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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)

For the fiscal year ended: February 28, 2002

For the transition period from                              to                             

Commission file number 000-25249

INTRAWARE, INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code:    (925) 253-4500

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

Securities registered pursuant to Section 12(g) of the Act:
Title of Class        Common Stock, $0.0001 par value

        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 ý    No o

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

        The aggregate market value of voting stock held by non-affiliates of the registrant as of May 10, 2002, was $33,333,472 based upon the last sales price reported for such date on The Nasdaq National Market. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant, have been excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive.

        At May 10, 2002 registrant had outstanding 41,623,928 shares of Common Stock.

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TABLE OF CONTENTS

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EXPLANATORY NOTE

        This annual report on Form 10-K contains forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended) that involve risks and uncertainties. We use words such as "anticipates," "believes," "plans," "expects," "future," "intends" and similar expressions to identify forward-looking statements. Actual results and the timing of events could differ materially from those projected in the forward-looking statements as a result of known and unknown factors, including the risk factors beginning on page 21 of this annual report and other factors discussed elsewhere in this annual report. We have identified many of these forward-looking statements for your convenient reference.

        "Intraware," "SubscribeNet," and "Control Your Technology" are registered trademarks or service marks of Intraware. This annual report also refers to other trademarks of Intraware and trademarks of other companies.

        Intraware, Inc., incorporated in August 1996 under the laws of the State of Delaware, is hereinafter sometimes referred to as "the Registrant," "the Company," "Intraware," "we," "our" and "us." The mailing address for our headquarters is 25 Orinda Way, Orinda, California 94563, and our telephone number at that location is (925) 253-4500. Intraware can also be reached at our web site http://www.intraware.com.

PART I

ITEM 1.    BUSINESS

Introduction

        We are a leading provider of electronic software delivery and management (ESDM) services to enterprise software companies. Using our ESDM solutions, software companies can reduce their costs, improve their customer satisfaction, strengthen their compliance with U.S. export laws, and better understand how their customers are using their software.

Services

Electronic Software Delivery and Management Service: SubscribeNet

        We market our ESDM services under the brand name "SubscribeNet." First offered in 1996, the SubscribeNet service enables software companies to deliver enterprise-class applications to their customers through the Internet, and provides a suite of related online tools to help both software companies and their customers manage and track the downloading, deployment, licensing and updating of those applications. The system sends an email notification to end-users whenever an update, bug fix, or patch becomes available for a supported software application. End-users around the world can download those updates, as well as past releases for their software, at any time from their secure, personalized online software archives. These archives also give end-users access to download logs, software assets, and administrative tools, and enable them to communicate with other personnel in their companies about important download information.

        Using the SubscribeNet service, software companies can offer these features and benefits to their customers under the software companies' brand names. The service is hosted on Intraware's servers, but is integrated into the software company's web site so that it appears to end-users to be offered by the software company. Software companies purchase the SubscribeNet service to help them increase customer satisfaction and retention, generate higher maintenance renewal rates, monitor customer usage and demand for their software and to save costs by replacing physical distribution of CD-ROMs with Web-based electronic delivery.

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        Underlying the SubscribeNet service is a sophisticated ESDM engine that includes multi-platform encryption, compression, and multi-server deployment capabilities optimized to meet corporate IT requirements. This engine provides software companies and their customers an efficient alternative to costly physical distribution, enabling rapid deployment to multiple sites and eliminating much of the complexity inherent in the enterprise software life cycle.

        We typically sell the SubscribeNet service to software companies on a subscription basis, charging a one-time implementation fee and a periodic service fee. As of May 10, 2002, 21 enterprise software companies subscribed to our ESDM service.

Reselling of iPlanet Software: Transitional Arrangement

        In fiscal year 2002, we began a transition away from our software procurement service business, in which we resold third-party software to business customers. In June 2001, we signed a two-year renewable agreement with CorpSoft, Inc. ("Corporate Software") under which we assigned to Corporate Software our agreement with Sun Microsystems, Inc. for our resale of Sun's iPlanet software. Shortly after signing this agreement with Corporate Software, we ceased all other resales of third-party software. Under our agreement with Corporate Software, we continue to act as a contracted sales force assisting Corporate Software in its resales of iPlanet software, in exchange for a portion of the gross margin from those resales and reimbursement of certain costs. We also provide our SubscribeNet service to Corporate Software to enable them to deliver iPlanet software to their customers electronically. We describe this relationship between Intraware and Corporate Software in greater detail in the section below entitled "Sales: Reselling of iPlanet Software: Transitional Arrangement."

Sale of Asset Management Software Business

        On May 23, 2002, we sold our asset management software business to Computer Associates International, Inc. That business was comprised primarily of our Argis, ContractDirector and Content Control software product lines. We are no longer in the business of developing or selling asset management software.

Sales

Electronic Software Delivery and Management Service: SubscribeNet

        We sell our SubscribeNet service to enterprise software companies through a direct sales force dedicated to our SubscribeNet business, and through sales referral arrangements.

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Direct Sales.  We have established direct sales offices for our SubscribeNet service in two cities in the United States: Boston, Massachusetts and Orinda, California. Each Intraware SubscribeNet sales representative has a territory that he or she covers through telecommunications and in-person sales calls. The sales cycle for this service is lengthy, as our sales efforts must target the software vendors' marketing, sales, customer satisfaction, operations and general management professionals at the executive level.



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Referral Agreement with Globetrotter Software, Inc.  In January 2002 we entered into an alliance agreement with Globetrotter Software, Inc., a leading publisher of digital rights management software and a division of Macrovision Corporation. Globetrotter markets software technology called FLEXlm, which software publishers incorporate into their software packages to help ensure that their customers comply with license terms when accessing and using the software packages. Globetrotter also markets a software product called GTlicensing, through which customers of FLEXlm-enabled software can purchase new licenses for that software over the Internet. Under our agreement with Globetrotter, we have integrated Globetrotter's GTlicensing software with Intraware's SubscribeNet service. This expanded SubscribeNet service now gives

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software publishers a centralized hub, privately branded and hosted by Intraware, for managing the online delivery and licensing of their software to their end-users. Globetrotter and Intraware market the integrated offering collaboratively, but sell our respective products and services to customers separately. The parties pay referral fees to one another for completed sales. The current term of the agreement expires in January 2003, but may be extended for up to three subsequent one-year periods if we meet certain sales goals.

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Strategic Customer Agreement with Sun Microsystems, Inc.  In October 1998 we entered into a services agreement with Netscape Communications Corporation for our provision of the SubscribeNet service and other services to Netscape for its entire product line and worldwide customer base. In March 1999, America Online, Inc. acquired Netscape. America Online later formed an alliance with Sun Microsystems, Inc. to manage Netscape's business software division. In July 1999, we entered into a new services agreement with Sun, replacing the old services agreement with Netscape. Under the services agreement with Sun, we provided the SubscribeNet service and other maintenance services to Sun for the Netscape line of business software, which Sun sold under the brand "iPlanet." In December 2000, we amended the SubscribeNet services agreement to add a related service whereby we electronically delivered iPlanet software to fulfill initial software licenses purchased by customers directly from iPlanet (the "Fulfillment service"), and also extended the agreement term through June 2003. In April 2002, we entered into a new services agreement with Sun, which replaced the old services agreement. Under this new agreement, we provide the SubscribeNet and Fulfillment services to Sun for the iPlanet product line and, at Sun's option, for additional Sun software products, until June 30, 2003; however, Sun may terminate the agreement at any time for convenience by providing us with 90 days prior written notice. Sun serves as a key customer reference for the Intraware SubscribeNet service.

Reselling of iPlanet Software: Transitional Arrangement

        We use an inside sales force to assist Corporate Software in its resales of iPlanet software. Each inside sales representative has a territory that he or she covers using telephone, facsimile and email communications. The length of sales cycles for sales of iPlanet software tends to correspond to the dollar values of those sales.

        This relationship with Corporate Software is part of our transition out of the business of reselling iPlanet software. This business began in October 1998, when we entered into an agreement with Netscape Communications Corporation for our resale and electronic distribution of Netscape software to end-users in North America. The agreement also allowed us to use Netscape products internally. Following America Online, Inc.'s acquisition of Netscape and formation of an alliance with Sun to manage Netscape's business software division in early 1999, we signed an agreement with Sun for our resale and electronic distribution of Netscape business software (marketed by Sun under the brand "iPlanet") and maintenance services to end-users in North America. In July 2001, this agreement was replaced by a new agreement between Intraware and Sun for our resale and electronic distribution of iPlanet software and maintenance services in North America. Concurrently with entering into this July 2001 software resale agreement with Sun, we assigned the agreement to Corporate Software, as detailed below.

        In June 2001, we signed an agreement with Corporate Software under which we transferred to Corporate Software our iPlanet software resale business, including our agreement with Sun for resale of iPlanet software and maintenance services. CorpSoft has assumed primary responsibility for resale of iPlanet software and related maintenance under that agreement with Sun. However, we continue to assist Corporate Software in its sales and marketing of iPlanet software and maintenance, and also provide our SubscribeNet service to Corporate Software to enable it to deliver iPlanet software to its customers electronically. As part of this arrangement, CorpSoft pays us a percentage of the gross profit

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derived from its sales of iPlanet software licenses and maintenance services, and reimburses us for our cost in maintaining a team dedicated to sales of iPlanet software licenses and maintenance. The term of this agreement will expire in June 2003 and is renewable for subsequent one-year terms. We continue to maintain a separate relationship with Sun under which we provide our SubscribeNet and Fulfillment services to Sun. This June 2001 agreement with Corporate Software was part of our planned transition out of the business of reselling third-party software. At the time we announced this agreement, we also ceased reselling all other third-party software except in a limited manner in connection with our proprietary products and services.

Marketing

        Our central marketing goal is to attract and retain customers for our services. We target our marketing efforts to operations personnel at software companies and to IT professionals in mid-to-large corporations and government agencies. We use an integrated approach of targeted advertising and promotions, and general brand-awareness campaigns, to stimulate demand for our services and generate sales leads for our direct sales force.

        We employ a variety of marketing tools to achieve these goals. We have an active public relations program that helps maintain press coverage of the company and secure invitations to present at IT industry events. Our print, online and wireless advertising campaigns are designed to target operations managers and IT professionals and educate them on our innovative solutions to the complex problems they face. Our arrangements with business software vendors to electronically deliver their software updates to their customers often give us co-branding rights that help us penetrate highly qualified market segments. We also use trade shows, online seminars, direct mail, online promotions, and regional marketing to further our marketing goals of expanding our customer base and heightening awareness of the "Intraware" brand.

Competition

        The electronic software delivery and management market is young, rapidly evolving and intensely competitive, and Intraware expects competition to intensify in the future. We believe we compete effectively as a result of our early deployment of a centralized, high-capacity, Internet-enabled ESDM solution. We primarily compete with other providers of ESDM services. Additionally, we face competition in this arena from our potential independent software vendor customers who choose to develop their own in-house ESDM systems. Principal competitive factors include:

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the performance, features and functionality of the ESDM technology;



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the comprehensiveness of the services offered;



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the cost of an ESDM service versus the cost of a competing ESDM service or the cost of building, deploying and maintaining and ESDM service; and



•

the willingness of software publishers to adopt an outsourcing strategy for electronic delivery of their software.

        We face a number of competitive challenges. Our greatest challenge is overcoming resistance from software companies that determine for strategic reasons that they do not wish to outsource electronic software delivery. In addition, many of our competitors have longer and more profitable operating histories, significantly greater financial and other resources, wider name recognition, and a larger installed base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to devote greater resources to the development, promotion and sale of their products than we can to ours, which would allow them to respond more quickly than we could to new or emerging technologies and changes in customer requirements. In addition, many of our competitors have existing relationships with divisions of

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Intraware's current or potential customers, and may be able to leverage their existing relationships to discourage these customers from purchasing additional Intraware products or persuade them to replace Intraware products with their products.

Intellectual Property, Proprietary Rights and Licenses

        Our ability to compete and continue to provide technological innovation is substantially dependent upon internally developed technology. Our principal internally developed application is our SubscribeNet service. We currently hold three patents covering software and methods for transacting commerce over the Web. While we rely on patent, copyright, trade secret and trademark law to protect our technology, we believe that factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements and reliable product maintenance are more essential to establishing and maintaining a technology leadership position. There can be no assurance that others will not develop technologies that are similar or superior to our technology. We are aware that certain other companies are using or may have plans to use in the future the name "Intraware" as a company name or as a trademark or service mark. While we do not believe we have infringed any rights and we have received no notice of any claims of infringement from any of those companies, and we own registrations for the "Intraware" trademark in the United States and in other countries, we can make no assurance that certain of these companies may not claim superior rights to "Intraware" or other marks used in our business.

        We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Policing unauthorized use of our products is difficult, and there can be no assurance that the steps we take will prevent misappropriation of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as do the laws of the United States of America.

        Substantial litigation regarding intellectual property rights exists in the software industry, and we expect that software products may be increasingly subject to third-party infringement claims as the number of competitors in our industry segments grows and the functionality of products in different industry segments overlaps. Any such claims could be time-consuming to defend, result in costly litigation, divert management's attention and resources, cause product and service delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all. A successful infringement claim against us and our failure or inability to license the infringed technology or a similar technology could have a material adverse effect on our business, financial condition and results of operations.

        In addition, we distribute certain high encryption software globally. Federal regulations restrict exportation of these types of encryption software to certain countries, types of recipients, and specific end-users. We have established internal procedures to help ensure that the high encryption software is not sold in violation of Federal export laws and regulations. However, if these procedures are not followed by our personnel, or are otherwise circumvented, resulting in our sale of high encryption software to a prohibited foreign customer, then we could be at risk for sanctions under these federal export regulations.

Employees

        As of May 10, 2002, we had approximately 118 employees, including part-time employees. However, as a result of our recent sale of our asset management software business, we expect the number of our employees, including part-time employees, to drop to about 70 as of June 1, 2002. None

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of our employees is represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good.

ITEM 2.    PROPERTIES

        We rent approximately 16,000 square feet of office space located in Orinda, California under a lease expiring in April 2003, with a renewal option for an additional year. We also occupy approximately 18,000 square feet of office space in Pittsburgh, Pennsylvania, under a lease expiring in July 2004. In connection with our recent sale of our asset management software business, we intend to seek a termination, assignment or subletting of this lease. We have assigned to a third party our rights and obligations as tenant under a lease expiring in August 2005 for 8,000 square feet in Fremont, California, but the landlord under that lease continues to have recourse against us for any breach of that lease by the new tenant. We have additional field sales offices in Boston, Massachusetts; Cleveland, Ohio; and New York, New York.

ITEM 3.    LEGAL PROCEEDINGS

        In October 2001, we were served with a summons and complaint in a purported class action lawsuit, Azvalinsky v. Intraware, Inc., et al., Case No. 01-CV-9349, filed in the United States District Court for the Southern District of New York. The complaint names certain underwriters involved in Intraware's initial public offering, Intraware, and certain of Intraware's officers and directors. The complaint alleges, among other things, violations of the Securities Act of 1933 and the Securities Exchange Act of 1934 involving undisclosed compensation to the underwriters and improper practices by the underwriters, and seeks unspecified damages. Similar complaints were filed in the same court against numerous public companies that conducted initial public offerings ("IPOs") of their common stock since the mid-1990s.

        All of the above-referenced lawsuits were consolidated for pretrial purposes before Judge Shira Scheindlin of the United States District Court for the Southern District of New York. Judge Scheindlin has ordered that the time for all defendants to respond to any complaint be postponed until further order of the Court. Thus, we have not been required to answer the complaint, and no discovery has been served on us. We believe we have meritorious defenses to these claims and intend to defend against them vigorously.

        From time to time, we are party to various other legal proceedings or claims, either asserted or unasserted, which arise in the ordinary course of business. Intraware's management has reviewed those other pending legal matters and believes that the resolution of such matters will not have a significant adverse effect on Intraware's financial position or results of operations.

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

        None.

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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        To date, we have not declared or paid dividends on our Common Stock. Our Board of Directors presently intends to retain all earnings for use in our business and therefore does not anticipate declaring or paying any cash dividends in the foreseeable future.

        Our Common Stock was traded on the Nasdaq National Market under the symbol "ITRA" from February 26, 1999 until May 29, 2002. As of May 30, 2002, our Common Stock will trade on the Nasdaq SmallCap market under the symbol "ITRA". The following table reflects the range of reported high and low sale prices for the Common Stock for the periods indicated.

        On May 10, 2002, the last reported sale price for the Common Stock on the Nasdaq National Market was $1.22 per share. As of May 10, 2002, Intraware estimates that there were approximately 480 holders of record of Intraware Common Stock and a substantially greater number of beneficial owners.

ITEM 6.    SELECTED HISTORICAL FINANCIAL INFORMATION

        The following tables present selected historical financial information for Intraware. This information has been derived from our respective consolidated financial statements and notes, some of which are included elsewhere in this annual report. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and are qualified by reference to the consolidated financial statements and notes thereto and appearing elsewhere in this annual report. The consolidated statement of operations data set forth below for the years ended February 28, 2002, February 28, 2001, and February 29, 2000, and the consolidated balance sheet data at February 28, 2002 and February 28, 2001, are derived from, and are qualified by reference to, the audited consolidated financial statements of Intraware included elsewhere in this annual report. The consolidated statement of operations data for the year ended February 29, 1999 and February 28, 1998 and the balance sheet data at February 29, 2000, February 28, 1999, and 1998 are derived from audited consolidated financial statements of Intraware which are not included or incorporated by reference in this annual report. The historical results are not necessarily indicative of results to be expected for any future period.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Forward-looking statements include statements regarding our future cash and liquidity position, the extent and timing of future revenues and expenses and customer demand, the deployment of our products, and our reliance on third parties. All forward-looking statements included in this document are based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those discussed in "Risk Factors" below and elsewhere in this annual report on Form 10-K.

INTRAWARE OVERVIEW

        Intraware, Inc. was incorporated in Delaware on August 14, 1996. We are a leading provider of electronic software delivery and management (ESDM) services to enterprise software companies. Using our ESDM solutions, software companies can reduce their costs, improve their customer satisfaction, strengthen their compliance with U.S. export laws, and better understand how their customers are using their software.

        We have a limited operating history upon which investors may evaluate our business and prospects. Since inception, we have incurred significant losses, and, as of February 28, 2002, had an accumulated deficit of approximately $142 million. As of February 28, 2002, we had negative working capital of approximately $9.3 million. We expect to incur additional net losses at least through our fiscal quarter ending November 30, 2002. There can be no assurance that our gross profit will increase or continue at its current level. There also can be no assurance that we will generate cash from operations in future periods, or achieve or maintain profitability or finance our operations without raising additional capital. Our future must be considered in light of our liquidity issues and the risks frequently encountered by companies in an early stage of development, particularly companies in new and rapidly evolving markets such as e-commerce. To address these risks, we must, among other things, continue to develop new services, implement and successfully execute our business and marketing strategy, continue to develop and upgrade our technology, provide superior customer service, respond to competitive developments and attract, retain and motivate qualified personnel. We may also be required to raise additional capital. There can be no assurance that we will be successful in addressing such risks and the failure to do so would have a material adverse effect on our business, financial condition and results of operations. Our current and future expense levels are based largely on our planned operations and estimates of future sales. Sales and operating results generally depend on the volume and timing of orders received, which are difficult to forecast, particularly in the current business environment. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in sales would have an immediate adverse effect on our business, financial condition, results of operations and cash flows. In view of the rapidly evolving nature of our business and our limited operating history, we are unable to accurately forecast our sales and believe that period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as an indication of future performance.

Critical Accounting Policies and Estimates

        Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of

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assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates our estimates and judgments. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        We consider accounting policies related to revenue recognition, prepaid licenses, allowance for doubtful accounts, impairment of long-lived assets and goodwill, and income taxes to be critical accounting policies due to the estimation process involved in each.

Revenue recognition

        We derive software product revenues from resold licenses and maintenance for multiple business software product lines. Although we no longer resell third party software licenses and maintenance as of July 1, 2001, we will continue to recognize revenue from third party software licenses and support over the life of the arrangements made prior to July 1, 2001.

        Online services and technology revenue results primarily from three types of arrangements. First, it results from sales of our SubscribeNet electronic software delivery and management service to software vendors. Second, it results from the sale of our proprietary software licenses and related maintenance to companies that use those products internally or that use those products to provide web-based services to their customers. These sales are either made through our direct sales force or through authorized resellers. Third, it results from professional services that we provide to integrate our proprietary software, to convert data for customers, and to customize our SubscribeNet Service for individual customer needs. As a result of the sale of our asset management software business in May 2002 (discussed below in Liquidity and Capital Resources), we will no longer derive significant revenue from the second type of arrangement above after our fiscal quarter ending May 31, 2002.

        We recognize revenue when all of the following conditions are met:

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There is persuasive evidence of an arrangement;



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We have delivered the service to the customer or we have made the software available for customer download through our web site, or shipped the software to the customer;



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We believe that collection of these fees is probable; and



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The amount of fees to be paid by the customer is fixed and determinable.

        We obtain vendor specific objective evidence of fair value for the maintenance element of the resold and proprietary software arrangements based on historical and contractual renewal rates for maintenance. In such cases, we defer the maintenance revenue at the outset of the arrangement and recognize it ratably over the period during which the maintenance is to be provided (generally 12 months), which normally commences on the date the software is delivered. Changes in the previously mentioned factors could have a material impact on actual revenue recognized. At the time of a license or service sale we assess whether or not any services included within the arrangement require us to perform significant work either to alter the underlying software or to build additional complex interfaces so that the software performs as the customer requests. If these services are considered to be an essential part of an arrangement, we recognize the entire software license or service fee using the percentage of completion method. We estimate the percentage of completion based on our estimate of the total time estimated to complete the project as a percentage of the time incurred to date. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the

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revision become known. Provisions for estimated losses on uncompleted contracts are made in the period in which estimated losses are determined.

        Revenue for transactions through authorized resellers has been recognized when the licenses and maintenance have been resold, utilized by the reseller or our related obligations have been satisfied.    We have provided for sales allowances for authorized resellers and direct sales on an estimated basis. This estimation has been based on prior history as well as contractual requirements.

        We defer services revenue related to our SubscribeNet service and generally recognize it ratably over the term of the service arrangement.

        We recognize revenue related to professional services as the services are completed and contractual obligations are met.

Prepaid licenses

        We write down our prepaid licenses for estimated obsolescence equal to the difference between the cost of the prepaid licenses and the estimated recoverable value based on assumptions about future demand, market conditions and our rights to return under stock rotation agreements. If actual future demand or market conditions are less favorable than those we project, additional prepaid license write-downs may be required. During the year ended February 28, 2002 we recorded approximately $349,000 in prepaid license write-downs.

Allowance for doubtful accounts

        We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments. We analyze specific accounts receivable, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment history when evaluating the adequacy of the allowance for doubtful accounts. Changes in the above factors can have a material impact on actual bad debts incurred.

Impairment of long-lived assets and goodwill

        As discussed in Note 1 of the consolidated financial statements, we are required to regularly review all of our long-lived assets, including goodwill and other intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and our market capitalization relative to net book value. When we determine that an impairment review is necessary based upon the existence of one or more of the above indicators of impairment, we compare the book value of such assets to the future undiscounted cash flows attributable to those assets. If the book value is less than the future undiscounted cash flows, we measure any impairment based on a projected discounted cash flow method using a discount rate commensurate with the risk inherent in our current business model. Significant judgment is required in the development of projected cash flows for these purposes including assumptions regarding the appropriate level of aggregation of cash flows, their term and discount rate as well as the underlying forecasts of expected future revenue and expense. We recorded the write-off of approximately $3.7 million of intangibles in FY 2002 relating to the BITSource, Inc. acquisition, as discussed in Note 12 to the consolidated financial statements. We did not record any additional impairment charges relating to goodwill or intangibles in FY 2002. However, to the extent that events or circumstances cause our assumptions to change, we may be required to record additional write-downs, which could be material.

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Income taxes

        In conjunction with preparing our financial statements, we must estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Given that we have incurred losses since inception and therefore, have not been required to pay income taxes, we have fully reserved our deferred tax assets at February 28, 2002. In the event that we are able to realize our deferred tax assets in the future, an adjustment to the deferred tax asset would increase income in the period that this is determined.

Results of Operations

Total Revenue

        Revenue decreased to $52.3 million for the year ended February 28, 2002 from $121.8 million for the year ended February 28, 2001, and $96.9 million for the year ended February 29, 2000. In addition, for the year ended February 28, 2002, product revenue accounted for $36.8 million or 70% of revenue, compared to $98.8 million or 81% of revenue for the year ended February 28, 2001 and $84.5 million or 87% of revenue for the year ended February 29, 2000. Online service and technology revenue for the year ended February 28, 2002 accounted for $15.5 million or 30% of revenue compared to $23.0 million or 19% of revenue for the year ended February 28, 2001 and $12.4 million or 13% of revenue for the year ended February 29, 2000.

        The decline in product revenue and total revenue was primarily due to our transition out of the business of reselling third-party software products and related maintenance. The decrease in online services and technology revenue is primarily due to the elimination of some of our online services and technology products that had low market acceptance in our December 2000 restructuring and a slowdown in technology spending resulting from weakened overall economic conditions. In June 2001, we entered into an agreement with Corporate Software whereby Corporate Software assumed our rights and obligations under our iPlanet software reseller agreement, and agreed to pay to us a percentage of the gross profit derived from Corporate Software's sales of iPlanet software licenses and services. We expect our third-party product revenue to continue to decrease substantially as a result of this agreement. We also expect our online services and technology revenue to decrease substantially as a result of our sale of our asset management software business to Computer Associates International, Inc. in May 2002.

Cost of Revenues

        Total cost of revenues decreased to $33.1 million for the year ended February 28, 2002 from $85.2 million for the year ended February 28, 2001 and $74.4 million for the year ended February 29, 2000. The decrease in cost of revenues primarily reflects our decrease in revenue and changes in the mix of products sold.

        Our gross margin increased to 37% for the year ended February 28, 2002 from 30% for the year ended February 28, 2001 and 23% for the year ended February 29, 2000. The margin percentage increase primarily reflects our focus on the sale of our own services and technology, which generate higher margins than third-party products we resold.

        Costs of revenue primarily consist of the cost of third-party products sold, Internet connectivity and certain allocated costs related to customer support and professional services personnel costs. We

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purchased third-party products at a discount to the third-party's established list prices according to standard reseller terms.

Sales and Marketing Expenses

        For the year ended February 28, 2002, sales and marketing expenses were $12.7 million or 24% of revenue, a decrease from $37.6 million or 31% of revenue for the year ended February 28, 2001, and $32.0 million or 33% of revenue for the year ended February 29, 2000.

        Sales and marketing expenses consist primarily of employee salaries, benefits and commissions, advertising, promotional materials and trade show expenses. The decrease is due to our restructuring efforts, which reduced expenditures on salaries and marketing, eliminated rent on closed offices and lowered commission expense due to lower sales.

        We plan to continue to invest in sales and marketing at levels similar to our fiscal year 2002 levels as a percentage of revenue, and to continue developing strategic relationships to sell our products and services directly to our customer base. The previous sentence is a forward-looking statement and actual results could differ materially from those anticipated.

Product Development Expenses

        For the year ended February 28, 2002, product development expenses were $10.1 million or 19% of revenue, a decrease from $19.6 million or 16% of revenue for the year ended February 28, 2001, and a slight increase from $9.8 million or 10% of revenue for the year ended February 29, 2000.

        Product development expenses primarily consist of personnel, consulting, software and related maintenance and equipment depreciation expenses. Costs related to research, design and development of products and services have been charged to product development expense as incurred. The recent decrease is due to our current and prior year restructuring efforts, which reduced expenditures on salaries and unproven product and service lines. We anticipate continuing to invest in additional functionality for our SubscribeNet service. Total expenditures are expected to approximate fiscal year 2002 levels as a percentage of revenue. We expect product development expenses to fluctuate from time to time to the extent we make incremental investments in product development. However, we cannot give assurance that such development efforts will result in products, features or functionality or that the market will accept the products, features or functionality developed.

General and Administrative Expenses

        For the year ended February 28, 2002, general and administrative expenses were $6.9 million or 13% of revenue, a decrease from $20.5 million or 17% of revenue for the year ended February 28, 2001, and $8.9 million or 9% of revenue for the year ended February 29, 2000.

        General and administrative expenses consist primarily of compensation for administrative and executive personnel, facility costs and fees for professional services. A significant part of our decreased general and administrative expenses stems from our restructuring efforts in December 2000 and August 2001, which resulted in a reduction of compensation expense and lease costs for office space. Total expenditures are expected to approximate fiscal year 2002 levels as a percentage of revenue. The previous sentence is a forward looking statement and actual results could differ materially from those anticipated.

December 2000 Restructuring and Loss on Abandonment of Assets

        On December 1, 2000, we announced a strategic restructuring directed toward strengthening our competitive and financial position. This strategy involved a restructuring that reduced our total headcount to approximately 200, from 380 at November 30, 2000. In addition, we consolidated our

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three San Francisco Bay Area offices into two and reduced our number of outside sales offices from eleven to seven. We took a charge relating to this restructuring in our fourth quarter ended February 28, 2001 of $8.9 million. The restructuring charges were primarily due to the following:

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$1.1 million for rent and sublease expenses, net of anticipated sublease income for office leases, and expenses related to the closure of certain offices.



•

$6.1 million relates primarily to the abandonment of property and equipment, net of anticipated proceeds of approximately $782,000.



•

$1.1 million for severance costs in connection with the termination of certain employees.



•

$403,000 for expenses relating to the write off of our E-Learning product.



•

$119,000 relates to other restructuring expenses.

        We made cash payments of $1.7 million during the year ended February 28, 2001 related to the restructuring charge. At February 28, 2001 we had a remaining restructuring accrual of $628,000 of which $616,000 was related to future lease and related expenses and the remainder was severance costs. As of February 28, 2002 we have settled all liabilities associated with the December 2000 strategic restructuring.

August 2001 Restructuring and Loss on Abandonment of Assets

        On August 8, 2001 we announced a strategic reorganization designed to accelerate our drive toward profitability and enhance our capital-raising opportunities. We recorded a charge of $8.6 million relating to this restructuring and the loss on abandonment of assets during the quarter ended August 31, 2001.

        The loss on abandonment of assets includes the write off of approximately $3.7 million of certain intangibles relating to the BITSource, Inc. acquisition as we have abandoned the related technology. The write off consisted of the following components: $521,000 for trademarks, $510,000 for goodwill, and $2,708,000 for existing technology. We wrote off property and equipment with net book values of approximately $2.7 million. These assets were taken out of service, as they were deemed unnecessary due to the reductions in work force. Included in this amount are certain furniture and fixtures that were written down to a net realizable value of approximately $55,000. These furniture and fixtures were taken out of service in the second quarter of fiscal 2002 and subsequently disposed of or sold.

        The restructuring consisted of approximately $262,000 for severance and benefits relating to the involuntary termination of 66 employees, all of which were based in North America. We reduced our workforce to 120 employees from 186 at the end of July. Of the 66 terminated employees, 25 were in Sales and Marketing, 26 were in Product Development and 15 were in General and Administrative. We also consolidated our two San Francisco Bay Area offices into one. We accrued for lease and related costs of approximately $1.9 million principally pertaining to the estimated future obligations of non-cancelable lease payments for excess facilities in the San Francisco Bay Area that were vacated due to the reduction in work force. We also recognized an additional $27,000 relating to other restructuring expenses.

        Due to changes in management's estimates relating to the strategic reorganization on August 8, 2001, we recognized additional expense of approximately $478,000 during the three months ended November 30, 2001. This additional charge principally related to the acquisition of the title to assets held under a capital lease (see Note 6 to the consolidated financial statements). In connection with our restructuring efforts we recorded a charge of approximately $120,000 relating to the Black-Scholes fair value of an option issued to a consultant on September 5, 2001 for services performed in conjunction with exiting our excess lease space. We issued a fully-vested and immediately exercisable option to purchase 110,000 shares of our Common Stock at an exercise price of $0.01 per share. The term of the

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option is ten years. The following assumptions were used to value the option under the Black-Scholes model: term of 10 years; fair value of the stock price on the grant date of $1.09; option exercise price of $0.01 per share; volatility of 159%; and a zero dividend yield.

        We made cash payments of approximately $1.9 million during the year ended February 28, 2002. As of February 28, 2002 we had settled all liabilities associated with the August 2001 restructuring.

        The following table sets forth an analysis of the components of the restructuring and loss on abandonment charges recorded in the second quarter of fiscal 2002 and subsequent adjustments and payments made against the reserve (in thousands):