I2 TECHNOLOGIES INC, 10-Q, 2000-08-14

I2 TECHNOLOGIES INC
10-Q, 2000-08-14
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended June 30, 2000

[ ] 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 0-28030

i2 TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)

<TABLE>
<S> <C>
DELAWARE 75-2294945
(State or other jurisdiction of incorporation) (I.R.S. Employer organization Identification No.)

One i2 Place 11701 Luna Road Dallas, TX 75234
(Address of principal executive offices) (Zip code)
</TABLE>

(469) 357-1000
(Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
--- ---

As of August 10, 2000 the Registrant had outstanding 198,121,323 shares of its
common stock, $0.00025 par value.

================================================================================

<PAGE> 2

i2 TECHNOLOGIES, INC.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
----
<S> <C> <C>
Item 1. Financial Statements (Unaudited) 3

Condensed Consolidated Balance Sheets as of December
31, 1999 and June 30, 2000 3

Condensed Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1999 and 2000 4

Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 2000 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10

Item 3. Quantitative and Qualitative Disclosures About Market Risk 25

PART II OTHER INFORMATION

Item 2. Changes in Securities 25

Item 4. Submission of Matters to a Vote of Security Holders 26

Item 6. Exhibits and Reports on Form 8-K 26

SIGNATURES 27
</TABLE>

<PAGE> 3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT PAR VALUE)

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................................... $ 454,585 $ 423,982
Short-term investments ....................................................... 124,806 292,160
Accounts receivable, net ..................................................... 157,586 240,014
Prepaid and other current assets ............................................. 26,475 53,498
------------ ------------
Total current assets ...................................................... 763,452 1,009,654
Furniture and equipment, net ................................................. 50,483 78,449
Deferred income taxes and other assets ....................................... 33,628 135,211
Intangibles and goodwill, net ................................................ 13,986 9,083,712
------------ ------------
Total assets ............................................................. $ 861,549 $ 10,307,026
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 20,039 $ 30,991
Accrued liabilities .......................................................... 85,757 184,979

Deferred revenue ............................................................. 72,617 157,138
------------ ------------
Total current liabilities ................................................ 178,413 373,108
Deferred income taxes and other long-term liabilities ........................ 968 85,680
Long term debt ............................................................... 350,000 350,000
------------ ------------
Total liabilities ........................................................ 529,381 808,788
------------ ------------
Stockholders' equity:
Preferred Stock, $0.001 par value, 5,000 shares authorized, none issued ...... -- --
Common Stock, $0.00025 par value, 500,000 shares authorized,
155,412 and 195,566 shares issued and outstanding, respectively ........... 39 48
Additional paid-in capital ................................................... 297,879 9,733,870
Accumulated other comprehensive loss ......................................... (4,126) (4,978)
Retained earnings (deficit) .................................................. 38,376 (230,702)
------------ ------------
Total stockholders' equity ............................................... 332,168 9,498,238
------------ ------------
Total liabilities and stockholders' equity ............................... $ 861,549 $ 10,307,026
============ ============
</TABLE>

See accompanying notes.

<PAGE> 4

i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Software licenses ................................................ $ 79,384 $ 150,245 $ 153,455 $ 263,829
Services ......................................................... 36,311 60,483 65,095 107,352
Maintenance ...................................................... 16,252 31,894 30,996 57,720
--------- --------- --------- ---------
Total revenues ............................................... 131,947 242,622 249,546 428,901
--------- --------- --------- ---------
Costs and expenses:
Cost of software licenses ........................................ 3,431 10,052 6,592 15,745
Cost of services and maintenance ................................. 30,994 48,212 59,973 89,256
Sales and marketing .............................................. 44,089 85,648 86,822 151,803
Research and development ......................................... 31,760 51,432 62,082 91,039
General and administrative ....................................... 13,427 20,909 25,598 37,511
Amortization of intangibles ...................................... -- 208,947 -- 208,947
In process R&D and acquisition-related expenses .................. 273 98,763 576 99,319
--------- --------- --------- ---------
Total costs and expenses ..................................... 123,974 523,963 241,643 693,620
--------- --------- --------- ---------
Operating income (loss) ............................................ 7,973 (281,341) 7,903 (264,719)
Other income, net .................................................. 1,324 4,213 2,402 6,712
--------- --------- --------- ---------
Income (loss) before income taxes .................................. 9,297 (277,128) 10,305 (258,007)
Provision for income taxes ......................................... 5,397 3,688 7,931 11,068
--------- --------- --------- ---------
Net income (loss) .................................................. $ 3,900 $(280,816) $ 2,374 $(269,075)
========= ========= ========= =========

Net income (loss) per share ........................................ $ 0.03 $ (1.66) $ 0.02 $ (1.66)
Net income (loss) per share, assuming dilution ..................... $ 0.02 $ (1.66) $ 0.01 $ (1.66)
Weighted average common shares outstanding ......................... 149,874 169,115 148,626 162,116
Weighted average common shares outstanding,
assuming dilution ................................................ 163,540 169,115 162,672 162,116
Comprehensive income (loss)
Net income (loss) ................................................ $ 3,900 $(280,816) 2,374 $(269,075)
Foreign currency translation adjustment, net of income tax ....... (641) (769) (1,036) (852)
--------- --------- --------- ---------
Total comprehensive income (loss) .................................. $ 3,259 $(281,585) $ 1,338 $(269,927)
========= ========= ========= =========
</TABLE>

See accompanying notes.

<PAGE> 5

i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................................... $ 2,374 $ (269,075)
Adjustment to reconcile net income to net cash
provided by operating activities:
In-process research and development ......................... 98,300
Depreciation and amortization ............................... 7,766 220,404
Provision for doubtful accounts ............................. 3,997 4,747
Amortization of deferred compensation ....................... 292 2,152
Deferred income taxes ....................................... (8,498) (70,793)
Tax benefit of stock options ................................ 15,030 59,099
Changes in operating assets and liabilities net of acquired
balances:
Accounts receivable, net .................................... (14,435) (56,792)
Prepaid and other assets .................................... (5,458) (6,903)
Accounts payable ............................................ 3,477 7,044
Accrued liabilities ......................................... 12,176 30,517
Income taxes payable ........................................ (4,596) 5,665
Deferred revenue ............................................ 11,841 59,489
------------ ------------

Net cash provided by operating activities ............ 23,966 83,854
Cash flows from investing activities:
Cash acquired in purchase of Aspect Development .............. -- 55,206
Cash acquired in purchase of SupplyBase ...................... -- 26
Direct costs of purchase transactions ........................ -- (11,590)
Long-term investments ........................................ -- (13,583)
Purchases of furniture and equipment ......................... (8,857) (24,792)
Net purchases of short-term investments ...................... 8,100 (148,848)
------------ ------------

Net cash used by investing activities ................ (757) (143,581)
Cash flows from financing activities:
Proceeds from issuance of notes payable to
stockholders .............................................. 7,016 --
Net proceeds from sale of common stock and
exercise of stock options ................................. 11,402 29,230
------------ ------------

Net cash provided by financing activities ............. 18,418 29,230

Effect of exchange rates on cash ................................ (128) (106)
------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................................. 41,499 (30,603)
Cash and cash equivalents at the beginning of the
period ...................................................... 62,611 454,585
------------ ------------
Cash and cash equivalents at the end of the
period ...................................................... $ 104,110 $ 423,982
============ ============
Supplemental disclosure of cash flow information:
Common stock issued for acquisition of various IBM
assets .................................................. -- $ 233,703
Common stock issued for acquisition of Aspect
Development ............................................. -- 8,766,352
Common stock issued for acquisition of SupplyBase ........... -- 345,452
------------ ------------
Total stock issued for acquisitions .................... -- $ 9,345,507
============ ============
</TABLE>

See accompanying notes.

<PAGE> 6

i2 TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
include the accounts of i2 Technologies, Inc. and its subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation.

The accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring entries, except
where noted) which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the Securities and Exchange Commission's rules
and regulations. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto for the year ended
December 31, 1999 included in our Annual Report on Form 10-K, which was filed on
March 22, 2000. The interim results are not necessarily indicative of results
that may be expected for any other interim period or for the full year 2000.

Certain prior year financial statement items have been reclassified to
conform to the current year's format.

2. BUSINESS COMBINATIONS

In July 1999, we acquired Sales Marketing Administration Research Tracking
Technologies, Inc., or SMART, which develops software applications that help
companies use the Internet to build and extend relationships with customers,
partners and suppliers. Under the terms of the acquisition agreement, we issued
approximately 4.2 million shares of common stock for all of the outstanding
capital stock and options of SMART. The SMART acquisition was accounted for as a
pooling of interests and, accordingly, the accompanying condensed consolidated
financial statements give retroactive effect to the combination and include the
combined operations of i2 and SMART for all periods presented.

On April 28, 2000 we completed our acquisition of SupplyBase, Inc.
("SupplyBase") the leading developer of high-end interactive database products,
services and supply chain management tools for managing custom content. We
issued approximately 1.8 million shares of our common stock with a fair market
value of $345.5 million in exchange for outstanding stock, options and warrants
of SupplyBase. In connection with the acquisition, we incurred transaction costs
consisting primarily of professional fees of $6.8 million, resulting in a total
purchase price of $352.3 million. The acquisition was accounted for as a
purchase business combination; accordingly, the results of operations of
SupplyBase have been included with our results of operations since April 28,
2000.

The total purchase price paid for the SupplyBase acquisition was allocated based
on the estimated fair values of the assets acquired as follows (in thousands):

<TABLE>
<CAPTION>
SupplyBase
---------------
<S> <C>
Net assets acquired $ (1,663)
Identifiable intangible assets 15,700
Goodwill 331,815
In-process R&D 6,400
---------------
Total $ 352,252
===============
</TABLE>

A total of approximately $15.7 million of the purchase consideration was
allocated to other intangible assets, including developed technology ($2.8
million), assembled workforce ($1.2 million), and content databases ($11.7
million) with these amounts being amortized over two to three years.

$6.4 million of the purchase price represents purchased in-process technology
that has not yet reached technological feasibility and has no alternative future
use. Accordingly, this amount was immediately expensed in the Consolidated
Statement of Operations upon

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consummation of the acquisition. The value assigned to purchased in-process
technology, based on a valuation prepared by an independent third-party
appraisal company, was determined by identifying research projects in areas for
which technological feasibility has not been established, including new
generation and web based custom content management products ranging from 5% to
75% complete. The value was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the net cash flows from such projects, and discounting the net cashflows to
their present value. The discount rate of 25% includes a factor that takes into
account the uncertainty surrounding the successful development of the purchased
in-process technology.

On June 9, 2000, we completed our acquisition of Aspect Development, Inc.
("Aspect") the leading developer of collaborative solutions for standardized
content management and inbound supply chain solutions for business-to-business
marketplaces. We issued 33.8 million shares of our common stock with a fair
market value of $6.4 billion and exchanged options to purchase 14.1 million
shares of our common stock with a fair value of $2.4 billion. The fair value of
the exchanged options was valued using the Black-Scholes options pricing model
with the following assumptions: 1) expected volatility of 0.84, 2)
weighted-average risk-free interest rate of 5.60%, 3) expected terms ranging
from 1-4 years and 4) no expected dividends. In connection with the acquisition,
we incurred transaction costs consisting primarily of professional fees of $39.5
million, resulting in a total purchase price of $8.8 billion. The acquisition
was accounted for as a purchase business combination; accordingly, the results
of operations of Aspect have been included with our results of operations since
June 9, 2000.

The total purchase price paid for the Aspect acquisition was allocated based on
the estimated fair values of the assets acquired as follows (in thousands):

<TABLE>
<CAPTION>
Aspect
----------
<S> <C>
Net assets acquired .............................. $ 115,943
Identifiable intangible assets ................... 217,000
Goodwill ......................................... 8,389,917
In-process R&D ................................... 83,000
----------
Total ............................................ $8,805,860
==========
</TABLE>

A total of $217.0 million of the purchase consideration was allocated to other
intangible assets, including developed technology ($81.0 million), assembled
workforce ($10.0 million) content databases ($84.0 million) and customer lists
($42.0 million) with these amounts being amortized over two to three years.

$83.0 million of the purchase price represents purchased in-process technology
that has not yet reached technological feasibility and has no alternative future
use. Accordingly, this amount was immediately expensed in the Consolidated
Statement of Operations upon consummation of the acquisition. The value assigned
to purchased in-process technology, based on a valuation prepared by an
independent third-party appraisal company, was determined by identifying
research projects in areas for which technological feasibility has not been
established, including next generation and development of eBusiness products
ranging from 35% to 65% complete. The value was determined by estimating the
costs to develop the purchased in-process technology into commercially viable
products, estimating the net cash flows from such projects, and discounting the
net cashflows to their present value. The discount rate of 20% includes a factor
that takes into account the uncertainty surrounding the successful development
of the purchased in-process technology.

At June 30, 2000, accumulated amortization related to the goodwill and other
intangible assets acquired in the Supplybase and Aspect acquisitions totaled
$196.6 million.

The following summary, prepared on an unaudited pro forma basis, reflects the
condensed consolidated results of operations for the six month period ended June
30, 1999 and 2000 assuming Supplybase and Aspect had been acquired at the
beginning of the periods presented (in thousands, except per share data):

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<PAGE> 8

<TABLE>
<CAPTION>
PRO FORMA (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
---------------------------------
1999 2000
----------- -----------
<S> <C> <C>
Revenue .......................................... $ 285,464 $ 481,508

Net Loss ......................................... (1,500,850) (1,506,367)
=========== ===========
Basic net loss per share ......................... $ (8.46) $ (9.29)
=========== ===========
</TABLE>

The pro forma results are not necessarily indicative of what would have occurred
if the acquisitions had been in effect for the periods presented. In addition
they are not intended to be a projection of future results and do not reflect
any synergies that might be affected from combined operations. The charges for
in-process research and development have not been included in the unaudited pro
forma results because they are nonrecurring.

3. ASSET ACQUISITION

On March 27, 2000, i2 purchased from IBM various software assets,
cross-patent rights and software licenses with an aggregate value of
approximately $234 million in exchange for approximately 1.3 million shares of
our common stock. This amount was recorded as acquired technology and cross
patent rights, software licenses, which are amortized over three to five years,
and in-process research and development, which is expensed immediately. The
value assigned to purchased in-process technology, based on a preliminary
valuation prepared by an independent third-party appraisal company, determined
by identifying research projects in areas for which technological feasibility
has not been established including next generation forecasting and replenishment
products and next generation industry specific scheduler products ranging from
73% to 85% complete. The value was determined by estimating the costs to develop
the purchased in-process technology into commercially viable products,
estimating the net cash flows from such projects, and discounting the net
cashflows to their present value. The discount rate of 19% includes a factor
that takes into account the uncertainty surrounding the successful development
of the purchased in-process technology. In addition, we may issue to IBM up to
an additional $250 million in shares of our common stock, valued based on a
trading average prior to the date of issuance. We could be obligated to issue
some or all of these shares in the future based on the amount of the revenue we
derive from or through IBM during four annual periods, with the first annual
period ending December 31, 2000. Issuance of this stock will be recorded as a
commission or sales discount and not as an addition to purchase price.

4. LINES OF CREDIT

In August 1999, we entered into a one-year, $30.0 million revolving credit
agreement. This facility is unsecured and contains customary restrictive
covenants, including covenants requiring us to maintain certain financial
ratios. The revolving credit agreement is not subject to a borrowing base
limitation and borrowings thereunder bear interest at LIBOR plus 0.75% to 1.75%,
depending on certain cash ratios. The maximum borrowings available under the
facility are reduced by the value of outstanding letters of credit issued by the
lender on our behalf, $8.2 million of which were outstanding at June 30, 2000.
At June 30, 2000, there were no borrowings outstanding under this agreement and
we were in compliance with all covenants.

5. BORROWINGS

On December 10, 1999, we issued an aggregate principal amount of $350
million of our 5 1/4% convertible subordinated notes due 2006, which were sold
at par less an underwriting discount of 2.75% of the principal amount of the
notes. These securities were issued and sold to Goldman, Sachs & Co., Morgan
Stanley & Co. Incorporated, and Credit Suisse First Boston Corporation, as the
initial purchasers in reliance on the exemption from registration under Rule
144A of the Securities Act of 1933, as amended. In connection with this
transaction, each of the initial purchasers represented that it was a "qualified
institutional buyer" as such term is defined in the Securities and Exchange Act
of 1934. The notes are convertible at the option of the holder into shares of
common stock at a conversion price of approximately $75.99 per share at any time
prior to maturity. The net proceeds from the offering will be used for working
capital and other general corporate purposes.

6. NET INCOME PER SHARE

Net income per share is computed in accordance with the provisions of
Statement of Financial Accounting Standards, or SFAS, No. 128, "Earnings Per
Share." Net income per share is based upon the weighted average number of common
shares outstanding. Net income per share, assuming dilution, includes the effect
of potentially dilutive common stock from the exercise of stock options and

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warrants using the treasury stock method and shares issued assuming conversion
of our convertible debt, if dilutive.

Potentially dilutive securities are excluded from the computation of net
income per share, assuming dilution. Exclusion of potentially dilutive
securities can occur when the exercise price of the securities exceeds the
average fair value of our common stock for a particular period or the company
shows a loss for the period. For the three months and six months ended June 30,
1999, approximately 1.8 million stock options were excluded from the computation
of net income per share, assuming dilution. For the three months and six months
ended June 30, 2000 approximately 41 million stock options were excluded from
the computation of net loss per share assuming dilution.

Reconciliations of the computation of net income per share and net income
per share, assuming dilution, for the three and six months ended June 30, 1999
and 2000 are as follows (amounts in thousands, except per share amounts):

<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1999 2000 1999 2000
--------- --------- --------- ---------

<S> <C> <C> <C> <C>
Weighted average common shares outstanding ................. 149,874 169,115 148,626 162,116

Common shares issuable upon exercise of stock
options, net of shares assumed to be repurchased ......... 13,666 -- 4,046 --
--------- --------- --------- ---------
Weighted average common shares outstanding,
assuming dilution ........................................ 163,540 169,115 162,672 162,116
========= ========= ========= =========
Net income (loss) .......................................... $ 3,900 $(280,816) $ 2,374 $(269,075)
========= ========= ========= =========
Net income (loss) per share ................................ $ 0.03 $ (1.66) $ 0.02 $ (1.66)
========= ========= ========= =========
Net income (loss) per share assuming dilution .............. $ 0.02 $ (1.66) $ 0.01 $ (1.66)
========= ========= ========= =========
</TABLE>

We incurred a net loss for the three and six months ended June 30, 2000. As
a result, the common shares issuable upon exercise of stock options would have
been anti-dilutive to the net loss per share and were excluded from the dilutive
computation for those periods.

7. STOCKHOLDERS EQUITY

On January 14, 2000, our board of directors approved a two-for-one stock
split. The stock split was paid as a 100% dividend on February 17, 2000. All
share and per share amounts included herein have been adjusted to reflect the
stock split as though it had occurred at the beginning of the initial period.

8. SEGMENT AND GEOGRAPHIC INFORMATION

We are principally engaged in the design, development, marketing and support
of our RHYTHM suite of intelligent eBusiness solutions, including software
applications sold under the TradeMatrix or RHYTHM trademarks and related service
offerings. Historically, substantially all revenues result from the licensing of
our software products and related consulting and customer support (maintenance)
services. Our chief operating decision-maker reviews financial information
presented on a consolidated basis, accompanied by disaggregated information
about revenues by geographic region for purposes of making operating decisions
and

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assessing financial performance. Accordingly, we consider ourselves to be in a
single industry segment, specifically the license, implementation and support of
our software applications and related services.

9. RECENT ACCOUNTING PRONOUNCEMENTS

In April, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB Opinion No. 25" which provides guidance
on accounting for certain stock option transactions, including stock options
issued in a business combination, stock option repricings, and other equity
arrangements. This statement is effective July 1, 2000 and is expected to have
an impact on the purchase price allocation and amortization of intangibles on
any business combinations accounted for as a purchase that we close subsequent
to the effective date. Management will periodically evaluate the impact of this
interpretation on other equity arrangements. We believe that this interpretation
will not have a significant effect on our consolidated financial position or
results of operations.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on applying generally accepted accounting
principles to revenue recognition issues in financial statements. We will adopt
SAB 101 as required in the fourth quarter of fiscal 2000. Management is
currently evaluating the impact of SAB 101, but we believe that SAB 101 will not
have a significant effect on our consolidated financial position or results of
operations based on current interpretations.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives be
recognized at fair value in the balance sheet, and that the corresponding gains
or losses be included in comprehensive income, depending on the type of hedging
relationship that exists. SFAS 133 will be effective for fiscal years beginning
after June 15, 2000. We believe that SFAS 133 will not have a material effect on
our consolidated financial position or results of operations.

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

In addition to the historical information contained herein, the discussion
in this Form 10-Q contains certain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, that involve risks and uncertainties, such as
statements concerning: growth and future operating results; future customer
benefits attributable to our products; developments in our markets and strategic
focus; new products and product enhancements; potential acquisitions and the
integration of acquired businesses; products and technologies; strategic
relationships; and future economic, business and regulatory conditions. Such
forward-looking statements are generally accompanied by words such as "plan,"
"estimate," "expect," "believe," "should," "would," "could," "anticipate," "may"
or other words that convey uncertainty of future events or outcomes. The
cautionary statements made in this Form 10-Q should be read as being applicable
to all related forward-looking statements whenever they appear in this Form
10-Q. Our actual results could differ materially from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed under the section
captioned "Factors That May Affect Future Results" included in Item 2 of this
Form 10-Q as well as those cautionary statements and other factors set forth
elsewhere herein.

References in this Form 10-Q to the terms "optimal" and "optimized" and
words to that effect are not necessarily intended to connote the mathematically
optimal solution, but may connote near-optimal solutions which reflect practical
considerations such as customer requirements as to response time and precision
of the results.

OVERVIEW

i2 is a leading provider of intelligent eBusiness solutions that help
enterprises optimize business processes both internally and among trading
partners. Our solutions enable enterprises to collaborate in real-time with
suppliers, design partners and customers, to significantly improve efficiencies,
respond quickly to changing market demands and engage in dynamic business
interactions over the Internet. Our TradeMatrix platform provides solutions and
content designed to improve the functions of designing, buying, planning,
selling, fulfilling and servicing products or services. These solutions compete
in the broader areas of supply chain management, customer management, and
product lifecycle management. Through TradeMatrix we are building, enabling, and
servicing public and private Internet-based marketplaces, or eMarketplaces,
which consist of communities of trading partners that, among other things,

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enable real-time collaboration and exchange of information among suppliers,
manufacturers, distributors, logistics providers and customers. In addition, our
announced TradeMatrix portal solution is designed to provide value-added
services for eMarketplace participants spanning multiple digital marketplaces,
which is intended to foster enhanced collaboration within and between
enterprises.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentages
that selected items in the unaudited Condensed Consolidated Statements of Income
bear to total revenues. The period-to-period comparisons of financial results
are not necessarily indicative of future results.

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Software licenses ............................. 60.2% 61.9% 61.5% 61.5 %
Services ...................................... 27.5 24.9 26.1 25.0
Maintenance ................................... 12.3 13.1 12.4 13.5
---------- ---------- ---------- ----------
Total revenues .......................... 100.0 100.0 100.0 100.0
---------- ---------- ---------- ----------
Costs and expenses:
Cost of software licenses ..................... 2.6 4.1 2.6 3.7
Cost of services and maintenance .............. 23.5 19.9 24.0 20.8
Sales and marketing ........................... 33.4 35.3 34.8 35.4
Research and development ...................... 24.1 21.2 24.9 21.2
General and administrative .................... 10.2 8.6 10.3 8.7
Amortization of intangibles ................... -- 86.1 -- 48.7
In process R&D and acquisition-related
expenses .................................... 0.2 40.7 0.2 23.2
---------- ---------- ---------- ----------
Total costs and expenses ................ 94.0 216.0 96.8 161.7
Operating income (loss) .......................... 6.0 (116.0) 3.2 (61.7)
Other income, net ................................ 1.0 1.7 1.0 1.6
---------- ---------- ---------- ----------
Income (loss) before income taxes ................ 7.0 (114.2) 4.1 (60.2)
Provision for income taxes ....................... 4.1 1.5 3.2 2.6
---------- ---------- ---------- ----------
Net income (loss) ................................ 3.0% (115.7)% 1.0% (62.7)%
========== ========== ========== ==========
</TABLE>

REVENUES

Our revenues consist of software license revenues, service revenues and
maintenance revenues. Software license revenues consist of sales of software
licenses which are recognized in accordance with the American Institute of
Certified Public Accountants' Statement of Position SOP 97-2 ("SOP 97-2"),
"Software Revenue Recognition," as modified by SOP 98-9. Under SOP 97-2,
software license revenues are recognized upon execution of a contract and
delivery of software, provided that the license fee is fixed

11
<PAGE> 12

and determinable, no significant production, modification or customization of
the software is required and collection is considered probable by management.
Service revenues are primarily derived from fees for implementation, consulting
and training services and are recognized as the services are performed.
Maintenance revenues are derived from customer support agreements generally
entered into in connection with initial license sales and subsequent renewals.
Maintenance revenues are recognized ratably over the term of the maintenance
period. Payments for maintenance fees are generally made in advance.

Total revenues increased 84% to $242.6 million for the three months ended
June 30, 2000 from $131.9 million for the three months ended June 30, 1999. In
the first six months of 2000, total revenue increased 72% to $428.9 million from
$249.5 million in the first six months of 1999. We derived substantially all of
our revenues from licenses associated with our suite of software products, as
well as related services and maintenance, including sales through public and
private marketplaces.

SOFTWARE LICENSES. Revenues from software licenses increased 89% to $150.2
million for the three months ended June 30, 2000 from $79.4 million for the
three months ended June 30, 1999. In the first six months of 2000, license
revenue increased 72% to $263.8 million from $153.5 million in the first six
months of 1999. The increases in software license revenues were primarily due to
an increased customer awareness of the potential benefits derived from deploying
our software solutions and the further acceptance and adoption of
TradeMatrix(TM). During the three months ended June 30, 2000, approximately 41%
of our software license revenues were derived from repeat sales. Although we
believe that direct sales will continue to account for a majority of software
license revenues, our strategy is to continue to increase the level of indirect
sales activities. We expect that sales of our software products through sales
alliances, distributors, resellers and other indirect channels will increase as
a percentage of software license revenues. However, there can be no assurance
that our efforts to expand indirect sales will be successful. There can also be
no assurance that these relationships will continue in the future.

SERVICES. Revenues from services increased 67% to $60.5 million for the
three months ended June 30, 2000 from $36.3 million for the three months ended
June 30, 1999. In the first six months of 2000, service revenues increased 65%
to $107.4 million from $65.1 million in the first six months of 1999. The
increases in service revenues were primarily due to the increase in the number
of RHYTHM licenses sold and resulting demand for consulting and implementation
services. The increases were also due to an increase in the use of third-party
consultants to provide implementation services to our customers which has
allowed us to more rapidly penetrate international markets and targeted vertical
markets. Service revenues as a percentage of total revenues have fluctuated, and
are expected to continue to fluctuate on a period to period basis, based upon
the demand for implementation, consulting and training services.

MAINTENANCE. Revenues from maintenance increased 96% to $31.9 million for
the three months ended June 30, 2000 from $16.3 million for the three months
ended June 30, 1999. In the first six months of 2000, maintenance revenues
increased 86% to $57.7 million from $31 million in the first six months of 1999.
The increase of maintenance revenues was primarily due to the continued
increase in the number of RHYTHM licenses sold and a high percentage of
maintenance agreement renewals. We expect that maintenance revenues will
continue to increase from levels achieved in the three months ended June 30,
2000.

CONCENTRATION OF REVENUES. We generally derive a significant portion of our
software license revenues in each quarter from a small number of relatively
large sales. Although no individual customer accounted for 10% or more of total
software license revenue in the first quarter of 2000, in the second quarter of
2000, one customer individually accounted for at least 10% of total software
license revenues. We generally derive a significant portion of our software
license revenues in each quarter from a small number of relatively large sales.
For example, in each quarter of 1999 one or more customers individually
accounted for at least 10% of total software license revenues during that
quarter. While we believe that the loss of any one of these customers would not
seriously harm our business, operating results or financial condition, an
inability to consummate one or more substantial license sales in any future
period could seriously harm our operating results for that period.

INTERNATIONAL REVENUES. Our international revenues, primarily generated from
customers located in Europe, Asia, Canada and Latin America, in the three months
ended June 30, 2000 were approximately 28% of total revenues, consistent with
the three months ended June 30, 1999. Increases in international revenue are
consistent with increases in consolidated revenues. We believe that continued
growth and profitability will require further expansion in international
markets. To successfully increase the level of international sales, we have
utilized and will continue to utilize substantial resources to expand existing
international operations and establish additional international operations. We
cannot be certain that our investments in international operations will produce
desired levels of revenues or profitability.

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<PAGE> 13

COSTS AND EXPENSES

COST OF SOFTWARE LICENSES. Cost of software licenses consists
primarily of:

o commissions paid to third parties in connection with joint
marketing and other related agreements,

o royalty fees associated with third-party software included with
sales of RHYTHM,

o the cost of user documentation; and

o the cost of reproduction and delivery of the software.

Cost of software licenses was $10.1 million and $3.4 million for the three
months ended June 30, 2000 and 1999, representing 6.7% and 4.3% of software
license revenues, respectively. Cost of software licenses was $15.7 million and
$6.6 million for the six months ended June 30, 2000 and 1999, representing 6%
and 4.3% of software license revenues respectively. The increases in cost of
software licenses were primarily due to an increase in the amount of royalty
fees associated with third-party software included with sales of RHYTHM and an
increase in commissions paid to third parties in connection with joint marketing
and other related agreements.

COST OF SERVICES AND MAINTENANCE. Cost of services and maintenance consists
primarily of costs associated with implementation, consulting and training
services. Cost of services and maintenance also includes the cost of providing
software maintenance to customers such as telephone support and packaging and
shipping costs related to new releases of software and updated user
documentation. Cost of services and maintenance was $48.2 million and $31
million for the three months ended June 30, 2000 and 1999, representing 52.2%
and 59% of total services and maintenance revenues, respectively. Cost of
services and maintenance was $89.3 million and $60 million for the six months
ended June 30, 2000 and 1999, representing 54.1% and 62.4%, of services and
maintenance revenue, respectively. The decrease in cost of services and
maintenance as a percentage of revenue is related to the increase of revenue as
a result of a high percentage of maintenance agreement renewals. The increases
in the dollar amount of services and maintenance were primarily due to the
increase in the number of consultants, product support and training staff and
the increased use of third-party consultants to provide implementation services.
We expect to continue to increase the number of our consulting, product support
and training personnel in the foreseeable future as a means to expand into
different geographic and vertical markets. To the extent that our license sales
do not increase at anticipated rates, the hiring of additional personnel could
seriously harm our profit margins.

SALES AND MARKETING EXPENSES. Sales and marketing expenses consist primarily
of personnel costs, commissions, office facilities, travel, promotional events
such as trade shows, seminars and technical conferences, advertising and public
relations programs. Sales and marketing expenses were $85.6 million and $44.1
million in the three months ended June 30, 2000 and 1999, representing 35.3% and
33.4% of total revenues, respectively. Sales and marketing expenses were $151.8
million and $86.8 million for the six months ended June 30, 2000 and 1999,
representing 35.4% and 34.8%, of total revenues, respectively. The sales and
marketing expense increased in dollar amount and as a percentage of total
revenues primarily due to continued expansion of our direct sales force,
increased sales commissions as a result of higher revenues, continued investment
in strengthening our international selling presence, and increased marketing and
promotional activities as a result of our expanded suite of intelligent
eBusiness solutions. We expect these expenses will continue to increase in
absolute dollars and may increase as a percentage of total revenues.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$51.4 million and $31.8 million for the three months ended June 30, 2000 and
1999, representing 21.2% and 24.1% of total revenues, respectively. Research and
development expenses were $91 million and $62.1 million for the six months ended
June 30, 2000 and 1999, representing 21.2% and 24.9%, of total revenues,
respectively. The decrease in research and development cost as a percentage of
revenue is the result of increased license revenue and maintenance contract
renewals and our ability to leverage our base of resources to support a larger
organization. The increases in the dollar amount of research and development
expenses were primarily due to the hiring of additional research and development
personnel and other related costs incurred to support our growing product
footprint. We expect that the dollar amount of research and development expenses
will continue to increase as we continue to invest in developing new products,
applications and product enhancements for existing and new vertical markets.

In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed", software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers. To
date, the establishment of technological feasibility of our products and general
release of such software have substantially coincided. As a

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<PAGE> 14

result, software development costs qualifying for capitalization have been
insignificant; therefore, we have not capitalized any software development
costs.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include the personnel and other costs of our finance, legal, accounting, human
resources, information systems and executive departments. General and
administrative expenses were $20.9 million and $13.4 million in the three months
ended June 30, 2000 and 1999, representing 8.6% and 10.2% of total revenues,
respectively. General and administrative expenses were $37.5 million and $25.6
million for the six months ended June 30, 2000 and 1999, representing 8.7% and
10.3%, of total revenue, respectively. The increases in the dollar amounts were
primarily the result of increased staffing and related costs associated with the
growth of our business. The decrease in general and administrative expenses as a
percentage of total revenues was due primarily to the increase in revenues and
our ability to leverage our base of resources to support a larger organization.
We expect that the dollar amount of general and administrative expenses will
continue to increase in the foreseeable future.

AMORTIZATION OF INTANGIBLES. In the recent past, we have sought to expand
the depth and breadth of our product offerings through various technology or
business acquisitions. When accounted for as a purchase, the purchase price, net
of liabilities assumed, is allocated to intangibles, including goodwill, which
is amortized over the life of the asset, and in-process research and
development, which is expensed immediately.

On April 28, 2000, we acquired SupplyBase, Inc. The acquisition was accounted
for as a purchase in which i2 issued approximately 1.8 million shares of i2
stock in exchange for the outstanding capital stock of SupplyBase including
shares reserved for issuance upon the exercise of assumed options and warrants.
The excess of purchase price over net assets was allocated to intangible assets,
including goodwill, and in-process research and development. The intangible
assets are to be amortized over two to three years.

On June 9, 2000, we acquired Aspect Development, Inc. The acquisition was
accounted for as a purchase in which i2 issued approximately 47.9 million shares
of i2 stock in exchange for the outstanding capital stock of Aspect including
shares reserved for issuance upon the exercise of assumed options. The excess of
purchase price over net assets was allocated to intangible assets, including
goodwill, and in-process research and development. The intangible assets are to
be amortized over two to three years.

For the three and six months ended June 30, 2000, we incurred $208.9 million in
amortization of intangibles.

IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION-RELATED EXPENSES. At the
time of acquisition, the acquisitions may involve technology that is not yet
determined to be technologically feasible and has no alternative future use in
its then-current stage of development. In such instances, and in accordance with
appropriate accounting guidelines, the portion of the purchase price allocated
to in-process research and development is expensed immediately upon acquisition.

For the three and six months ended June 30, 2000, we incurred a total of $98.8
million and $99.3 million, respectively, consisting mostly of a one time write
off of in-process research and development charges related to the acquisition of
certain IBM assets, SupplyBase, Inc. and Aspect Development, Inc. For the three
and six months ended June 30,1999, we incurred a total of $0.3 million and $0.6
million, respectively, consisting mostly of acquisition expenses.

OTHER INCOME, NET

Other income, net typically consists of interest income on short-term
investments and overnight repurchase agreements partially offset by interest
expense. Other income, net was $4.2 million and $1.3 million in the three months
ended June 30, 2000 and 1999, representing 1.7% and 1% of total revenues,
respectively. Other income, net, for the six months ended June 30, 2000 and
1999, was $6.7 million and $2.4 million representing 1.6% and 1% of total
revenues, respectively. The increase in other income, net for the three and six
months ended June 300, 2000 was primarily attributable to increased returns on
cash, cash equivalents and short-term investment balances due to the overall
increase in cash balances in 2000 and the increase in overall market interest
rates, as compared to the same periods in 1999, offset by increased interest
expense from the 5 1/4% convertible notes that were issued in December 1999.

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<PAGE> 15

PROVISION FOR INCOME TAXES

The effective income tax rates for the three months ended June 30, 2000 was
(1.3%) compared to 58.1% for the three months ended June 30, 1999. The effective
income tax rate for the six months ended June 30, 2000 was (4.3%) compared to
76.9% for the six months ended June 30, 1999. The effective income tax rate for
the three and six months ended June 30, 2000 differed from the U.S. statutory
rate due primarily to the non-deductibility of acquisition-related expenses. The
effective rate for 1999 was affected by the non-deductible losses of certain
subsidiaries and non-deductible in-process research and development and certain
other acquisition-related expenses. Excluding the effects of these items, our
effective tax rates for the three and six months ended June 30, 2000, and 1999
were 37.5% and 38.0%, respectively.

NET INCOME PER SHARE

Net income per share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share". This method requires
calculation of both net income per share and net income per share, assuming
dilution. Net income per share excludes the potentially dilutive effect of
common stock equivalents such as stock options and convertible debt, while net
income per share, assuming dilution includes such potentially dilutive effects.
Future weighted-average shares outstanding calculations will be impacted by the
following factors:

o the ongoing issuance of common stock associated with stock option
exercises;

o the issuance of common shares associated with our employee stock
purchase program;

o any fluctuations in our stock price, which could cause changes in the
number of common stock equivalents included in the net income per share,
assuming dilution computation;

o the issuance of common stock to effect business combinations should we
enter into such transactions;

o the issuance of common stock or warrants to effect joint marketing,
joint development, or other such arrangements should we enter into such
transactions; and

o assumed or actual conversions of debt into common stock with respect to
the convertible notes issued in December 1999.

LIQUIDITY AND CAPITAL RESOURCES

Historically, we have financed our operations and met our capital
expenditure requirements primarily through cash flows from operations, long-term
borrowings and sales of equity securities. Our liquidity and financial position
consisted of $636.5 million of working capital as of June 30, 2000 compared to
$585 million as of December 31, 1999. The increase in working capital was
primarily related to an increase in short-term investments to $292.2 million at
June 30, 2000 from $124.8 million at December 31, 1999 and an increase in
accounts receivable, net of allowance for doubtful accounts, to $240 million at
June 30, 2000 from $157.6 million at December 31, 1999, offset by an increase in
accrued liabilities to $185 million at June 30, 2000 from $85.8 million at
December 31, 1999 and an increase in deferred revenue to $157.1 million at June
30, 2000 from $72.6 million at December 31, 1999. Cash flows from operations
were $83.9 million and $24 million for the six months ended June 30, 2000 and
1999, respectively. Operating cash flows resulting from increased revenues,
increases in deferred revenue, accrued liabilities, stock option tax benefits,
and income taxes payable were partially offset by increases in accounts
receivable, deferred income taxes and prepaid assets.

Deferred revenue increased as a result of the demand for marketplace
solutions provided by i2. A significant piece of the deferred revenues result
from pre-payments of fees associated with marketplace transactions. Customers,
such as IBM, have subscribed to multi-year commitments for our marketplace
services. The deferred revenues will be recognized over time, based on the
individual contracts.

Quarter-end days' sales outstanding increased to 90 days at June 30, 2000
from 83 days for the quarter ended December 31, 1999. Accounts receivable and
days' sales outstanding can fluctuate for a variety of reasons, including:

o the amount and timing of revenues earned;

o collection experience;

15
<PAGE> 16

o negotiated payment terms;

o the amount of receivables generated from international customers, which
generally have longer payment terms compared to customers in the U.S.
and

o the number of large sales for which some amounts may not be due upon
execution of the contract.

We believe that the allowance for doubtful accounts at June 30, 2000 is
adequate to cover any collection difficulties with respect to accounts
receivable. However, a significant portion of our accounts receivable are
derived from sales of large licenses, often to new customers with whom we do not
have a payment history. Accordingly, there can be no assurance that the
allowance will be adequate to cover any receivables which are later determined
to be uncollectible, particularly if one or more large receivables becomes
uncollectible.

Cash used in investing activities was $ 143.6 million for the six months
ended June 30, 2000 as compared to $0.8 million for the six months ended June
30, 1999. Expenditures during the first six months of 2000 consisted mainly of
purchases of short-term investments, purchases of furniture and equipment and
long-term investments partially offset by cash acquired in the purchase of
SupplyBase, Inc. and Aspect Development, Inc.

On March 27, 2000, we purchased from IBM various software assets,
cross-patent rights and software licenses with an aggregate value of
approximately $234 million in exchange for approximately 1.3 million share of
our common stock. In addition, we may issue to IBM up to an additional $250
million in shares of our common stock, valued based on a trading average prior
to the date of issuance. We could be obligated to issue some or all of these
shares in the future based on the amount of the revenue we derive from or
through IBM during four annual periods, with the first annual period ending
December 31, 2000. Issuance of this stock will be recorded as a commission or
sales discount and not as an addition to purchase price.

On April 28, 2000, we acquired SupplyBase, Inc., a developer of high-end,
interactive database products, services and supply chain management tools. The
acquisition was accounted for as a purchase in which i2 issued approximately 1.8
million shares of i2 stock in exchange for the outstanding capital stock of
SupplyBase including shares reserved for issuance upon the exercise of assumed
options and warrants.

On June 9, 2000, we acquired Aspect Development, Inc., a developer of
collaborative solutions for business-to business marketplaces. The acquisition
was accounted for as a purchase in which i2 issued approximately 47.9 million
shares of i2 stock in exchange for the outstanding capital stock of Aspect
including shares reserved for issuance upon the exercise of assumed options.

We may in the future pursue additional acquisitions of businesses, products
and technologies, or enter into joint venture arrangements, that could
complement or expand our business. Any material acquisition or joint venture
could result in a decrease to our working capital depending on the amount,
timing and nature of the consideration to be paid.

Cash provided by financing activities was $29.2 million for the six months
ended June 30, 2000 as compared to $18.4 million for the six months ended June
30, 1999. The increase in cash provided by financing activities was due to an
increase in the net proceeds received upon the exercise of employee stock
options.

In August 1999, we entered into a one-year, $30.0 million revolving credit
agreement. The facility is unsecured and contains customary restrictive
covenants, including covenants requiring us to maintain certain financial
ratios. The revolving credit agreement is not subject to a borrowing base
limitation and borrowings thereunder bear interest at LIBOR plus 0.75% to 1.75%,
depending on certain cash ratios. The maximum borrowings available under the
facility are reduced by the value of outstanding letters of credit issued by the
lender on our behalf, $8.2 million of which were outstanding at June 30, 2000.
At June 30, 2000, there were no borrowings outstanding under this agreement and
we were in compliance with all covenants.

On December 10, 1999, we issued an aggregated principal amount of $350
million of 5 1/4% convertible subordinated notes due 2006, which were sold at
par less an underwriting discount of 2.75% of the principal amount of the notes.
The notes are convertible at the option of the holder into shares of common
stock at a conversion price of $75.99 per share at any time prior to maturity.
We will pay interest on the notes on June 15 and December 15 of each year. The
first interest payment was paid on June 15, 2000.

We believe that existing cash and cash equivalent balances, short-term
investment balances, available borrowings under the

16
<PAGE> 17

revolving credit agreement and potential cash flows from operations will satisfy
our working capital and capital expenditure requirements for the next 12 months.
However, any material acquisitions of complementary businesses, products or
technologies or joint venture arrangements could require us to obtain additional
equity or debt financing. There can be no assurance that such financing would be
available on acceptable terms, if at all.

FACTORS THAT MAY AFFECT FUTURE RESULTS

Numerous factors may affect our business and future results of operations.
These factors include, but are not limited to, the potential for significant
fluctuations in quarterly results; dependence on significant individual sales;
competition; management of growth; product concentration; dependence on product
line expansion; integration of acquisitions; potential future acquisitions;
international operations and currency fluctuations; risks associated with
strategic relationships; dependence upon key personnel; intellectual property
and proprietary rights; use of licensed technology; complexity of software
products; rapid technological change and new products; dependence on technical
and implementation personnel; and product liability claims. The discussion below
addresses some of these factors. For a more thorough discussion of these and
other factors that may affect our business and future results, see the
discussion under the caption "Factors That May Affect Future Results" in our
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 22, 2000.

OUR FINANCIAL RESULTS MAY VARY SIGNIFICANTLY FROM QUARTER-TO-QUARTER AND WE
MAY FAIL TO MEET EXPECTATIONS, WHICH MAY NEGATIVELY IMPACT THE PRICE OF OUR
STOCK.

Our operating results have varied significantly from quarter-to-quarter in
the past, and we expect our operating results to continue to vary from
quarter-to-quarter in the future, due to a variety of factors, many of which are
outside of our control. Factors that could affect quarterly operating results
include:

o volume and timing of customer orders;

o length of the sales cycle;

o customer budget constraints;

o announcement or introduction of new products or product enhancements by
us or our competitors;

o changes in prices of our products and those of our competitors;

o foreign currency exchange rate fluctuations;

o market acceptance of new products;

o mix of direct and indirect sales;

o changes in our strategic relationships; and

o changes in our business strategy.

Furthermore, customers may defer or cancel their purchases of products if they
experience a downturn in their business or if there is a downturn in the general
economy. We will continue to determine our investment and expense levels based
on expected future revenues. A significant portion of our expenses is not
variable in the short term, and we cannot reduce our costs quickly to respond to
decreases in revenues. Therefore, if revenues are below expectations, this
shortfall is likely to adversely and disproportionately affect our operating
results. In addition, we may reduce our prices or accelerate investment in
research and development efforts in response to competitive pressures or to
pursue new market opportunities. Any of these activities may further limit our
ability to adjust spending in response to revenue fluctuations. Revenues may not
grow at historical rates in future periods, or they may not grow at all.
Accordingly, we may not maintain positive operating margins in future quarters.
Any of these factors could cause our operating results to be below the
expectations of public market analysts and investors, and the price of our
common stock may fall.

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<PAGE> 18

WE ANTICIPATE SEASONAL FLUCTUATIONS IN REVENUES, WHICH MAY CAUSE VOLATILITY
IN OUR STOCK PRICE.

The market price of our common stock has been volatile in the past, and the
market price of our common stock may be volatile in the future. Historically,
our revenues have tended to be strongest in the fourth quarter of the year. We
believe that our seasonality is due to the calendar year budgeting cycles of
many of our customers and our compensation policy that rewards sales personnel
for achieving annual revenue quotas. In future periods, these seasonal trends
may cause our quarter-to-quarter operating results to vary, which may result in
failing to meet the expectations of public market analysts and investors.

WE DEPEND ON SIGNIFICANT INDIVIDUAL LICENSE SALES. THEREFORE, OUR OPERATING
RESULTS FOR A GIVEN PERIOD COULD SUFFER SERIOUS HARM IF WE FAIL TO CLOSE THE
LARGE SALES WE TARGETED FOR THAT PERIOD.

We generally derive a significant portion of revenues in each quarter from a
small number of relatively large sales. Moreover, due to customer purchasing
patterns, we typically realize a significant portion of our software license
revenues in the last few weeks of a quarter. As a result, we are subject to
significant variations in license revenues and results of operations if we incur
any delays in customer orders. If in any future period we fail to close one or
more substantial license sales that we have targeted to close in that period,
this failure could seriously harm our operating results for that period.

WE MAY NOT REMAIN COMPETITIVE, AND INCREASED COMPETITION COULD SERIOUSLY
HARM OUR BUSINESS.

Our competitors offer a variety of eBusiness including supply chain and
other core processes. These competitors include:

o vendors establishing electronic marketplaces and indirect procurement
capabilities, such as Ariba and Commerce One;

o enterprise resource application software vendors such as SAP AG,
PeopleSoft Inc., Oracle Corporation and Baan Company, N.V., each of
which currently offers sophisticated enterprise resource planning, or
ERP, solutions that currently or may in the future incorporate
applications competitive with our products;

o supply chain software vendors including Manugistics Group, Inc. and
Logility, Inc.;

o other business application software vendors which may broaden their
product offerings by internally developing, or by acquiring or
partnering with independent developers of, advanced planning and
scheduling software;

o internal development efforts by corporate information technology
departments; and

o companies offering standardized or customized products for mainframe
and/or mid-range computer systems.

Historically, a number of enterprise resource planning vendors have from time to
time jointly marketed our products as a complement to their own systems.
However, as we attempt to increase our market share and expand our product
offerings, and as enterprise resource planning vendors expand their own product
offerings, our relationships with these vendors have and may continue to become
more competitive. We believe that enterprise resource planning vendors are
focusing significant resources on establishing and increasing the functionality
of their own eBusiness solutions, and other enterprise resource planning vendors
have recently acquired independent developers of advanced planning and
scheduling software which compete with RHYTHM.

Relative to us, many of our competitors have:

o longer operating histories;

o significantly greater financial, technical, marketing and other
resources;

o greater name recognition;

o a broader range of products to offer; and

o a larger installed base of customers.

Current and potential competitors have established, or may establish,
cooperative relationships among themselves or with third parties to enhance
their products, which may result in increased competition. In addition, we
expect to experience increasing price competition as we compete for market
share, and we may not be able to compete successfully with our existing or new
competitors. If

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we experience increased competition, substantial harm may result to our
business, operating results and financial condition.

OUR STRATEGY OF ESTABLISHING AND PROMOTING OUR TRADEMATRIX IS UNPROVEN AND
MAY BE UNSUCCESSFUL.

As part of our business strategy, we are offering the TradeMatrix platform
to trading community participants in digital marketplaces. This strategy is
unproven, and currently we are providing only a limited portion of our intended
TradeMatrix services in only a small number of digital trading communities. We
have limited experience developing and operating digital marketplaces, and we
cannot be certain that these trading communities will be operated effectively,
that enterprises will join and remain in these trading communities, that we will
develop and provide successfully all intended TradeMatrix services, or that we
will generate significant revenues from these services. To date, we have not
generated significant transaction revenues from these services. If this business
strategy is flawed, or if we are unable to execute effectively, our business,
operating results and financial condition could be substantially harmed.

In addition, we expect to rely on third parties' efforts to promote our
TradeMatrix platform. Because our revenues from these sources are likely to be
largely based on subscriptions to or utilization of our digital marketplaces,
any failure by these third parties to successfully promote our TradeMatrix
platform, or any reluctance to participate in our digital marketplaces on the
part of suppliers, manufacturers, distributors, logistics providers or
customers, could harm our business, results of operations and financial
condition.

RAPID GROWTH IN OUR OPERATIONS COULD CONTINUE TO STRAIN OUR MANAGERIAL AND
OPERATIONAL RESOURCES.

We have experienced rapid growth. Revenues have increased to approximately
$242.6 million and $428.9 million for the three and six months ended June 30,
2000, respectively, from approximately $ 131.9 and $249.5 million for the three
and six months ended June 30, 1999. Revenues increased from approximately $571.1
million in 1999, from approximately $369.2 million in 1998 and from
approximately $221.8 million in 1997. Our employee headcount has increased to
approximately 4,910 at June 30, 2000 from approximately 2,798 at December 31,
1999, from approximately 2,353 at December 31, 1998, and from approximately
1,331 at December 31, 1997. We have also increased the scope of our operating
and financial systems and the geographic distribution of our operations and
customers. This growth has strained our management and operations, and they will
continue to be strained if rapid growth continues. Our officers and other key
employees will need to implement and improve our operational, customer support
and financial control systems and effectively expand, train and manage our
employee base. Further, we expect that we will be required to manage an
increasing number of relationships with various customers and other third
parties. We may not be able to manage future expansion successfully, and our
inability to do so would harm our business, operating results and financial
condition.

ANY DECREASE IN DEMAND FOR OUR RHYTHM SUITE OF PRODUCTS AND SERVICES COULD
SIGNIFICANTLY REDUCE OUR REVENUES.

We derive substantially all of our revenues from licenses of our RHYTHM
suite of products and related services. RHYTHM-related revenues, including
maintenance and consulting contracts, will continue to account for substantially
all of our revenues for the foreseeable future. As a result, our future
operating results will depend upon continued market acceptance of RHYTHM and
enhancements thereto. However, RHYTHM may not achieve continued market
acceptance. Competition, technological change or other factors could decrease
demand for, or market acceptance of, RHYTHM. Any decrease in demand or market
acceptance of RHYTHM could substantially harm our business, operating results
and financial condition.

WE ARE INVESTING SIGNIFICANT RESOURCES IN DEVELOPING AND MARKETING OUR
INTELLIGENT EBUSINESS SOLUTIONS. THE MARKET FOR THESE SOLUTIONS IS NEW AND
EVOLVING, AND, IF THIS MARKET DOES NOT DEVELOP AS WE ANTICIPATE, OR IF WE ARE
UNABLE TO DEVELOP ACCEPTABLE SOLUTIONS, SERIOUS HARM WOULD RESULT TO OUR
BUSINESS.

We currently derive a substantial portion of our revenues from licenses for
decision-support software products associated with supply chain management
software and related services. However, we are investing significant resources
in further developing and marketing enhanced products and services to facilitate
eBusiness over public and private networks. For the first few months after we
introduce new products and services, the demand for and market acceptance of
those products and services are subject to a high level of uncertainty,
especially where acquisition of our products or services requires a large
capital commitment or other significant commitment of resources. Adoption of
eBusiness software solutions, particularly by those individuals and enterprises
that have

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historically relied upon traditional means of commerce and communication, will
require a broad acceptance of new and substantially different methods of
conducting business and exchanging information. These products and services
involve a new approach to the method of conducting business, and, as a result,
intensive marketing and sales efforts may be necessary to educate prospective
customers regarding the uses and benefits of these products and services in
order to generate demand. The market for this broader functionality may not
develop, competitors may develop superior products and services, or we may not
develop acceptable solutions to address this functionality. Any one of these
events could seriously harm our business, operating results and financial
condition.

RAPID ADOPTION OF OUR TRADEMATRIX PLATFORMS COULD REDUCE OUR SOFTWARE
LICENSING REVENUES.

Our current revenue model is mainly focused on license revenue, with
additional revenues earned from consulting, maintenance and training. The
TradeMatrix platform offers a more diverse and expansive set of service
offerings that will generate additional revenue streams for hosting, transaction
processing and subscription fees. The TradeMatrix pricing model differs from our
historical model of deriving revenues from licenses of the RHYTHM suite of
products, which we largely recognize upon executing a contract and delivering
software. Under the TradeMatrix model, up-front license fees may be less
substantial and the fees derived from subscriptions to utilize of the digital
marketplace services may be more robust. We cannot predict the rate at which our
customers will adopt the TradeMatrix platform or whether these expanded service
offerings will adversely impact our license revenues.

WE DO NOT HAVE SIGNIFICANT EXPERIENCE IN HOSTING ELECTRONIC MARKETPLACES AND
MAY NOT ADEQUATELY PREDICT THE VOLUME OF TRAFFIC.

If the volume of traffic on the web site for our TradeMatrix platform
increases, the platform may experience slower response times or other problems.
We will rely on several third parties to expand, manage and maintain the
necessary computer equipment, software, Internet and telecommunication services
required for efficient access to TradeMatrix as demand increases. Any delays in
response time or performance problems could cause TradeMatrix users to perceive
this service as not functioning properly and therefore cause them to reduce or
discontinue use of our products and services.

OUR TRADEMATRIX PLATFORM MAY EXPERIENCE PERFORMANCE PROBLEMS OR DELAYS AS A
RESULT OF SERVICE INTERRUPTIONS.

We must protect our network infrastructure and equipment against damage from
human error, physical or electronic security breaches, power loss and other
facility failures, fire, earthquake, flood, telecommunications failure,
sabotage, vandalism and other similar events. Despite precautions we have taken,
a natural disaster or other unanticipated problems at our data centers could
result in interruptions in our services or significant damage to equipment
supporting the platform. In addition, failure of any of our telecommunications
providers to provide consistent data communications capacity could result in
interruptions in our services. Each of these could experience outages, delays
and other difficulties due to system failures unrelated to our systems. Any
damage to or failure of our systems or service providers could result in
reductions in, or terminations of, services supplied to our customers, which
could have a material adverse effect on our business.

IF WE PUBLISH INACCURATE CATALOG CONTENT DATA, OUR BUSINESS COULD SUFFER.

The accurate publication of catalog content is critical to our customers'
businesses. Our TradeMatrix platform contains content management tools that help
suppliers manage the collection and publication of catalog content. Any defects
or errors in these tools or the failure of these tools to accurately publish
catalog content could deter businesses from participating in the TradeMatrix
marketplaces, damage our business reputation, harm our ability to win new
customers and potentially expose us to legal liability. In addition, from time
to time some of our customers may submit inaccurate pricing or other inaccurate
catalog information. Even though such inaccuracies are not caused by our work
and are not within our control, such inaccuracies could deter current and
potential customers from using our products and could harm our business,
operating results and financial condition.

THE MARKETS IN WHICH WE COMPETE EXPERIENCE RAPID TECHNOLOGICAL CHANGE. IF WE
DO NOT RESPOND TO THE TECHNOLOGICAL ADVANCES WE COULD SERIOUSLY HARM OUR
BUSINESS.

Enterprises are increasing their focus on decision-support solutions for
eBusiness challenges. As a result, they are requiring their application software
vendors to provide greater levels of functionality and broader product
offerings. Moreover, competitors continue to make rapid technological advances
in computer hardware and software technology and frequently introduce new
products, services and enhancements. We must continue to enhance our current
product line and develop and introduce new products and services that

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keep pace with the technological developments of our competitors. We must also
satisfy increasingly sophisticated customer requirements. If we cannot
successfully respond to the technological advances of others, or if our new
products or product enhancements and services do not achieve market acceptance,
these events could seriously harm our business, operating results and financial
condition.

IF USE OF THE INTERNET FOR COMMERCE AND COMMUNICATION DOES NOT INCREASE AS
WE ANTICIPATE, OUR BUSINESS WILL SUFFER.

We are offering new and enhanced products and services, which depend on
increased acceptance and use of the Internet as a medium for commerce and
communication. Rapid growth in the use of the Internet is a recent phenomenon.
As a result, acceptance and use may not continue to develop at historical rates,
and a sufficiently broad base of business customers may not adopt or continue to
use the Internet as a medium of commerce. Demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty, and there exist few proven services and products.

Our business could be seriously harmed if:

o use of the Internet and other online services does not continue to
increase or increases more slowly than expected;

o the necessary communication and computer network technology underlying
the Internet and other online services does not effectively support any
expansion that may occur;

o new standards and protocols are not developed or adopted in a timely
manner; or

o for any other reason -- such as concerns about security, reliability,
cost, ease of use, accessibility or quality of service -- the Internet
does not create a viable commercial marketplace, inhibiting the
development of electronic commerce and reducing the need for and
desirability of our products and services.

FUTURE REGULATION OF THE INTERNET MAY SLOW ITS GROWTH, RESULTING IN
DECREASED DEMAND FOR OUR PRODUCTS AND SERVICES AND INCREASED COSTS OF DOING
BUSINESS.

Due to increasing popularity and use of the Internet, it is possible that
state and federal regulators could adopt laws and regulations that impose
additional burdens on companies conducting business online. For example, the
growth and development of the market for Internet-based services may prompt
calls for more stringent consumer protection laws. Moreover, the applicability
to the Internet of existing laws in various jurisdictions governing issues such
as property ownership, sales tax, libel and personal privacy is uncertain and
may take years to resolve. Any new legislation or regulation, the application of
laws and regulations from jurisdictions whose laws do not currently apply to our
business, or the application of existing laws and regulations to the Internet
and other online services could decrease the expansion of the Internet, causing
our costs to increase and our growth to be harmed.

CONCERNS THAT OUR PRODUCTS DO NOT ADEQUATELY PROTECT THE PRIVACY OF
CONSUMERS COULD INHIBIT SALES OF OUR PRODUCTS.

One of the principal features of our customer management software
applications is the ability to develop and maintain profiles of consumers for
use by businesses. Typically, these products capture profile information when
consumers, business customers and employees visit a web site and volunteer
information in response to survey questions concerning their backgrounds,
interests and preferences. Our products augment these profiles over time by
collecting usage data. Although we have designed our customer management
products to enable the development of applications that permit web site visitors
to prevent the distribution of any of their personal data beyond that specific
web site, privacy concerns may nevertheless cause visitors to resist providing
the personal data necessary to support this profiling capability. If we cannot
adequately address consumers' privacy concerns, these concerns could seriously
harm our business, operating results and financial condition.

IF OUR ENCRYPTION TECHNOLOGY FAILS TO ENSURE THE SECURITY OF OUR CUSTOMERS'
ONLINE TRANSACTIONS, SERIOUS HARM TO OUR BUSINESS COULD RESULT.

The secure exchange of value and confidential information over public
networks is a significant concern of consumers engaging in online transactions
and inter-action. Our customer management software applications use encryption
technology to provide the security necessary to effect the secure exchange of
value and confidential information. Advances in computer capabilities, new

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discoveries in the field of cryptography or other events or developments could
result in a compromise or breach of the algorithms that these applications use
to protect customer transaction data. If any compromise or breach were to occur,
it could seriously harm our business, operating results and financial condition.

WE MAY NOT SUCCESSFULLY INTEGRATE OR REALIZE THE INTENDED BENEFITS OF OUR
RECENT ACQUISITIONS.

We acquired SMART in July 1999. We also acquired various software assets,
cross-patent rights and software licenses from IBM in March 2000, in April 2000,
we acquired SupplyBase, Inc. and in June 2000 we acquired Aspect. In addition,
we have acquired other businesses and products to help broaden and strengthen
our product portfolio. The success of these acquisitions will depend primarily
on our ability to:

o retain, motivate and integrate the acquired personnel;

o integrate multiple information systems; and

o integrate acquired software with our existing products and services.

We may encounter difficulties in integrating our operations and products with
those of SMART, IBM, SupplyBase, Aspect and others. We may not realize the
benefits that we anticipated when we made these acquisitions. Our failure to
successfully integrate our operations and products with those of SMART,
SupplyBase, Aspect and others could seriously harm our business, operating
results and financial condition.

WE MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES THAT MAY NOT BE
SUCCESSFUL.

In the future, we may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand our business. In furtherance of this strategy, in March 2000 we entered
into agreements to acquire Aspect and SupplyBase. The SupplyBase transaction
closed April 28, 2000 and the Aspect transaction closed June 9, 2000.
Management's negotiations of potential acquisitions or joint ventures and
management's integration of acquired businesses, products or technologies could
divert their time and resources. Future acquisitions could cause us to issue
dilutive equity securities, incur debt or contingent liabilities, amortize
goodwill and other intangibles, or write off in-process research and development
and other acquisition-related expenses that could seriously harm our financial
condition and operating results. Further, we may not be able to integrate any
acquired business, product or technology with our existing operations or train,
retain and motivate personnel from the acquired business. 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.

WE FACE RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS THAT COULD
HARM OUR COMPANY.

Our international operations are subject to risks inherent in international
business activities. In addition, we may expand our international operations in
the future which would increase our exposure to these risks. The risks we face
internationally include:

o difficulties and costs of staffing and managing geographically disparate
operations;

o longer accounts receivable payment cycles in certain countries;

o compliance with a variety of foreign laws and regulations;

o unexpected changes in regulatory requirements;

o overlap of different tax structures;

o greater difficulty in safeguarding intellectual property;

o import and export licensing requirements;

o trade restrictions;

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o changes in tariff rates;

o political instability; and

o general economic conditions in international markets.

CHANGES IN THE VALUE OF THE U.S. DOLLAR, AS COMPARED TO THE CURRENCIES OF
FOREIGN COUNTRIES WHERE WE TRANSACT BUSINESS, COULD HARM OUR OPERATING RESULTS.

To date, our international revenues have been denominated primarily in U.S.
dollars. The majority of our international expenses and some revenues have been
denominated in currencies other than the U.S. dollar. Therefore, changes in the
value of the

U.S. dollar as compared to these other currencies may adversely affect our
operating results. As our international operations expand, we will use an
increasing number of foreign currencies, causing our exposure to currency
exchange rate fluctuations to increase. Although we have implemented limited
hedging programs to mitigate our exposure to currency fluctuations, currency
exchange rate fluctuations have caused, and will continue to cause, currency
transaction gains and losses. While these transactional gains and losses have
not been material to date, they may harm our business, results of operations or
financial condition in the future.

WE DEPEND ON OUR STRATEGIC PARTNERS AND OTHER THIRD PARTIES. IF WE FAIL TO
DERIVE BENEFITS FROM OUR EXISTING AND FUTURE STRATEGIC RELATIONSHIPS, OUR
BUSINESS WILL SUFFER.

From time to time, we have collaborated with other companies, including IBM
and Pricewaterhouse Coopers, in areas such as product development, marketing,
distribution and implementation. Maintaining these and other relationships is a
meaningful part of our business strategy. However, some of our current and
potential strategic partners are either actual or potential competitors, which
may impair the viability of these relationships. In addition, some of our
relationships have failed to meet expectations and may fail to meet expectations
in the future. We may not be able to enter into successful new strategic
relationships in the future.

THE LOSS OF ANY OF OUR KEY PERSONNEL OR OUR FAILURE TO ATTRACT ADDITIONAL
PERSONNEL COULD SERIOUSLY HARM OUR COMPANY.

We rely upon the continued service of a relatively small number of key
technical and senior management personnel, particularly Sanjiv Sidhu, our
chairman and chief executive officer. Our future success depends on retaining
our key employees and our continuing ability to attract, train and retain other
highly qualified technical and managerial personnel. Very few of our key
technical personnel and none of our senior management personnel are bound by
employment agreements. As a result, our employees could leave with little or no
prior notice. In the past, we have had difficulty recruiting qualified
personnel. We may not be able to attract, assimilate or retain other highly
qualified technical and managerial personnel in the future. Our loss of any of
our key technical and senior management personnel or our inability to attract,
train and retain additional qualified personnel could seriously harm our
business, operating results and financial condition.

IF WE FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR FACE A
CLAIM OF INTELLECTUAL PROPERTY INFRINGEMENT BY A THIRD PARTY, WE COULD LOSE OUR
INTELLECTUAL PROPERTY RIGHTS OR BE LIABLE FOR SIGNIFICANT DAMAGES.

We rely primarily on a combination of copyright, trademark and trade secret
laws, confidentiality procedures and contractual provisions to protect our
proprietary rights. In addition, we generally license RHYTHM products to end
users in object code (machine-readable) format, and our license agreements
generally allow the use of RHYTHM products solely by the customer for internal
purposes without the right to sublicense or transfer the RHYTHM products.
However, these measures afford only limited protection. Unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Although we believe software piracy may be a problem, we
are not able to determine the extent to which piracy of our software products
exists. Policing unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent misappropriation of our
technology. This is particularly true in foreign countries where the laws may
not protect proprietary rights to the same extent as the laws of the United
States and may not provide us with an effective remedy against piracy.

As the number of products and competitors continues to grow, the functionality
of products in different industry segments is increasingly overlapping. As a
result, we increasingly may be subject to claims of intellectual property
infringement. Although we are not aware that any of our products infringe upon
the proprietary rights of third parties, third parties may claim infringement by
us with

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respect to current or future products. Any infringement claims, with or without
merit, could be time-consuming, result in costly litigation or damages, cause
product shipment delays or the loss or deferral of sales, or require us to enter
into royalty or licensing agreements. If we enter into royalty or licensing
agreements in settlement of any litigation or claims, these agreements may not
be on terms acceptable to us. Unfavorable royalty and licensing agreements could
seriously harm our business, operating results and financial condition.

We resell some software that we license from third parties. Although we may
continue this practice, third-party software licenses may not continue to be
available to us on commercially reasonable terms. Our inability to maintain or
obtain any of these software licenses will delay or reduce our product shipments
until we can identify, license and integrate equivalent software. Any loss of
these licenses or delay or reduction in product shipments could harm our
business, operating results and financial condition.

OUR PRODUCTS' FAILURE TO REMAIN COMPATIBLE WITH EXISTING AND NEW COMPUTERS
AND SOFTWARE OPERATING SYSTEMS WOULD SERIOUSLY HARM OUR BUSINESS.

Our RHYTHM software can operate on hardware platforms from Digital
Equipment, Hewlett-Packard, IBM and Sun Microsystems and operating systems from
Sun Microsystems and Microsoft. RHYTHM can access data from most widely-used
structured query language databases, including Informix, Oracle and Sybase. If
additional hardware or software platforms gain significant market acceptance, we
may be required to attempt to adapt RHYTHM to those platforms in order to remain
competitive. However, those platforms may not be architecturally compatible with
RHYTHM's software product design, and we may not be able to adapt RHYTHM to
those additional platforms on a timely basis, or at all. Any failure to maintain
compatibility with existing platforms or to adapt to new platforms that achieve
significant market acceptance would seriously harm our business, operating
results and financial condition.

OUR SOFTWARE IS COMPLEX AND MAY CONTAIN UNDETECTED ERRORS.

Our software programs are complex and may contain undetected errors or
"bugs." Although we conduct extensive testing, we may not discover bugs until
our customers install and use a given product or until the volume of services
that a product provides increases. On occasion, we have experienced delays in
the scheduled introduction of new and enhanced products because of bugs.
Undetected errors could result in loss of customers or reputation, adverse
publicity, loss of revenues, delay in market acceptance, diversion of
development resources, increased insurance costs or claims against us by
customers, any of which could seriously harm our business, operating results and
financial condition.

RELEASES AND PROBLEMS WITH NEW PRODUCTS MAY CAUSE PURCHASING DELAYS, WHICH
WOULD HARM OUR REVENUES.

Customers may delay their purchasing decisions in anticipation of our new or
enhanced products, or products of competitors. Delays in customer purchasing
decisions could seriously harm our business and operating results. Moreover,
significant delays in the general availability of new releases, significant
problems in the installation or implementation of new releases, or customer
dissatisfaction with new releases could seriously harm our business, operating
results and financial condition.

OUR FAILURE TO SUCCESSFULLY RECRUIT AND RETAIN TECHNICAL AND IMPLEMENTATION
PERSONNEL COULD REDUCE OUR LICENSE REVENUES OR LIMIT THE GROWTH OF OUR LICENSE
REVENUES.

A shortage of qualified technical sales support personnel could harm our
ability to expand sales and enter into new vertical markets. We will depend on
our trained implementation personnel or those of independent consultants to
implement our products and services. A shortage in the number of trained
implementation personnel could limit our ability to implement our software and
services on a timely and effective basis. Delayed or ineffective implementation
of our software and services may limit our ability to expand our revenues and
may result in customer dissatisfaction and harm to our reputation. Any of these
events could seriously harm our business, operating results and financial
condition.

WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.

Our license agreements typically seek to limit our exposure to product
liability claims from our customers. However, these contract provisions may not
preclude all potential claims. Additionally, our general liability insurance may
be inadequate to protect us from all liabilities that we may face. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any claim, whether or not
successful, could harm our reputation and business, operating results and
financial condition.

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OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE VOTING CONTROL.

Our executive officers and directors together beneficially own approximately
37% of the total voting power of our company. Accordingly, these stockholders
will be able to determine the composition of our Board of Directors, will retain
the voting power to approve all matters requiring stockholder approval and will
continue to have significant influence over our affairs.

OUR CHARTER AND BY-LAWS HAVE ANTI-TAKEOVER PROVISIONS.

Provisions of our Certificate of Incorporation and our Bylaws as well as the
Delaware General Corporation Law could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our stockholders. We are
subject to the provisions 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.

OUR STOCK PRICE HISTORICALLY HAS BEEN VOLATILE, WHICH MAY MAKE IT MORE
DIFFICULT FOR YOU TO RESELL OUR COMMON STOCK WHEN YOU WANT AT PRICES YOU FIND
ATTRACTIVE.

The market price of our common stock has been volatile in the past, and the
market price of our common stock may be volatile in the future. The following
factors may significantly affect the market price of the common stock:

o quarterly variations in our results of operations;

o the announcement of new products, product enhancements, joint ventures
and other alliances by us or our competitors;

o technological innovations by us or our competitors; and

o general market conditions or market conditions specific to particular
industries.

In particular, the stock prices of many companies in the technology and emerging
growth sectors have fluctuated widely due to events unrelated to their operating
performance. These fluctuations may harm the market price of our common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information concerning market risk is contained on Page 30 of our 1999
Annual Report on Form 10-K and is incorporated by reference to such annual
report.

PART II

ITEM 2. CHANGES IN SECURITIES.

From April 1 through June 30, 2000, we issued approximately 426,156 shares
of common stock to employees pursuant to exercises of stock options (with
exercise prices ranging from $0.01 to $3.03 per share) under our stock plans.
These issuances were deemed exempt from registration under Section 5 of the
Securities Act of 1933 in reliance upon Rule 701 thereunder. In addition, the
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to, or for
sale in connection with, any distribution thereof and appropriate restrictive
transfer legends were affixed to the share certificates issued in each such
transaction.

On March 27, 2000, i2 purchased from IBM various software assets,
cross-patent rights and software licenses with an aggregate value of
approximately $234 million in exchange for approximately 1.3 million shares of
i2 common stock. This issuance was deemed exempt from registration under Section
5 of the Securities Act 1933 in reliance upon Section 4(2) thereof.

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On April 28, 2000, we issued approximately 1.8 million shares of i2 common
stock in exchange for the outstanding capital stock of SupplyBase, Inc. An
additional 1,500 shares of i2 common stock have been reserved for issuance upon
the exercise of assumed warrants. The i2 common stock issued in connection with
the acquisition of SupplyBase was deemed exempt from registration under Section
5 of the Securities Act of 1933 in reliance upon Section 3(a)(10) thereof,
pursuant to a fairness hearing conducted by the California Department of
Corporations.

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

At our annual meeting of stockholders held on May 31, 2000, our
stockholders voted on the following matters:

(1) The election of one Class III director to serve until our annual
stockholders' meeting in 2003, or until his or her successor has been
elected and qualified. The nominee of the Board of Directors was
elected.

Name of Nominee Sanjiv S. Sidhu
Number of Votes 146,140,230
Number of Votes For 146,026,472
Number of Votes Withheld 113,758

(2) Approval an amendment to our 1995 Stock Option/Stock Issuance Plan to
increase the number of shares of commons stock authorized to be issued
under the plan by 40,000,000 shares. This amendment was approved.

Number of Votes For 94,779,304
Number of Votes Against 28,363,647
Number of Broker Non-Votes 21,505,554
Number of Abstentions 1,491,725

At a special meeting of stockholders held on June 8, 2000, our
stockholders voted on the following matters:

Approval of a proposal to approve the issuance of shares of our common
stock pursuant to a merger agreement among i2, Hoya Merger Corp., a wholly
owned subsidiary of i2, and Aspect Development, Inc. The proposal was
approved.

Number of Votes For 114,871,909
Number of Votes Against 459,959
Number of Abstentions 14,616

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

(a) Exhibit Index

Number Exhibit Description

10.1 Agreement and Plan of Reorganization dated March 12, 2000 by
and among i2 Technologies, Inc., Hoya Merger Corp. and Aspect
Development, Inc., incorporated herein by reference to
Exhibit 2.1 to i2's Current Report on Form 8-K filed with the
SEC on June 22, 2000.

10.2 Agreement and Plan of Reorganization dated March, 12, 2000 by
and among i2 Technologies, Inc., Starfish Merger Corp. and
SupplyBase, Inc., incorporated herein by reference to Exhibit
2.1 to i2's Current Report on Form 8-K filed with the SEC on
May 12, 2000.

10.3 Employment and Noncompetition Agreement dated June 9, 2000,
by and between i2 Technologies, Inc. and Romesh T. Wadhwani,
incorporated by reference to Exhibit 10.2 to i2's Current
Report on Form 8-K filed with the SEC on June 22, 2000.

10.4 Employment and Noncompetition Agreement dated June 9, 2000,
by and between i2 Technologies, Inc. and Robert Evans,
incorporated by reference to Exhibit 10.1 to i2's Current
Report on Form 8-K filed with the SEC on June 22, 2000.

10.5 Common Stock Purchase Agreement dated March 7, 2000, by and
between i2 Technologies, Inc. and International Business
Machines Corporation, incorporated herein by reference to
Exhibit 2.1 to i2's Current Report on Form 8-K, filed with
the SEC on April 17, 2000, as amended by i2's Form 8-K/A,
filed with the SEC on June 1, 2000.

27.1 Financial Data Schedule

(b) Reports on Form 8-K

During the quarter ended June 30, 2000, we filed the following Current
Reports on Form 8-K:

We filed a Form 8-K on April 11, 2000 (Item 2) announcing the purchase of
various IBM assets, cross-patents rights and software license.

We filed a Form 8-K on April 19, 2000 (Item 7) announcing the earnings for
the first quarter of 2000.

We filed a Form 8-K on May 12, 2000 (Item 2) announcing the completion of
the SupplyBase merger including required financial statements.

We filed a Form 8-K/A on June 1, 2000 (Item 2) announcing the purchase of
various IBM assets, cross-patents rights and software license including
required financial statements.

We filed a Form 8-K on June 22, 2000 (Item 2) announcing the completion of
the Aspect merger including required financial statements.

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SIGNATURES

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.

i2 TECHNOLOGIES, INC.

August 14, 2000

/s/ WILLIAM M. BEECHER
----------------------------------------
William M. Beecher
Executive Vice President and Chief
Financial Officer
(Principal financial officer)

August 14, 2000 /s/ NANCY F. BRIGHAM
----------------------------------------
Nancy F. Brigham
Controller
(Principal accounting officer)

27
<PAGE> 28

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------

<S> <C>
27.1 Financial Data Schedule
</TABLE>