sales for the products in which the third
party licenses were embedded.





11.    Option Exchange Program





On October 18, 2001, we announced a voluntary stock option exchange program for our employees. Under the program, our option holders had the opportunity to
cancel outstanding options with an exercise price in excess of $15.00 per share in exchange for new options to be granted at a future date that is at least six months and one day after the date of cancellation, which was November 19, 2001. The
number of shares of common stock subject to the new options was equal to 75% of the number subject to the exchanged options. Under the exchange program, options for 4.0 million shares of our common stock were tendered and cancelled. On May 31, 2002,
we issued options to purchase approximately 2.5 million shares of common stock to replace the tendered options. In addition, a certain number of employees terminated their employment in the intervening six months, and were not granted replacement
options. The exercise price of each replacement option is $8.34 per share, which was the fair market value of our common stock on May 31, 2002, represented by the closing sale price on such date on the Nasdaq National Market. The replacement options
have terms and conditions that are substantially the same as those of the




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canceled options. The exchange program did not result in any additional compensation charges or variable plan accounting. Members of our Board
of Directors did not participate in this program.





12.    Litigation





On or about October 25, 2001, a stockholder class action complaint was filed in the United States District Court for the Southern District of New York against
us, several of our officers and directors, and the underwriters of our initial public offering, Rennel Trading Corp. et al. v. Agile Software Corp. et al., Index No. 01-CV-9801 (SAS). The class action has been consolidated for pre-trial purposes
with more than one thousand other actions, filed against more than 300 other issuers of securities, affiliated individuals, and dozens of underwriters of the securities offerings in In Re Initial Public Offering Securities Litigation, 21 MC 92
(SAS). The plaintiffs allege that the prospectus for the initial public offering of Agile securities, incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading
because it failed to disclose, among other things, that the underwriters had made secret arrangements for aftermarket purchases of the securities, and made arrangements for excessive and improper underwriters compensation in the form of increased
brokerage commissions. The plaintiffs subsequently filed an amended complaint that additionally alleges that the prospectus for a secondary offering of Agile securities, conducted on December 13, 1999, and incorporated into a Registration Statement
on Form S-1 filed with the Securities and Exchange Commission, also was materially false and misleading for the same alleged reasons. The plaintiffs also allege that the Companys stock price was artificially inflated as a result of the alleged
underwriter practices. Plaintiffs attempt to state and claim violations by the Company, the individuals and the underwriters of Section 11 of the Securities Act of 1933, violations by the individual defendants and underwriters of Section 12(a)(2) of
the Securities Act, and violations by the underwriters of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission. The Company and individual defendants, together with
other issuer and individual defendants, recently argued motions to dismiss the complaint, and are awaiting the judges rulings on the motions. The Company believes that it has meritorious defenses against these actions and intends to vigorously
defend them.





We are also subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of
management, 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.





13.    Goodwill and Intangible Assets





Effective May 1, 2002, we adopted Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, which establishes new accounting and reporting requirements for goodwill and other
intangible assets. Under SFAS No. 142, all goodwill amortization ceased effective May 1, 2002 and recorded goodwill was tested for impairment by comparing the fair value of Agile Software Corporation, as determined by its implied market
capitalization, to its consolidated carrying value including recorded goodwill. An impairment test is required to be performed at adoption of SFAS No. 142 and at least annually thereafter. On an ongoing basis (absent any impairment indicators), we
expect to perform our impairment testing during the three months ended April 30.





In connection with adopting SFAS No. 142, we also
reassessed the useful lives and the classification of our identifiable intangible assets. Based upon such assessment, the Company reclassified $2.1 million of its intangible assets, representing acquired workforce in place to goodwill and ceased
amortization of such amounts. As of April 30, 2002 the Company had gross intangible assets of $2.2 million and related accumulated amortization of approximately $1.9 million. Prospectively, the Company will not record any amortization related to the
intangible assets existing at April 30, 2002. Based on our initial impairment test, we determined that none of the recorded goodwill was impaired. Impairment adjustments recognized after adoption, if any, are generally required to be recognized as
operating expenses.





Actual results of operations for the three and six months ended October 31, 2002 and 2001 and pro forma results of
operations for the three and six months ended October 31, 2002 and 2001, had we applied the provisions of SFAS No. 142 in those periods, are as follows (in thousands, except per share amounts):




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Three Months Ended October 31,


Six Months Ended October 31,2002


2001


2002


2001Net loss as reported

$
(15,053
)

$
(4,489
)

$
(27,401
)

$
(9,509
)Add: amortization of goodwill






189







378Pro forma net loss

$
(15,053
)

$
(4,300
)

$
(27,401
)

$
(9,131
)Net loss per share as reported

$
(0.31
)

$
(0.09
)

$
(0.57
)

$
(0.20
)Pro forma net loss per share

$
(0.31
)

$
(0.09
)

$
(0.57
)

$
(0.19
)





14.    Recent Accounting Pronouncements





In August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles
Board Opinion No. 30. SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair
value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for the Company for all financial statements issued in fiscal 2003. The adoption of SFAS No. 144 did not have a material impact on its financial position or
results of operations.





On July 29, 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses significant issues relating to the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging
Issues Task Force (EITF) Issue No. 94-3 (EITF 94-3), Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.) SFAS No. 146 requires that
the initial liability for costs associated with exit and disposal activities be measured at fair value and prohibits the recognition of a liability based solely on an entitys commitment to a plan, which, in turn, nullifies EITF 94-3. The
provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December 31, 2002. Retroactive application of FAS 146 is prohibited and, accordingly, liabilities recognized prior to the initial application of FAS 146 should
continue to be accounted for in accordance with EITF 94-3 or other applicable preexisting guidance.




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ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS





The information in this discussion contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. 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
significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed in Other Factors Affecting Operating Results and
Liquidity and Capital Resources below, as well as Risk Factors included in our Annual Report on Form 10-K filed on July 26, 2002 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.





Overview





We develop and market product lifecycle management solutions to help companies work internally and with their suppliers and customers to build better,
more profitable products faster. We believe that our products reduce time-to-volume and cost of goods sold and improve customer responsiveness and product quality. Our solutions manage the system of record for a companys products and provide
business applications for critical communication and collaboration about the product record among manufacturers, outsourced manufacturing providers, suppliers and customers. Our products help companies manage complex supply chains, as well as
globally dispersed engineering, manufacturing, sales and distribution functions. We were founded in March 1995 and in June 1996 we began selling our first products and delivering related services. We currently license our products in the United
States through our direct sales force, and in Japan, Europe and Asia-Pacific both through our direct sales force and distributors. To date, international revenues have been growing as we have expanded our international sales force. Revenues from
foreign customers were approximately 25% of total revenues during the three months ended October 31, 2002 compared to 16% of total revenues during the three months ended October 31, 2001, and 26% of total revenues during the six months ended October
31, 2002 compared to 12% of total revenues during the six months ended October 31, 2001. The increase in revenue from foreign customers as a percentage of total revenues was due primarily to increases in sales to customers located in Japan, and to a
lesser extent, Europe.





Customers who license our software products receive a license for our application servers, one or more user
licenses, and adapters provided by third parties to connect with the customers other existing enterprise systems. Our customers generally purchase a limited number of user licenses at the time of the initial license of the software products
and may purchase additional user licenses as needed. Customers may purchase implementation services from us. These professional services are provided on a fixed-price or time-and-materials basis and may be provided by third-party consulting
organizations. We also offer fee-based training services to our customers. As of October 31, 2002, over 98% of our customers of new or add-on licenses purchased maintenance contracts, which provide unspecified software upgrades on a when-and-if
available basis, and technical support over a stated term, which is generally a twelve-month period. Over 90% of our existing customers had renewed their maintenance contracts as of October 31, 2002. We may not be able to maintain or continue these
rates of purchases or renewals of maintenance agreements.





As a result of unfavorable global economic conditions and a reduction in
information technology spending around the world, during the three months ended April 30, 2002, we announced a worldwide restructuring program to reduce expenses to align our operations and cost structure with market conditions. During the fourth
quarter of 2002, we recorded $6.3 million of restructuring and other charges associated with the worldwide restructuring plan. The costs associated with this plan consisted of $2.4 million for severance benefits and other related costs resulting
from our reduction in personnel, $447,000 in stock compensation charges related to modifications of certain stock options held by terminated personnel, $729,000 to downsize and close excess facilities, $902,000 to write-down leasehold improvements
and prepaid software licenses resulting from discontinued projects, and $2.2 million to write down impaired assets, primarily comprising prepaid software licenses used in our products.




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The restructuring plan resulted in the termination of employment of approximately 15% of our worldwide
headcount, or 75 personnel. The terminations were made across all business functions and geographic regions. Costs resulting from the restructuring included severance benefits and out-placement services. All termination benefits were communicated to
the affected employees on April 30, 2002.





During the three months ended October 31, 2002, we recorded an additional restructuring
charge, which consisted of $4.6 million primarily for the consolidation of excess facilities, $485,000 to write-down excess fixed assets, and $2.7 million to write down additional prepaid software license fees used in our products.





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 $15.1 million and $4.5 million in the three months ended October 31, 2002 and 2001. We had an accumulated deficit of approximately $249.0 million as of October 31, 2002. We expect to continue to incur
significant sales and marketing, research and development, general and administrative expenses and stock compensation expenses, resulting in continued operating losses for the foreseeable future. Accordingly, in order to achieve profitability, we
will need to increase our revenues significantly or reduce our operating costs.





Use of Estimates and Critical Accounting Policies





In preparing our financial statements, we make estimates, assumptions and judgments that can have a significant impact on our
revenues, loss from operations, and net loss, as well as on the value of certain assets on our balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance, as
these policies affect the reported amounts of revenues, expenses, and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that
are particularly significant include revenue recognition, allowance for doubtful accounts and sales returns, investments, prepaid software license fees restructuring reserves, and stock options and warrants, which are described below.





In addition to the estimates and assumptions that we use to prepare our historical financial statements, we monitor our sales pipeline in order to
estimate the timing and amount of future revenues. If we are unable to properly estimate the timing and amount of revenues, our future operations could be significantly impacted. Our sales pipeline may not consistently result in revenues in a
particular period, as the data upon which the assumptions and estimates were made by management may change. For example, the current economic slowdown has resulted in reduced information technology spending that has caused customers to delay and
reduce purchasing decisions. Accordingly, it has been more difficult and has taken longer to close contracts with customers, the size of the transactions have decreased, and many of our license contracts are signed in the last weeks of the quarter,
making it difficult for us to forecast revenues for the quarter. These factors have resulted in difficulty adjusting spending to respond to variations in revenue growth during the quarter, all of which has adversely affected our business, financial
condition and results of operations.





Revenue Recognition





We recognize revenue in accordance with Statement of Position, or SOP 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions. We recognize license revenues when all of the following criteria are met: persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable, delivery of the product has
occurred and the customer has accepted the product (including the expiration of an acceptance period) if the terms of the contract include an acceptance requirement. In the event that we grant a customer the right to specified upgrades and
vendor-specific objective evidence of fair value exists for such upgrades, we defer license revenue in an amount equal to this fair value until we have delivered the specified upgrade. If vendor-specific objective evidence of fair value does not
exist, then we defer recognition of the entire license fee until we deliver the specified upgrade. We provide allowances for estimated returns at the time we deliver product, based upon our historical level of returns. If professional services are
essential to the functionality of the other elements of the arrangement, we defer recognition of revenue until we had satisfied our professional services obligations. To date, professional services have not been essential to the functionality of the
other elements, and thus have been accounted for separately.




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We consider a non-cancelable agreement signed by us and the customer to be evidence of an arrangement.
Delivery is considered to occur when media containing the licensed programs is provided to a common carrier, or the customer is given electronic access to the licensed software. Our typical end user license agreements do not contain acceptance
clauses. We consider the fee to be fixed or determinable if the fee is not subject to refund or adjustment. If the fee is not fixed or determinable, we recognize revenue as the amounts become due and payable. Probability of collection is based upon
our assessment of the customer s financial condition through review of their current financial statements or credit reports. Collection is deemed probable if we expect that the customer will be able to pay amounts under the arrangement as payments
become due. For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. If we determine that collection is not probable, we defer the revenue and recognize the revenue upon cash collection.





When our software licenses contain multiple elements, we allocate revenue to each element based on the relative fair values of the
elements. Multiple element arrangements generally include post-contract support (PCS or maintenance), software products, and in some cases, services. Revenue from multiple-element arrangements is allocated to undelivered elements of the arrangement,
such as PCS, based on the relative fair values of the elements specific to us. Our determination of fair value of each element in multi-element arrangements is based on vendor-specific objective evidence, which is generally determined by sales of
the individual element or service to third parties or by reference to a renewal rate specified in the related arrangement or by sale of the element when sold seperately.





Where vendor-specific objective evidence of fair-value exists for all undelivered elements, but evidence does not exist for one or more delivered elements, we account for the delivered elements in
accordance with the Residual Method prescribed by SOP 98-9. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. In most cases, the bundled
multiple elements include PCS and the software product. In such cases, when vendor-specific objective evidence of fair value exists for all of the undelivered elements (most commonly PCS), the residual or remaining amount is recognized as revenue
and the PCS is recognized ratably over the PCS term, which is typically 12 months.





Revenues from professional services consist of
training and implementation services. Training revenues are recognized as the services are performed. Professional services are not essential to the functionality of the other elements of the arrangement and are accounted for as a separate element.
Professional services are recognized as the services are performed for time and materials contracts or upon achievement of milestones on fixed price contracts. A provision for estimated losses on fixed-price professional services contracts is
recognized in the period in which the loss becomes known.





A customer typically prepays maintenance revenues for the first 12 months and
the related maintenance revenues are recognized ratably monthly over the term of the maintenance contract, which is generally 12 months. Maintenance contracts include the right to unspecified upgrades on a when-and-if available basis, and ongoing
support.





Deferred revenues include amounts received from customers for which revenue has not yet been recognized that generally results
from deferred maintenance, consulting or training services not yet rendered and license revenue deferred until all requirements under SOP 97-2 are met. Deferred revenue is recognized upon delivery of our products, as services are rendered, or as
other requirements requiring deferral under SOP 97-2 are satisfied.





Allowance for Doubtful Accounts and Sales Returns





We maintain an allowance for doubtful accounts and a sales return allowance at amounts we estimate to be sufficient to provide
adequate protection against losses resulting from collecting less than full payment on our receivables and for sales returns. A considerable amount of judgment is required when we assess the realization of receivables, including assessing the
probability of collection and the current credit-worthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, an additional provision for doubtful
accounts may be required. We provide an allowance for estimated returns at the time we deliver product, based upon our historical level of returns.




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Investments





We invest 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, we regularly review the assumptions underlying the operating performance and 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 months ended July 31, 2002 and 2001, we determined that such investments had incurred a decline in value that was other-than-temporary based upon specific triggering events and, accordingly, we reduced their carrying
amounts to estimated fair value by a charge to other income (expense) of $2.6 million and $1.4 million in the three months ended July 31, 2002 and 2001, respectively. To the extent that events or circumstances cause our assumptions to change,
additional charges may be required which could be material.





Prepaid Software License Fees





Prepaid software license fees are paid to third party software developers under development arrangements for technology integrated into our products. We amortize
the prepaid license fees to cost of revenues based either upon the actual number of units we ship or net revenue earned, over the period of the agreement with the third party developer or the expected life of the software product, depending upon the
terms of the respective contract. Management evaluates the future realization of such costs quarterly and charges to operations any amounts that management deems unlikely to be fully realized through future sales. Such costs are classified as
current and noncurrent assets based upon estimated product release date. We have recorded impairment charges for these prepaid software license fees in the past and to the extent that events or circumstances cause our assumptions to change,
additional charges may be required which could be material.





During the three months ended October 31, 2002, we determined that the
carrying value of certain prepaid software license fees exceed their net realizable value as a result of a revised forecast of future revenues prepared during the quarter showing lower than anticipated sales for the products in which the third party
licenses were embedded. See the discussion under Results of OperationsRestructuring and Other Charges.





Restructuring Reserves





In each of the three months ended April 30, 2002 and October 31, 2002, we announced
worldwide restructurings and established reserves for severance and other associated costs incurred as a result of our reduction in personnel and against outstanding future estimated lease commitments for properties that we will vacate. These future
estimated lease commitments include rent, and utilities that have been reduced by estimated sublease income. These estimates will be reviewed and revised quarterly and may result in an increase to restructuring expense should we not be able to lease
the properties in a reasonable period or at a rate significantly different than estimated.





Stock Options and Warrants





In connection with certain employee and consultant stock option grants, we have recorded unearned stock compensation totaling
$35.0 million through October 31, 2002, of which $2.9 million remains to be amortized. For employees, unearned stock compensation represents the difference between the option price and the deemed fair value of our common stock on the date of grant
and is reported as unearned stock compensation, a component of stockholders equity. Unearned stock compensation is amortized through charges to operations over the vesting period of the options, which is generally five years, using the
accelerated method of amortization as described in Financial Accounting Standards Board, or FASB, Interpretation No. 28. Stock compensation expense, less recoveries, for employees and consultants was $615,000 and ($161,000) for the three
months ended October 31, 2002 and 2001, respectively, and $1.2 million and $253,000 for the six months ended October 31, 2002 and 2001, respectively.





Stock compensation expense related to stock options granted to consultants is recognized as earned, over the applicable vesting period of the options, using the accelerated method of amortization prescribed by




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FASBInterpretation No. 28. At each reporting date, we recalculates the value of the stock option using
the Black-Scholes option pricing model and records changes in fair value for the vested portion of the option. As a result, the stock compensation expense fluctuates with the movement in the fair market value of our common stock. Amortization of
stock compensation for consultants was $423,000 and $100,000 for the three months ended October 31, 2002 and 2001, respectively, and $547,000 and $22,000 for the six months ended October 31, 2002 and 2001, respectively.





In September 2000, in connection with a marketing alliance that we entered into with a third party, we issued a warrant to purchase 50,000 shares of our common
stock at an exercise price of $67.05 per share, the fair value of our common stock on the date of the agreement. We recorded a charge of $2.0 million representing the fair value of the warrant at the time of issuance, estimated using the
Black-Scholes option pricing model with the following weighted-average assumptions: risk-free rate of 5.75%, expected life of 3 years, expected dividend rate of 0%, and volatility of 80%. Such amount is presented as a reduction of stockholders
equity and is being amortized to sales and marketing expense over the three-year life of the marketing alliance. The warrant was granted on a non-contingent basis and vested immediately. The warrant is not subject to repurchase, nor does it require
substantial performance for the third party to exercise. The marketing alliance is a three-year non-exclusive cooperative agreement, which is designed to enhance our and the third partys potential revenues in their respective areas, and
credibility in collaborative manufacturing commerce without constraining each others business. We will each be responsible for our own costs and expenses in performing joint marketing sales activities.





On October 18, 2001, we announced a voluntary stock option exchange program for our employees. Under the program, our option holders had the opportunity to
cancel outstanding options with an exercise price in excess of $15.00 per share in exchange for new options to be granted at a future date that is at least six months and one day after the date of cancellation, which was November 19, 2001. The
number of shares of common stock subject to the new options was equal to 75% of the number subject to the exchanged options. Under the exchange program, options for 4.0 million shares of our common stock were tendered and cancelled. On May 31, 2002,
we issued options to purchase approximately 2.5 million shares of common stock to replace the tendered options. In addition, a certain number of employees terminated their employment in the intervening six months, and were not granted replacement
options. The exercise price of each replacement option is $8.34 per share, which was the fair market value of our common stock on May 31, 2002, represented by the closing sale price on such date on the Nasdaq National Market. The replacement options
have terms and conditions that are substantially the same as those of the canceled options. The exchange program did not result in any additional compensation charges or variable plan accounting. Members of our Board of Directors did not participate
in this program.




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Results of Operations





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





Three Months Ended October 31,


Six Months Ended October 31,2002


2001


2002


2001Revenues:License

43
%

62
%

43
%

65
%Professional services and maintenance

57


38


57


35Total revenues

100


100


100


100Cost of revenues:License

4


3


4


4Professional services and maintenance

27


17


28


16Stock compensation (recovery)










Total cost of revenues

31


20


32


20Gross profit

69


80


68


80Operating expenses:Sales and marketing:Other sales and marketing

61


67


67


66Stock compensation

3





3


1Research and development:Other research and development

41


38


45


37Stock compensation (recovery)










General and administrative:Other general and administrative

10


9


10


9Stock compensation (recovery)




(1
)




(1
)Amortization of goodwill and other intangible assets




1





1Merger related benefit










(2
)Restructuring and other charges

45





24


Total operating expenses

160


114


149


111Loss from operations

(91
)

(34
)

(81
)

(31
)Interest and other income, net

7


13


8


14Impairment of equity investments







(8
)

(3
)Loss before income taxes

(84
)

(21
)

(81
)

(20
)Provision for income taxes

2





1


1Net loss

(86
)%

(21
)%

(82
)%

(21
)%





Three Months Ended October 31, 2002 and 2001





Revenues





Our total revenues for
the three months ended October 31, 2002 were $17.5 million, representing a decrease of $3.7 million, or 17%, from the revenues of $21.2 million for the three months ended October 31, 2001. No customer represented more than 10% of the Companys
total revenues for the three months ended October 31, 2002. We had two customers that each accounted for 12% of our total revenues for the three months ended October 31, 2001. Revenues from foreign customers were approximately 25% of total revenues
for the three months ended October 31, 2002, compared to 16% for the three months ended October 31, 2001. The increase in revenue from foreign customers as a percentage of total revenues was due primarily to increased sales to customers located in
Japan, and to a lesser extent, Europe.




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License Revenues.    Our license revenues for the three months ended
October 31, 2002 were $7.6 million, representing a decrease of $5.5 million, or 42%, from the license revenues of $13.1 million in the three months ended October 31, 2001. License revenues as a percentage of total revenues were 43% and 62% for the
three months ended October 31, 2002 and 2001, respectively. The decrease in license revenues in absolute dollars and as a percentage of total revenues was due to lower average sales prices and a lower number of license sales transactions resulting
from the economic slowdown and significant decline in information technology spending that has impacted our license sales during most of fiscal 2002 and 2003. The current economic slowdown and reduction in technology spending may continue to impact
our business for the next quarter and beyond.





Professional Services and Maintenance Revenues.    Our
professional services and maintenance revenues for the three months ended October 31, 2002 were $9.9 million, representing an increase of $1.7 million, or 21%, from the professional services and maintenance revenues of $8.1 million for the three
months ended October 31, 2001. Professional services and maintenance revenues as a percentage of total revenues were 57% and 38% for the three months ended October 31, 2002 and 2001, respectively. The increase in professional services and
maintenance revenues in absolute dollars was due primarily to a larger number of maintenance contract renewals on our larger customer base. The increase in professional services and maintenance revenues as a percentage of total revenues is
principally due to the reduced levels of license revenues. We expect that professional services and maintenance revenues will remain at current levels on an absolute basis as the rate of maintenance contract renewals slows as the growth in our
customer base has slowed during fiscal 2002 and 2003. Due to the current economic environment, we believe that we may be unable to maintain historical maintenance contract renewal rates and may also experience reductions in size of contract
renewals.





Cost of Revenues





Cost of License Revenues.    Our cost of license revenues includes license fees due to third parties for integrated technology, the cost of manuals and product documentation, production media used to
deliver our products and packaging costs.





Cost of license revenues, excluding stock compensation, was $648,000 for the three months
ended October 31, 2002, representing a decrease of $42,000, or 6%, from the cost of license revenues of $690,000 for the three months ended October 31, 2001. Cost of license revenues as a percentage of license revenues was 9% and 5% for the three
months ended October 31, 2002 and 2001, respectively. The slight decrease in cost of license revenues in absolute dollars was primarily due to a decrease in our license revenues, resulting in a decrease in license fees paid to third parties on
third-party software integrated into our products. We expect the cost of license revenues in absolute dollars to track with the increase or decrease in our overall license revenues. The increase in cost of license revenues as a percentage of license
revenues is due to a higher component of third party software embedded in our new products. New and future versions of our product suite will include more embedded third party software than prior versions, which we expect will cause the cost of
license revenue as a percentage of license revenue to remain at current levels.





In addition, we released new products in the quarter
ended July 31, 2002, which include software that we are licensing in whole or in part from third party vendors. If these products contribute a significant portion of license revenue in the future periods, cost of license revenues could increase.





Cost of Professional Services and Maintenance Revenues.    Our cost of professional services and
maintenance revenues includes salaries and related expenses for our implementation and training services 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. Cost of professional services and maintenance revenues also includes maintenance and upgrade fees paid to third parties for technology embedded in software upgrades provided to our
customers that have current maintenance contracts with us.





Cost of professional services and maintenance revenues, excluding stock
compensation, was $4.7 million for the three months ended October 31, 2002, representing an increase of $1.1 million, or 30%, from the cost of professional services and maintenance revenues of $3.6 million for the three months ended October 31,
2001. Cost of professional services and maintenance revenues as a percentage of professional services and maintenance revenues was 48% and 45% for both the three months ended October 31, 2002 and 2001. The increase in cost of




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professional services and maintenance revenues in absolute dollars and as a percentage of professional
services and maintenance revenues was primarily due to higher upgrade and support fees payable to third party integrated software providers as our customer base upgrades to the next version of our product suite, and to a lesser extent, increased
personnel and higher fixed costs necessary to support our increased customer base. We expect that cost of professional services and maintenance revenues in absolute dollars and as a percentage of professional services and maintenance revenues to
decrease as our customer base completes the upgrades to the next release of our product suite, resulting in lower upgrade fees payable to third party software providers, and as we realize the benefit from a reorganization in the support group that
was implemented during the three months ended October 31, 2002.





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 expenses categories, such as salaries, employee benefits, incentive compensation, bonuses, travel costs, telephone, communication, rent and allocated
facilities costs and professional fees. The sales and marketing category of operating expenses includes additional expenditures specific to the marketing group, such as public relations and advertising, trade shows, marketing collateral materials,
and customer user group meetings, as well as expenditures specific to the sales group, such as commissions. To date, all software development costs in research and development have been expensed as incurred. 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.





Sales and Marketing.    Sales and marketing expenses, excluding stock compensation, were $10.7 million for the three months ended October 31, 2002, representing a
decrease of $3.6 million, or 25%, from the sales and marketing expenses of $14.3 million for the three months ended October 31, 2001. Sales and marketing expenses as a percentage of total revenues, excluding stock compensation, were 61% and 67%
during the three months ended October 31, 2002 and 2001, respectively. The decrease in sales and marketing expenses on an absolute basis, and as a percentage of revenues, reflect reduced personnel-related expenses, including commissions, and travel
expenses as a result of our restructuring program announced in the fourth quarter of fiscal 2002. We anticipate that our sales and marketing expenses will remain at current levels over the next quarter.





Research and Development.    Research and development expenses, excluding stock compensation, were $7.1 million for the three
months ended October 31, 2002, representing a decrease of $870,000, or 11%, from the research and development expenses of $8.0 million for the three months ended October 31, 2001. Research and development expenses as a percentage of total revenues,
excluding stock compensation, were 41% and 38% during the three months ended October 31, 2002 and 2001, respectively. The decrease in research and development expenses on an absolute basis is the result of lower outside consulting, and to a lesser
extent, lower costs resulting from our shift to new offshore development centers in India, Hong Kong and China. The increase in research and development expenses as a percentage of total revenues was due primarily to lower total revenues. We
anticipate that research and development expenses will decline during the next quarter as we fully realize the impact of our lower cost development centers in India, Hong Kong and China as these centers become fully utilized .





General and Administrative.    General and administrative expenses, excluding stock compensation, were $1.7 million
for the three months ended October 31, 2002, representing a decrease of $109,000, or 6%, from the general and administrative expenses of $1.8 million for the three months ended October 31, 2001. General and administrative expenses as a percentage of
total revenues, excluding stock compensation, were 10% and 9% during the three months ended October 31, 2002 and 2001, respectively. The decrease in general and administrative expenses in absolute dollars was primarily due to lower bad debt expenses
and outside consulting due to reduced discretionary spending. We expect that general and administrative expenses as a percentage of revenue will remain relatively stable over the remainder of the fiscal year.





Amortization of Stock Compensation.    We recognized amortization of stock compensation, net of recoveries, of approximately
$615,000 and $(161,000) for the three months ended October 31, 2002 and 2001, respectively. Amortization of stock compensation includes both the amortization of deferred employee stock compensation, and options to consultants, offset by credits
associated with the impact of the reversal of accelerated amortization on options held by terminated employees.




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Amortization of Goodwill and Purchased Intangible Assets.    We
implemented the provisions of SFAS No. 142 as of May 1, 2002. As a result of our implementation of SFAS No. 142, remaining intangibles assets, consisting of acquired workforce in place, were reclassified to goodwill. We did not record any
amortization in the three months ended October 31, 2002, and will not record amortization prospectively. Instead, the remaining goodwill will be subject to periodic tests for impairment. Amortization of goodwill and intangibles was $189,000 for the
three months ended October 31, 2001, relating to intangible assets in place during the period that have since been reclassified to goodwill and will no longer be amortized.





Restructuring and Other Charges.    During the three months ended October 31, 2002, we recorded a restructuring charge of $7.8 million, which consisted of $4.6 million
for the consolidation of excess facilities, $485,000 to write-down excess fixed assets, and $2.7 million to write down additional prepaid software license fees for third party software used in our products.





Interest and other income, net.    Interest and other income, net was $1.2 million for the three months ended October 31, 2002
compared to $2.8 million for the three months ended October 31, 2001. This decrease in interest income was due principally to lower interest rates on lower average cash and investment balances.





Provision for Income Taxes.    During the three months ended October 31, 2002 and 2001, we incurred income tax expense of
$343,000 and $50,000, respectively, primarily attributable to our international subsidiaries. We incurred net operating losses for the three months ended October 31, 2002 and 2001. We have recorded a valuation allowance for the full amount of the
net deferred tax assets, including our net operating loss carryforwards and tax credits, as sufficient uncertainty exists regarding the realization of the deferred tax assets balance.





Six Months Ended October 31, 2002 and 2001





Revenues





Our total revenues for the six months ended October 31, 2002 were $33.5 million, representing a decrease of $11.0 million, or 25%, from the revenues
of $44.5 million in the six months ended October 31, 2001. We had one customer that accounted for 12% of our total revenues for the six months ended October 31, 2002. We had another customer that represented 10% of our total revenues for the six
months ended October 31, 2001. Revenues from foreign customers were approximately 26% of total revenues for the six months ended October 31, 2002, and approximately 12% of total revenues for the six months ended October 31, 2001. The increase in
revenue from foreign customers as a percentage of total revenues was primarily due to increased sales to customers located in Japan, and to a lesser extent, Europe.





License Revenues.    Our license revenues for the six months ended October 31, 2002 were $14.5 million, representing a decrease of $14.6 million, or 50%, from the
license revenues of $29.1 million for the six months ended October 31, 2001. License revenues as a percentage of total revenues were 43% and 65% for the six months ended October 31, 2002 and 2001, respectively. The decrease in license revenues in
absolute dollars and as a percentage of total revenues was due to lower average sales prices and a lower number of license sales transactions resulting from the economic slowdown and significant decline in information technology spending that has
impacted our license sales during most of fiscal 2002 and 2003.





Professional Services and Maintenance
Revenues.    Our professional services and maintenance revenues for the six months ended October 31, 2002 were $19.1 million, representing an increase of $3.6 million, or 23%, from the professional services and
maintenance revenues of $15.5 million for the six months ended October 31, 2001. Professional services and maintenance revenues as a percentage of total revenues were 57% and 35% for the six months ended October 31, 2002 and 2001, respectively. The
increase in professional services and maintenance revenues in absolute dollars was primarily due to a larger number of maintenance contract renewals on our larger customer base. The increase in professional services and maintenance revenues as a
percentage of total revenues is principally due to the reduced levels of license revenues.




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Cost of Revenues





Cost of License Revenues. Cost of license revenues, excluding stock compensation, was $1.3 million for the six months ended October 31, 2002, representing a decrease of $353,000, or 21%,
from the cost of license revenues of $1.7 million for the six months ended October 31, 2001. Cost of license revenues as a percentage of license revenues was 9% and 6% for the six months ended October 31, 2002 and 2001, respectively. The decrease in
cost of license revenues in absolute dollars was primarily due to a decrease in our license revenues, resulting in a decrease 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 is due to a higher component of third party software embedded in our new products.





Cost of Professional Services and Maintenance Revenues. Cost of professional services and maintenance revenues, excluding stock compensation, was $9.4 million for the six months ended October 31, 2002, representing an
increase of $2.0 million, or 28%, from the cost of professional services and maintenance revenues of $7.3 million for the six months ended October 31, 2001. Cost of professional services and maintenance revenues as a percentage of professional
services and maintenance revenues was 49% and 47% for the six months ended October 31, 2002 and 2001, respectively. The increase in cost of professional services and maintenance revenues in absolute dollars and as a percentage of professional
services and maintenance revenues was primarily due to higher upgrade and support fees payable to third party integrated software providers as our customer base upgrades to the next version of our product suite, and to a lesser extent, increased
personnel and higher fixed costs necessary to support our increased customer base.





Operating Expenses





Sales and Marketing. Sales and marketing expenses, excluding stock compensation, were $22.4 million for the six months ended October 31, 2002,
representing a decrease of $7.0 million, or 24%, from the sales and marketing expenses of $29.4 million for the six months ended October 31, 2001. Sales and marketing expenses as a percentage of total revenues, excluding stock compensation, were 67%
and 66% during the six months ended October 31, 2002 and 2001, respectively. The decrease in sales and marketing expenses on an absolute basis reflects reduced personnel-related expenses, including commissions, and travel expenses as a result of our
restructuring program announced in the April 30, 2002. The increase in sales and marketing expenses as a percentage of total revenues was primarily due to lower total revenues.





Research and Development. Research and development expenses, excluding stock compensation, were $15.2 million for the six months ended October 31, 2002, representing a decrease of $1.2
million, or 7%, from the research and development expenses of $16.3 million for the six months ended October 31, 2001. Research and development expenses as a percentage of total revenues, excluding stock compensation, were 45% and 37% during the six
months ended October 31, 2002 and 2001, respectively. The decrease in research and development expenses on an absolute basis is the result of lower outside consulting, and to a lesser extent, lower costs resulting from our shift to new offshore
development centers in India, Hong Kong and China. The increase in research and development expenses as a percentage of total revenues was primarily due to lower total revenues.





General and Administrative. General and administrative expenses, excluding stock compensation, were $3.4 million for the six months ended October 31, 2002, representing a
decrease of $672,000, or 17%, from the general and administrative expenses of $4.1 million for the six months ended October 31, 2001. General and administrative expenses as a percentage of total revenues, excluding stock compensation, were 10% and
9% during the six months ended October 31, 2002 and 2001, respectively. The decrease in general and administrative expenses in absolute dollars was primarily due to lower bad debt expenses, and lower compensation expenses and outside consulting as a
result of our reduction in discretionary spending.





Amortization of Stock Compensation. We recognized amortization of stock
compensation of approximately $1.2 million and $253,000 for the six months ended October 31, 2002 and 2001, respectively. Amortization of stock compensation includes both the amortization of deferred employee stock compensation, and options to
consultants, offset by credits associated with the impact of the reversal of accelerated amortization on options held by terminated employees.




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Amortization of Goodwill and Purchased Intangible Assets. We implemented the provision of
SFAS No. 142 as of May 1, 2002. As a result of our implementation of the provisions included in SFAS No. 142, remaining intangibles assets, consisting of acquired workforce in place, were reclassified to goodwill. We did not record any amortization
in the six months ended October 31, 2002, and will not record amortization prospectively. Instead, the remaining goodwill will be subject to periodic tests for impairment. Amortization of goodwill and intangibles was $378,000 for the six months
ended October 31, 2001, relating to intangible assets in place during the period that have since been reclassified to goodwill and no longer amortized.





Merger related benefit. In the three months ended April 30, 2001, we accrued $5.0 million for financial advisory and professional fees resulting from the terminated merger with a third party. The accrual was
managements best estimate of its obligation for such fees at the time. As of July 31, 2001, we had incurred actual costs of $4.2 million and we had no remaining liability related to the terminated merger. As a result, we recorded a reduction
of merger related expenses of $835,000 in the six months ended October 31, 2001, which was included in the statement of operations.





Interest and other income, net. Interest and other income, net was $2.7 million for the six months ended October 31, 2002 compared to $6.1 million for the six months ended October 31, 2001. This decrease in interest
income was principally due to lower interest rates on lower average cash and investment balances.





Impairment of Equity
Investments. During the six months ended October 31, 2002 and 2001, we determined that certain investments that we had made in privately held companies had incurred a decline in value that was other-than-temporary and, accordingly, we
reduced their carrying amounts to estimated fair value by a charge to other income (expense) of $2.6 million and $1.4 million in the six months ended October 31, 2002 and 2001, respectively.





Provision for Income Taxes. During the six months ended October 31, 2002 and 2001, we incurred income tax expense of $439,000 and $157,000, respectively, primarily attributable
to our international subsidiaries.We incurred net operating losses for the six months ended October 31, 2002 and October 31, 2001. Management has recorded a valuation allowance for the full amount of the net deferred tax assets, including our net
operating loss carryforwards and tax credits, as sufficient uncertainty exists regarding the realization of the deferred tax assets balance.





Liquidity and Capital Resources





As of October 31, 2002, we had cash, cash equivalents and short-term investments
of $268.1 million, a decrease of $17.5 million from the cash, cash equivalents and short-term investments held as of April 30, 2002. Our working capital at October 31, 2002 was $252.3 million.





As of October 31, 2002, our days sales outstanding (DSO) was 45 days. However, we believe that this is unusually low, as a result of strong cash collections, and the high level of
maintenance renewal revenues, which are generally prepaid, as a percentage of total revenues, in the three months ended October 31, 2002. We expect that days sales outstanding will increase to our historical range of 65 to 75 days if license
revenues increase as a percentage of total revenues.





Our operating activities used cash of $15.7 million for the six months ended
October 31, 2002 and $9.0 million for the six months ended October 31, 2001. Net cash used in operating activities in the six months ended October 31, 2002 was dprimarily due to the net loss (less non-cash expenses), increases in accounts receivable
and other assets and decreases in accounts payable and accrued expenses, partially offset by an increase in deferred revenue. Net cash used in operating activities in the six months ended October 31, 2001 was primarily due to the net loss (less
non-cash expenses) and an increase in other assets and decreases in accounts payable, accrued expenses, and deferred revenue partially offset by a decrease in accounts receivable.





Investing activities used cash of $13.9 million for the six months ended October 31, 2002 and used cash of $39.2 million for the six months ended October 31, 2001. Net cash used in investing activities
in the six months ended October 31, 2002 consisted primarily of net purchases of marketable investments, partially offset by purchases of property and equipment. Purchases of property and equipment were approximately $3.2 million in the six months
ended October 31, 2002. Net cash used in investing activities in the six months ended October 31, 2001 consisted




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primarily of net purchases of marketable investments and purchases of property and equipment. Purchases
of property and equipment were approximately $5.3 million in the six months ended October 31, 2001.





Financing activities provided cash
of $1.2 million in the six months ended October 31, 2002 and $2.6 million in the six months ended October 31, 2001. Net cash was provided in both the six months ended October 31, 2002 and 2001 primarily from the sale of common stock under employee
stock option plans.





We anticipate that our operating expenses, particularly research and development and sales and marketing expenses,
as well as planned capital expenditures, will constitute a continued use of our cash resources. 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 and cash equivalents and our anticipated cash flow from operations will be sufficient to meet our working capital and operating resource expenditure requirements for at least the next twelve months.





Recent Accounting Pronouncements





In
August, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. SFAS No. 144 applies to all long-lived assets (including discontinued operations) and consequently amends Accounting Principles Board Opinion No. 30. SFAS No. 144 develops one accounting model for long-lived assets that are to be
disposed of by sale. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for the Company
for all financial statements issued in fiscal 2003. The adoption ofSFAS No. 144 did not have a material impact on our financial position or results of operations.





On July 29, 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses significant issues relating to the recognition,
measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities, and nullifies the guidance in Emerging Issues Task Force (EITF) Issue No. 94-3 (EITF 94-3), Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring.) SFAS No. 146 requires that the initial liability for costs associated with exit and disposal activities be measured at
fair value and prohibits the recognition of a liability based solely on an entitys commitment to a plan, which, in turn, nullifies EITF 94-3. The provisions of SFAS No. 146 are effective for exit or disposal activities initiated after December
31, 2002. Retroactive application of SFAS No. 146 is prohibited and, accordingly, liabilities recognized prior to the initial application of SFAS No. 146 should continue to be accounted for in accordance with EITF 94-3 or other applicable
preexisting guidance.





Other Factors Affecting Operating Results





In addition to other information set forth in this report, the following risk factors should be carefully considered in evaluating our business because these factors may have a significant impact on
our business, operating results and financial condition.





We Have a History of Losses, We Expect to Incur Losses in the Future and
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 $15.1 million
and $4.5 million for the three months ended October 31, 2002 and 2001, respectively. As of October 31, 2002, we had an accumulated deficit of approximately $249.0 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




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relating to the amortization of intangible assets and stock compensation which will contribute to our
net losses. We will need to generate significant increases in revenues 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.





Our Quarterly Operating Results Fluctuate and Are Difficult to Predict, and if Our Future
Results Are Below the Expectations of Public Market Analysts or Investors, the Price of Our Common Stock May Decline





Our
quarterly operating results have varied significantly in the past and are likely to vary significantly in the future, which makes it difficult for us to predict our future operating results. This quarter-to-quarter fluctuation is due to a number of
factors, including the following:





| | · |  | fluctuations in demand for product lifecycle management software;
| | - |  | -----------------------------------------------------------------




| | · |  | size and timing of sales and installations of our products;
| | - |  | -----------------------------------------------------------




| | · |  | shortened number of business days due to holidays;
| | - |  | --------------------------------------------------




| | · |  | changes in management of our sales force organization;
| | - |  | ------------------------------------------------------




| | · |  | entry of new competitors into our market, or the announcement of new products or product enhancements by competitors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------




| | · |  | our ability to successfully expand our direct sales force and our international sales organization;
| | - |  | ---------------------------------------------------------------------------------------------------




| | · |  | changes in our sales force incentives;
| | - |  | --------------------------------------




| | · |  | unexpected delays in developing or introducing new and enhanced products;
| | - |  | -------------------------------------------------------------------------




| | · |  | unexpected decline in purchases by our existing customers, including purchases of additional licenses and maintenance contracts;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------




| | · |  | delays in our customers orders due to their priorities;
| | - |  | --------------------------------------------------------




| | · |  | variability in the mix of our license and professional services revenues;
| | - |  | -------------------------------------------------------------------------




| | · |  | our ability to accurately price fixed-priced professional services projects;
| | - |  | ----------------------------------------------------------------------------




| | · |  | variability in the mix of professional services that we perform versus those performed for our customers by others; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------




| | · |  | our ability to establish and maintain relationships with our third-party implementation partners.
| | - |  | -------------------------------------------------------------------------------------------------




Furthermore, we typically receive and fulfill most of our orders within the same quarter, with the substantial majority of our orders typically received in the
last month of each fiscal quarter. Recently, because declining economic conditions have caused our customers to delay and reduce spending on information technology, our sales cycle has lengthened and orders are being pushed to the very end of the
quarter. As a result, we may not learn of revenue shortfalls until late in a fiscal quarter, after which it is too late to adjust expenses for that quarter.





Moreover, recent adverse economic conditions in the United States, particularly those related to the technology industry, may increase the likelihood that customers will unexpectedly delay or cancel orders causing us to fail
to achieve anticipated revenues for the quarter. A number of technology companies, particularly software companies that, like Agile, sell enterprise-wide software solutions, have recently announced that adverse economic conditions have negatively
affected their business and results of operations. Any revenue shortfall below our expectations could have an immediate and significant adverse effect on our results of operations.




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If, in response to market pressures or other demands, we introduce new pricing structures for our
existing products, we could experience customer dissatisfaction and loss of sales. In addition, we could introduce products that are sold in a manner different from how we currently market our products, or we could recognize revenue differently than
under our current accounting policies. Depending on the manner in which we sell existing or future products, this could have the effect of extending the length of time over which we recognize revenues. Furthermore, our quarterly revenues could be
significantly affected based on how applicable accounting standards are amended or interpreted over time.





In addition, we have accounted
for options to purchase common stock granted to consultants under variable plan accounting. The expenses associated with these options may fluctuate significantly from quarter to quarter through fiscal 2006 if the price of our stock fluctuates and
could cause our operating results to vary significantly from quarter to quarter.





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 occurs, the price of our common stock may decline.





The Impact of Changes in Global
Economic Conditions on Our Customers May Cause Us to Fail to Meet Expectations, Which Would Negatively Impact the Price of Our Stock





Our operating results can vary significantly based upon the impact of changes in global economic conditions on our customers, and our business has been adversely affected by the economic slowdown the industry is currently facing.
More specifically, the macro-economic environment that we are facing in fiscal 2003 is more uncertain than in recent periods and has materially and adversely affected us and our operating results. The revenue growth and profitability of our business
depends on the overall demand for enterprise-level software services, particularly in the areas in which we compete. Because our sales are primarily to major corporate customers whose businesses fluctuate with general economic and business
conditions, a softening of demand for computer software caused by a weakening economy may result in decreased revenues and lower growth rates. We may be especially prone to this weakening demand as a result of the relatively large license
transactions that we have historically entered into with our customers. Customers are deferring and may continue to defer or reconsider purchasing products as a result of the downturn in the general economy and reduction in information technology
spending, particularly for high-cost license transactions. We expect this economic slowdown to continue to adversely impact our business for at least the new few quarters and possibly significantly longer. In addition, as a result of these economic
difficulties, we may continue to experience longer sales cycles, lower average selling prices and reduced bookings and revenues.





Due to the Difficult Economic Climate, Our Customers May Experience Financial Difficulties and May Represent a Credit Risk





With the slowdown in global economic growth over the past year, especially in the U.S. technology markets, and the uncertainty over the prospects for near-term economic growth, some of our customers may experience financial
difficulties and may represent a credit risk to us. We may have difficulty recovering accounts receivable, customers may seek protection under the bankruptcy laws, and we may incur greater operating expenses. In addition, we previously expanded our
customer base to include licenses to small emerging growth companies. Many of these companies have limited operating histories, are operating at a loss and have limited access to capital. Some of these customers may represent a credit risk. If our
customers experience financial difficulties or fail to experience commercial success, we may have difficulty collecting on our accounts.





As a Result of the Difficult Economic Conditions, We Have Implemented Restructuring and Workforce Reductions, Which May Adversely Affect the Morale and Performance of Our Personnel and Our Ability to Hire New Personnel





In connection with our efforts to streamline operations, reduce costs and bring staffing and structure in line with current
demand for our products, we implemented a restructuring of our company during the fourth quarter of fiscal 2002 and reduced our workforce and reduced capital expenditures. Our restructuring may yield unanticipated




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consequences, such as attrition beyond our planned reduction in workforce and loss of employee moral and decreased performance. In addition, the recent trading levels of our stock have decreased
the value of our stock options granted to employees under our stock option plan. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies that they perceive as having less
volatile stock prices. Continuity of personnel can be a very important factor in the sales and implementation of our products and completion of our research and development efforts.





If We Engage in Further Cost-Cutting or Workforce Reductions, We May Be Unable to Successfully Implement New Products or Enhancements or Upgrades to Our Products





We expect to continue to introduce new and enhanced products, and our future financial performance will depend on customer acceptance of our new products and any
upgrades or enhancements that we may make to our products. However, if our recent efforts to streamline operations and reduce costs and workforce are insufficient to bring our structure in line with current demand for our products, we may be forced
to make additional workforce reductions. These reductions could impact our research and development and engineering activities, which may slow our development of new or enhanced products, or may render us unable to deliver functionality requested by
our customers. We may be unable to successfully introduce new or enhanced products, and may lose customer satisfaction, which could impact our reputation and future sales of our products.





A Decline in Revenues May Have a Disproportionate Impact on Operating Results and Require Reductions in Our Operating Expense Levels





Because expense levels are relatively fixed in the near term for a given quarter and are based in part on expectations of our future revenues, any decline in our
revenues to a level that is below our expectations would have a disproportionately adverse impact on our operating results for that quarter. If revenues decline significantly, we may be required to incur restructuring charges in connection with
efforts to contain and reduce costs.





We May Not Achieve Anticipated Revenues if the Introduction and Customer Acceptance of Our
Products or Any Upgrades or Enhancements to Our Products Is Unsuccessful





Our future financial performance will depend on
customer acceptance of our products and any upgrades or enhancements that we may make to our products in the future. We have generated substantially all of our revenues from licenses and services related to current and prior versions of our product
suite. We believe that revenues from our products, together with revenues from maintenance and support contracts from our products and prior versions of our suite, will account for a substantial portion of our revenues for the foreseeable future. As
a result, if our software does not achieve and maintain widespread market acceptance, if we are unable to ship or implement any upgrades or enhancements when planned, or if the introduction of upgrades or enhancements causes customers to defer
orders for our existing products, we may not achieve anticipated revenues. In addition, if our competitors release new products that are superior to our products, demand for our products may not accelerate and could decline.





We May Not Achieve Anticipated Revenues if Large Software and Service Orders Expected in a Quarter Are Not Placed or Are Delayed





Although we license our software to numerous customers in any quarter, we expect that revenues from large orders will continue to account for a large
percentage of our total revenues in future quarters. The timing of large orders has become more unpredictable, and if any large order anticipated for a particular quarter is not realized or is delayed to a subsequent quarter, we may experience an
unplanned shortfall in revenues, which could significantly and adversely affect our operating results.





We Depend on Licensed
Technology and the Loss or Inability to Maintain These Technology Licenses Could Result in Increased Cost or Delays in Sales of Our Products





We license technology on a non-exclusive basis from several businesses for use with our products, including licenses from RSA Security Inc. for security and encryption technology software, Actuate Corporation for reporting
capability, Cimmetry Systems Inc. for our viewers, and BEA Systems for embedded software for our application




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server. In addition, we license software from Centric Software for design integration adapters and from ProductFactory for program execution
software, as well as 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. This software 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, if available, is
identified, licensed and integrated. In addition, the effective implementation of our products depends upon the successful operation of third-party licensed products in conjunction with our products, and therefore any undetected errors in these
licensed products may prevent the implementation or impair the functionality of products, delay new product introductions and/or injure our reputation. The increased use of third-party software could require us to enter into license agreements with
third parties, which could result in higher royalty payments and a loss of product differentiation and lower product gross margins.





If We Do Not Sell Additional Licenses or Enhanced Versions or Upgrades of Our Products to Existing Customers, We May Not Achieve Revenue Growth





The size of a new customers initial order is relatively small and may include a limited number of user licenses. In subsequent orders, customers often add user licenses or additional products
designed for specific functions, such as the AML Server targeted at manufacturers. In order to grow revenues, we depend on sales of additional user licenses to our existing customers as well as sales of new licenses to new customers. 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. Customers could choose not to purchase any new
products or expand the use of our products. If we do not increase sales to existing customers, we may not be able to achieve revenue growth.





If We Do Not Establish and Maintain Relationships With Key Partners, We May Encounter Difficulty in Providing Implementation and Customer Support of Our Products





We rely on our relationships with consulting and integration partners to implement our software, provide customer support services and endorse our products during the evaluation stage of the
sales cycle. Currently, a limited number of companies provide implementation services for our products. We expect to increasingly rely on these types of partners in the future. These companies are not contractually obligated to continue to provide
implementation services for us or to otherwise promote our products. Although we seek to develop and maintain relationships with these types of service providers, they may have similar or more established relationships with our competitors. If these
service providers do not increase this segment of their business, or reduce or discontinue their relationships with us or their support of our products, our business could be harmed. We will need to develop new third party relationships if sales of
our products increase and our current partners cannot fulfill all of our needs for implementation and customer support services. Without these third parties, we would have to expand our services organization to increase the consulting and
professional services that we provide to our customers and divert resources from other areas of our business. If we are required to expand our professional services capabilities, we may not be able to do so on a timely basis.





We are implementing larger deployments of our products together with third parties. If we are not successful with these joint deployments, we may
incur increased costs and customer dissatisfaction and may not achieve increased sales and market acceptance of our products.





To meet
customer demand, we might have to outsource services to more costly independent contractors and other third parties. In addition, if our implementation partners do not adequately perform implementation services, our customers could become
dissatisfied with our products. In order to avoid dissatisfaction, we may need to provide supplemental implementation services at no additional cost to customers. Although we could experience an increase in services revenues if our service partners
are not successful, services revenues have lower gross margins than license revenues. We could also experience delays in recognition of license revenue if customer implementation projects fall behind schedule.




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Our Variable Sales Cycle Makes it Difficult For Us to Predict When or if Sales Will Be Made





Our products have an unpredictable sales cycle that contributes to the uncertainty of our future operating results. With the
recent economic uncertainties facing our customers, and the decline in the business that they face, our sales cycle has lengthened. Customers are taking longer to evaluate our product, and orders have been delayed or postponed, and in some cases
cancelled. Our collaborative manufacturing commerce software is a new category of products, and customers often view the purchase of our products as a significant and strategic decision. As a result, intensive marketing and sales efforts may be
necessary to educate prospective customers regarding the uses and benefits of our products. Customers may take time to evaluate our products, and with the reduction in overall information technology spending and reduced budgets faced by many of our
customers, we are finding that the evaluation period and sales cycle of our products has lengthened further. The sale of our products may be subject to delays due to the lengthy internal budgeting, approval and evaluation processes of our customers.
We may expend significant sales and marketing expenses during this evaluation period before the customer places an order with us. Customers may initially purchase a smaller number of user licenses before expanding the order to allow a greater number
of users to benefit from the application. Larger customers may purchase our products as part of multiple simultaneous purchasing decisions, which may result in additional unplanned administrative processing and other delays in our product sales. If
sales forecasted from a specific customer for a particular quarter are not realized, we may experience an unplanned shortfall in revenues. As a result, we have only a limited ability to forecast the timing and size of sales of our products.





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





We have historically sold our products primarily to companies in the electronics and medical device manufacturing industries. We intend to market products to
customers in additional industries. Although we have targeted enterprises in other markets as potential customers, these potential customers may not be as willing to purchase our products as our customers in the electronics and medical device
industries have been. If we are unable to expand into other industries and markets, we may be unable to maintain or increase sales of our software, adversely impacting revenue growth and operating performance.





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





The market for software products that allow companies to collaborate with suppliers on product information and change is still developing. Companies have not traditionally automated
collaborative manufacturing commerce solutions like we offer throughout the supply chain. We cannot be certain that this market will continue to develop and grow or that companies will elect to utilize our products rather than attempt to develop
applications internally or through other sources. Companies that have already invested substantial resources in other methods of sharing product information during the manufacturing and supply process 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. Therefore,
demand for and market acceptance of our products will be subject to a high level of uncertainty.





Competition Among Providers of
Software Enabling Collaboration in a Manufacturing Supply Chain May Increase, Which Could Cause Us to Reduce Prices, and Result in Reduced Gross Margins or Loss of Market Share





The market for products that enable companies to interactively manage and share information relating to the manufacture and supply of products is highly fragmented, rapidly changing and increasingly
competitive. We expect competition to continue to intensify, which could result in price reductions for our products, reduced margins and loss of market share. Competitors vary in size and in the scope and breadth of the products and services
offered. We face potential competition from in-house development efforts by potential customers or partners, vendors of software designed for management of engineering information, and developers of general purpose groupware software addressing only
limited technology components involved in managing data generated by changes to the engineering process. We also face potential competition from providers of enterprise resource planning software and supply-chain software.




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Many of our actual or potential competitors have a number of significant advantages over us, including:





| |  |  | longer operating histories;
| | - |  | ---------------------------




| |  |  | significantly greater financial, technical, marketing and other resources;
| | - |  | --------------------------------------------------------------------------




| |  |  | significantly greater name recognition and a larger installed base of customers; and
| | - |  | ------------------------------------------------------------------------------------




| |  |  | well-established relationships with our actual and potential customers as well as with systems integrators and other vendors and service providers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------




These competitors may also be able to respond more quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the development, promotion and sale of their products, than we can. Some of our actual or potential competitors may also bundle their products in a manner that may discourage potential customers from
purchasing our products. Accordingly, we may not be able to maintain or expand our sales if competition increases and we are unable to respond effectively.





We May Experience Difficulties in Introducing New Products and Upgrades Which Could Result in Negative Publicity, Loss of Sales, Delay in Market Acceptance or Customer Dissatisfaction





Our future financial performance depends on our successful and timely development, introduction and market acceptance of new and enhanced products. The life
cycles of our products are difficult to predict because the market for our products is new and emerging, and is characterized by rapid technological change, changing customer needs and evolving industry standards. The introduction of products or
computer systems employing new technologies and emerging industry standards could render our existing products obsolete and unmarketable. For example, portions of our software are written in the Java computer programming language. If a new software
language becomes standard in our industry or is considered more robust, we may need to rewrite portions of our products in another computer language in order to remain competitive. The introduction of enhancements to our suite of products may also
cause customers to defer orders for our existing products. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new or enhanced products in the future. In addition, those products may
not meet the requirements of the marketplace and achieve market acceptance.





We expect to add new products to our supply chain
applications by acquisition or internal development and by developing enhancements to our existing products. We have in the past experienced delays in the planned release dates of our software products and upgrades, and we have discovered software
defects in new products after their introduction. New products or upgrades may not be released according to schedule, or may contain defects when released. Either situation could result in negative publicity, loss of sales, delay in market
acceptance of our products or customer claims against us.





We May Experience Customer Dissatisfaction and Lost Sales if Our
Products Do Not Scale to Accommodate Substantial Increases in the Number of Users





Our strategy requires that our software be
highly scalable, or able to accommodate substantial increases in the number of users. 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.





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 and subject to wide fluctuations in response to factors including the following, some of which will be
beyond our control:





| |  |  | actual or anticipated variations in our quarterly results of operations;
| | - |  | ------------------------------------------------------------------------



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| |  |  | announcements of technological innovations, increased cost of operations or new products or services by us or our competitors;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------




| |  |  | changes in financial estimates by securities analysts;
| | - |  | ------------------------------------------------------




| |  |  | conditions or trends in the Internet and/or software industries;
| | - |  | ----------------------------------------------------------------




| |  |  | changes in the economic performance and/or market valuations of other providers of collaborative supply chain software;
| | - |  | -----------------------------------------------------------------------------------------------------------------------




| |  |  | volatility in the stock markets, particularly with respect to Internet and software stocks, and decreases in the availability of capital for Internet-related
businesses;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------




| |  |  | additions or departures of key personnel; and
| | - |  | ---------------------------------------------




| |  |  | pending and potential litigation.
| | - |  | ---------------------------------




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.





We May Need to Make Additional Future Acquisitions to Remain Competitive, and Our Business Could be Adversely Affected as a
Result of These Acquisitions





As part of our business strategy, we may in the future seek to acquire or invest in additional
businesses, joint venture arrangements, products or technologies that we believe could complement or expand our business, augment our market coverage, enhance our technical capabilities or that may otherwise offer growth opportunities. We may
encounter risks to our business during our integration of acquisitions including:





| |  |  | difficulties in assimilation 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 managements decision in February 2001 to discontinue the further development of the products acquired in the DMI acquisition;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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




| |  |  | adverse effects on our existing business relationships with our customers or the customers of any acquisitions we make; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------




| |  |  | inability to retain employees of acquisitions we make.
| | - |  | ------------------------------------------------------




If we are unable to fully integrate an acquired business, product or technology or train, retain and motivate personnel from the acquired business, we may not receive the intended benefits of that
acquisition. Future 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
that could seriously harm our financial condition and operating results.





Recent volatility in the stock markets has made it more
difficult to value acquired businesses where the consideration payable as the purchase price is stock. We may reach agreement to buy another company using our




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stock as consideration. Thereafter, prior to closing the acquisition the relative values of the capital stock of the acquired company could
change, causing the purchase price to increase. As a result, in periods of market volatility as we are experiencing, acquisitions are difficult to complete, and we may be unable to complete beneficial acquisitions of complementary businesses or
technologies at an acceptable price.





Implementation of Our Products By Large Customers May Be Complex and Customers Could Become
Dissatisfied if Implementation of Our Products Proves Difficult, Costly or Time-Consuming





Our products must integrate with many
existing computer systems and software programs used by our customers. Integrating with many other computer systems and software programs can be complex, time consuming and expensive, causing delays in the deployment of our products. Because we are
one of the first companies to offer products designed for collaborative manufacturing commerce solutions, many customers will be facing these integration issues for the first time in the context of collaborating with supply chain partners. Customers
could become dissatisfied with our products if implementations prove to be difficult, costly or time-consuming, resulting in reduced sales, decreased revenues and damage to our reputation.





We Currently Perform Some of Our Implementations on a Fixed-Price Basis, Which Could Cause Us to Incur More Costs Than We Expect





In the past, and occasionally in the future on smaller transactions, we charge customers a fixed fee for installation services. At the time of a product sale and
prior to agreeing to an installation price, we estimate the amount of work involved for a particular installation project. 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 Products Might Not Be Compatible With All Platforms,
Which Could Inhibit Sales





We must continually modify and enhance our products to keep pace with changes in computer hardware and
software and database technology, as well as emerging technical standards in the software industry. For example, we have designed our products to work with databases such as Oracle. Any changes to these platforms could require us to modify our
products, and could cause us to delay releasing product enhancements until the updated version of that platform has been released. Furthermore, third parties develop adapters to integrate our products with other design, manufacture, finance and
supply chain systems used by our customers. We rely on these third parties to update the adapters to reflect changes to our products as well as to the targeted platform in order to maintain the functionality provided by our products. As a result,
uncertainties related to the timing and nature of new product announcements, introductions or modifications by vendors of operating systems, back-office applications and browsers and other Internet-related applications could hurt our business, as
customers may not be certain as to how our products will operate with their existing systems.





In addition, portions of our products are
based upon a programming language that does not offer all of the features available in Windows. Accordingly, certain features available to products that run on Windows may not be available in the non-Windows version of our products, and this could
result in reduced customer demand. Furthermore, some of our products do not run on certain types of popular server computers, such as those that utilize the UNIX operating system. If another platform becomes more widely used or offers greater
scalability, we could be required to convert, or port our product to that platform. We may not succeed in these efforts, and, even if we do, potential customers may not choose our product. As we extend the functionality of our products
to run on additional platforms, we may incur increased development costs and increased development lifecycles.





We May Not Be Able
to Increase Sales of Our Products if We Do Not Expand Our Direct Sales Organization





We sell our products primarily through our
direct sales force. Our ability to increase our sales will depend on our ability to recruit, train and retain top quality sales people with the advanced sales skills and technical knowledge we need. Competition for qualified personnel remains
intense in our industry. In addition, it takes time for our new sales personnel to become productive, particularly our senior sales and services personnel, who could take up to nine




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months to become fully productive. Recent volatility in our stock price could decrease our ability to hire and retain qualified personnel. If we
are unable to hire or retain qualified sales personnel, or if newly hired personnel fail to develop the necessary skills or reach productivity more slowly than anticipated, it would be more difficult for us to sell our products, and we may
experience a shortfall in revenues.





Terrorist Attacks Against the United States and Related U.S. Military Action Could
Adversely Affect Our Business





The September 11, 2001 terrorist attacks in the United States and resulting military
actions and future developments occurring in connection with these events including, without limitation, actual or threatened future terrorist attacks against the United States or other countries, may adversely affect our business. Although it is
difficult to predict the effect of these world events, they could cause:





| | · |  | a further softening of U.S. and foreign economies that could cause sales of our products and services to decline;
| | - |  | -----------------------------------------------------------------------------------------------------------------




| | · |  | the reduced ability to do business in the ordinary course as it is customarily conducted, resulting from a variety of factors, including changes or disruptions
in movement and sourcing of materials, goods and components or the possible interruption in the flow of information or monies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | a lengthening of our sales cycles and implementations, which might result from a number of factors, including among others changes in security measures for
passenger air travel and reductions in available commercial flights which may make it more difficult for our sales force to schedule face-to-face meetings with prospects and to negotiate and consummate transactions;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | · |  | general uncertainty in the capital markets that could make it more difficult for us to raise debt or equity financing in the future; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------




| | · |  | possible reductions, delays or postponements, if any, in capital expenditures as a result of changes in priorities and approval processes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------




These outcomes, and other unforeseen outcomes of these world events, would adversely affect our revenues, results of operations and
financial condition.





If We Are Unable to Timely Expand Our International Operations, We May Not Achieve Anticipated Revenue
Growth





We believe that 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. We employ sales
professionals in Europe and the Asia-Pacific market. If we are unable to successfully expand further in these international markets on a timely basis, we may not be able to achieve anticipated revenue growth. This expansion may be more difficult or
take longer than we anticipate, and we may not be able to successfully market, sell, deliver and support our products internationally.





Our international expansion will subject us to a number of risks associated with international business activities. These risks include:





| | · |  | difficulty in providing customer support for our software in multiple time zones;
| | - |  | ---------------------------------------------------------------------------------




| | · |  | the need to develop our software in multiple foreign languages;
| | - |  | ---------------------------------------------------------------




| | · |  | 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;
| | - |  | ---------------------------------------------------------------------------------------------------



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| | · |  | political and economic instability, particularly in Asia;
| | - |  | ---------------------------------------------------------




| | · |  | difficulties in enforcing agreements through foreign legal systems; and
| | - |  | -----------------------------------------------------------------------




| | · |  | 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.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




To date, most of our revenues have been denominated in United States dollars.
If we experience an increase in the portion of our revenues denominated in foreign currencies, we may incur greater risks in currency fluctuations, particularly since we translate our foreign currency revenues once at the end of each quarter. In the
future, our international revenues could be denominated in the Euro, the currency of the European Union. The Euro is an untested currency and may be subject to economic risks that are not currently contemplated. 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.





If the Establishment of Our Development Centers in India, Hong Kong or China is More Costly Than We Expect, Our Operating Results Will Suffer





As part of our planned expansion of our research and development and customer service and support functions, we are establishing facilities in India, Hong Kong and China. If we are unable to
establish these facilities in a timely manner, we may not be able to maintain research and development activities while decreasing operating expenses, as planned. If our expansion proves more costly than we anticipate or we incur greater ongoing
costs than we expect, our operating results would be adversely affected. If we do not realize expected cost savings, our margins may be negatively impacted and our operating results may suffer.





Changes in the Political, Social and Economic Environment in India, China or Hong Kong May Affect our Financial Performance





We have moved certain of our research and development activities, as well as some of our customer support activities, to India, China and Hong Kong. Our
financial performance may be affected by changes in the political, social and economic environment in these regions. The role of the central and local governments in the Indian and Chinese economy is significant. Policies toward economic
liberalization, and laws and policies affecting technology companies, foreign investment, currency convertibility, currency exchange rates and other matters could change, resulting in greater restrictions on our ability to do business and operate
our facilities in China, Hong Kong and India. Any imposition of surcharges or any increase in tax rates could hurt our operating results. The Chinese or Indian governments could revoke, terminate or suspend our license for national security and
similar reasons without compensation to us. If the government of China or the government of India were to take any of these actions, we would be prevented from conducting all or part of our business. Any failure on our part to comply with
governmental regulations could result in the loss of our ability to develop our products and provide customer support in China, Hong Kong or India, could result in increased costs to us, and could limit our ability to own and protect our
intellectual property.





Both China and India have from time to time experienced instances of civil unrest and hostilities. Confrontations
have occurred between the military and civilians. Events of this nature could influence the local economy, result in nationalization of foreign-owned operations such as ours, and could negatively affect our ability to operate our facilities abroad.





Legislative Actions, Higher Insurance Costs and Potential New Accounting Pronouncements are Likely to Cause our General and
Administrative Expenses to Increase and Impact our Future Financial Position and Results of Operations.





In order to
comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed 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. Insurers are also likely to increase premiums as a




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result of the high claims rates incurred over the past year, and so our premiums for our various insurance policies, including our
directors and officers insurance policies, are likely 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.





Defects in Our Software Products Could Diminish Demand For Our Products





Our software
products are complex and may contain errors that may be detected at any point in the life of the product. We have in the past discovered software errors in certain of our products and as a result have experienced delays in shipment of products
during the period required to correct these errors. We cannot be sure that, despite testing by us, our implementation partners and our current and potential customers, errors will not be found in new products or releases after shipment, resulting in
loss of revenue, delay in market acceptance and sales, diversion of development resources, injury to our reputation or increased service and warranty costs.





Further, our products are generally used in systems with other vendors products, and as a result, our products must integrate successfully with these existing systems. System errors, whether caused by our products or
those of another vendor, could adversely affect the market acceptance of our products, and any necessary revisions could cause us to incur significant expenses.





If We Become Subject to Product Liability Litigation, It Could Be Time Consuming and Costly to Defend





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 damages 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 litigation, existing or future laws or unfavorable judicial decisions could negate such limitation
of liability provisions. Product liability litigation, even if unsuccessful, would be time-consuming and costly to defend and could harm our business.





We Are the Target of a Securities Class Action Complaint and are at Risk of Securities Class Action Litigation, Which Could Result in Substantial Costs and Divert Management Attention and Resources





On or around October 25, 2001, a stockholder class action complaint was filed in the United States District Court for the Southern
District of New York against us, several of our officers and directors, and the underwriters of our initial public offering, Rennel Trading Corp. et al. v. Agile Software Corp. et al., Index No. 01-CV-9801 (SAS). The class action has been
consolidated for pre-trial purposes with more than one thousand other actions, filed against more than 300 other issuers of securities, affiliated individuals, and dozens of underwriters of the securities offerings in In Re Initial Public Offering
Securities Litigation, 21 MC 92 (SAS).





The plaintiffs allege that the prospectus for the initial public offering of Agile securities,
incorporated in the Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose, among other things, that the underwriters had made secret arrangements for
aftermarket purchases of the securities, and made arrangements for excessive and improper underwriters compensation in the form of increased brokerage commissions. The plaintiffs recently filed an amended complaint alleging also that the
prospectus for a secondary offering of Agile securities, conducted on December 13, 1999, and incorporated into a Registration Statement on Form S-1 filed with the Securities and Exchange Commission, also was materially false and misleading for the
same alleged reasons. The plaintiffs allege that the Companys stock price was artificially inflated as a result of the alleged underwriter practices. Plaintiffs attempt to state and claim violations by the Company, the individuals and the
underwriters of Section 11 of the Securities Act of 1933, violations by the individual defendants and underwriters of Section 12(a)(2) of the Securities Act, and violations by the underwriters of Section 10(b) the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated thereunder by the Securities Exchange Commission. The litigation is in an early phase, and no substantive rulings have been issued by the Court. We intend to defend against the complaint vigorously. Securities class action
litigation could result in substantial costs and divert our managements attention and resources, which could seriously harm our business




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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





Our success and ability to compete
depend upon our proprietary technology, including our brand and logo and 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, or could develop software competitive to ours. Our means of protecting our proprietary rights may not be
adequate and our competitors may independently develop similar technology, duplicate our products or design around patents that may be issued to us or our other intellectual property. In addition, the laws of some foreign 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 if we increase our international presence.





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 our proprietary technology 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.





We May Be Subject to Intellectual
Property Infringement Claims That, With or Without Merit, Could Be Costly to Defend or Settle





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 and Internet industries regarding
intellectual property rights. It is possible that, in the future, third parties may claim that we or our current or potential future 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.





We Rely on Third Parties to Manage System and Network Environments for Hosted Customers





We rely on third parties to manage system and network environments running our products and related solutions for customers requiring hosting. Services provided
by these third parties include managing the hosted servers, maintaining communications lines and managing network data centers, which are the locations where the Agile solutions reside. Since the hosting of the Agile solutions for certain customers
will depend on these third parties, it is possible that these third parties may not be able to meet our and our customers service level requirements. Dissatisfaction or problems with our service or the service of the third parties that host
our solutions or delays or interruptions or other problems with service due to mechanical failure, human error, security breaches, power loss and other facility failures, natural disasters, sabotage, vandalism, or other similar events could result
in a reduction of business generated by the hosted environment. In the event that we choose to use alternative hosting sources, this may result in a temporary degradation of the service level for hosting services that may be unacceptable to our
customers.





Provisions Contained in Our Charter Documents 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.




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We Have Adopted Certain Anti-Takeover Measures That May Make it More Difficult For a Third
Party to Acquire Us





Our board of directors has the authority to issue up to 10,000,000 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 adoption of this plan was not in response to any proposal to acquire us, and the board is not aware of any such effort. 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. In addition, certain provisions of our certificate of incorporation may have the effect of delaying or preventing a change of control, which could
adversely affect the market price of our common stock.





ITEM 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Foreign Currency Risk





We develop products in the United States and Asia, and market our products in North America, and to a lesser extent in Europe and Asia. 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 nearly all of our revenue is currently denominated in U.S. dollars, an increase 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.





Interest Rate Risk





Our
interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. 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 the majority of our portfolio of cash in money market funds and short-term investments classified as available for sale. In general, money market funds and short-term investments are not
subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.





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




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(in thousands, except interest rates)

Maturing within 12 months


Thereafter

TotalCash equivalents

$
23,400




$
23,400Average interest rate


1.96
%




1.96
%Investments

$
173,198




$
173,198Average interest rate


2.26
%




2.26
%Total investment securities

$
196,598




$
196,598





Other Investments





We invest 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, we regularly review the assumptions underlying the operating performance and 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 months ended October 31, 2002 and 2001, we determined that such investments had incurred a decline in value that was other-than-temporary and, accordingly, we reduced their carrying amounts to estimated fair value by
a charge to other income (expense) of $2.6 million and $1.4 million in the three months ended October 31, 2002 and 2001, respectively. To the extent that events or circumstances cause our assumptions to change, additional charges may be required
which could be material.





ITEM 4.
CONTROLS AND PROCEDURES





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 Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the
Exchange Act), within 90 days prior to the filing date of 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.





PART II. OTHER INFORMATION





ITEM 1.
LEGAL PROCEEDINGS





On or around October 25, 2001, a stockholder class action
complaint was filed in the United States District Court for the Southern District of New York against us, several of our officers and directors, and the underwriters of our initial public offering, Rennel Trading Corp. et al. v. Agile Software Corp.
et al., Index No. 01-CV-9801 (SAS). The class action has been consolidated for pre-trial purposes with more than one thousand other actions, filed against more than 300 other issuers of securities, affiliated individuals, and dozens of underwriters
of the securities offerings in In Re Initial Public Offering Securities Litigation, 21 MC 92 (SAS). The plaintiffs also allege that the prospectus for the initial public offering of Agile securities, incorporated in the Registration Statement on
Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading because it failed to disclose, among other things, that the underwriters had made secret arrangements for aftermarket purchases of the securities, and
made arrangements for excessive and improper underwriters compensation in the form of increased brokerage commissions. The plaintiffs recently filed an amended complaint that additional alleges that the prospectus for a secondary offering of
Agile securities, conducted on December 13, 1999, and incorporated into a Registration Statement on Form S-1 filed with the Securities and Exchange Commission, was materially false and misleading for




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the same alleged reasons. The plaintiffs allege that the Companys stock price was artificially
inflated as a result of the alleged underwriter practices. Plaintiffs attempt to state and claim violations by the Company, the individuals and the underwriters of Section 11 of the Securities Act of 1933, violations by the individual defendants and
underwriters of Section 12(a)(2) of the Securities Act, and violations by the underwriters of Section 10(b) the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the Securities Exchange Commission. The litigation is in an
early phase, and no substantive rulings have been issued by the Court. We believe that we have meritorious defenses against these actions and we intend to vigorously defend them.





We are also subject to various other claims and legal actions arising in the ordinary course of business. In the opinion of management, 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 AND USE OF PROCEEDS.





Not applicable.





ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.





Not applicable.





ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.





The Company held its annual meeting of stockholders in San Jose, California on October 3, 2002. Of the 48,469,816 shares outstanding as of the record date,
43,304,553 shares were present or represented by proxy at the meeting. Proxies were solicited by the Company pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. At the meeting, the Companys stockholders voted on
the following matters.





|(1) |  | Proposal to elect two Class III directors of the Company, each to serve for a three-year term and until his successor is duly elected and qualified.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




For

WithheldBryan D. Stolle

37,059,800

6,244,753Paul Wahl

42,653,648

650,905





|(2) |  | Proposal to amend the Company's 1995 Stock Option Plan limiting the maximum number of shares for which options may be granted to any employee in any fiscal
year.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------




For

Against

Abstain22,716,178

20,529,454

58,921





|(3) |  | Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal year ended April 30, 2003.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------




For

Against

Abstain42,713,383

586,929

4,241





ITEM 5.
OTHER INFORMATION.





Not applicable





ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K.





(a)    Exhibits.





10.23, 99.1 and 99.2





(b)    Reports on Form 8-K





Not applicable.




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AGILE SOFTWARE CORPORATION





SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.





Date:    December 13, 2002





AGILE SOFTWARE CORPORATION/s/    CAROLYN V. AVERCarolyn V. Aver Executive Vice President and Chief Financial Officer (Principal Accounting Officer)





CERTIFICATIONS





I, Bryan D. Stolle, certify that:





1.      I
have reviewed this quarterly report on Form 10-Q of Agile Software Corporation;





2.      Based on my
knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;





3.      Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
quarterly report;





4.      The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




5.      The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors:





| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------






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





Date: December 13, 2002



/s/ BRYAN D. STOLLEBryan D. Stolle President and Chief Executive Officer





***********





I, Carolyn V. Aver, certify that:





1.      I
have reviewed this quarterly report on Form 10-Q of Agile Software Corporation;





2.      Based on my
knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;





3.      Based on my knowledge, the financial
statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
quarterly report;





4.    The registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





| | (a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | (c) |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




5.      The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of the registrants board of directors:





| | (a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

| | (b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




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





Date: December 13, 2002



/s/ CAROLYN V. AVERCarolyn V. Aver Executive Vice President and Chief Financial
Officer




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EXHIBIT INDEX





Exhibit No.

Description3.1

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)10.23

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.99.1

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
200299.2

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 (File 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.
|--- |  | --------------------------------------------------------------------------------------------------------------



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