I2 TECHNOLOGIES INC, 10-Q, 2000-05-15

I2 TECHNOLOGIES INC
10-Q, 2000-05-15
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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 March 31, 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)

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

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

(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 May 11, 2000 the Registrant had outstanding 159,642,916 shares of Common
Stock, $0.00025 par value.

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i2 TECHNOLOGIES, INC.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION Page
----
<S> <C>
Item 1. Financial Statements (Unaudited)

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

Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 1999 and 2000 4

Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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 9

Item 3. Quantitative and Qualitative Disclosures About Market
Risk 23

PART II OTHER INFORMATION

Item 2. Changes in Securities 24

Item 6. Exhibits and Reports on Form 8-K 24

SIGNATURES 25
</TABLE>

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except par value)

December 31, March 31,
1999 2000
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ..................................................... $ 454,585 $ 456,936
Short-term investments ........................................................ 124,806 181,464
Accounts receivable, net ...................................................... 157,586 187,065
Prepaid and other current assets .............................................. 26,475 44,288
------------ ------------
Total current assets ...................................................... 763,452 869,753

Furniture and equipment, net .................................................. 50,483 59,907
Intangible assets ............................................................. 13,986 246,880
Other assets .................................................................. 32,660 83,474
------------ ------------
Total assets .............................................................. $ 860,581 $ 1,260,014
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................................. $ 20,039 $ 22,471
Accrued liabilities ........................................................... 81,246 114,315
Income taxes payable .......................................................... 4,511 6,584
Deferred revenue .............................................................. 72,617 136,689
------------ ------------
Total current liabilities ................................................. 178,413 280,059
Long term debt ................................................................ 350,000 350,000
------------ ------------
Total liabilities ......................................................... 528,413 630,059
------------ ------------
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 157,489 shares issued and outstanding, respectively ............ 39 39
Additional paid-in capital .................................................... 297,879 584,008
Accumulated other comprehensive loss .......................................... (4,126) (4,209)
Retained earnings ............................................................. 38,376 50,117
------------ ------------
Total stockholders' equity ................................................ 332,168 629,955
------------ ------------
Total liabilities and stockholders' equity ................................ $ 860,581 $ 1,260,014
============ ============
</TABLE>

See accompanying notes

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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)

<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Revenues:
Software licenses ..................................................... $ 74,071 $ 113,584
Services .............................................................. 28,784 46,870
Maintenance ........................................................... 14,744 25,826
------------ ------------

117,599 186,280
Costs and expenses:
Cost of software licenses ............................................. 3,161 5,366
Cost of services and maintenance ...................................... 28,979 41,072
Sales and marketing ................................................... 42,733 66,210
Research and development .............................................. 30,322 39,846
General and administrative ............................................ 12,171 16,607
In-process R&D and acquisition-related expenses ....................... 303 557
------------ ------------
Total costs and expenses .......................................... 117,669 169,658
------------ ------------

Operating income (loss) .................................................... (70) 16,622
Other income, net .......................................................... 1,078 2,499
------------ ------------
Income before income taxes ................................................. 1,008 19,121
Provision for income taxes ................................................. 2,534 7,380
------------ ------------
Net income (loss) .......................................................... $ (1,526) $ 11,741
============ ============

Net income (loss) per share ................................................ $ (0.01) $ 0.08
Net income (loss) per share, assuming dilution ............................. $ (0.01) $ 0.06
Weighted average common shares outstanding ................................. 147,392 156,500
Weighted average common shares outstanding assuming dilution ............... 147,392 183,025

Comprehensive income (loss)
Net income (loss) ...................................................... $ (1,526) $ 11,741
Foreign currency translation adjustments, net of income tax ............ (395) 83
------------ ------------
Total comprehensive income (loss) .......................................... $ (1,921) $ 11,824
============ ============
</TABLE>

See accompanying notes

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i2 TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)

<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................... $ (1,526) $ 11,741
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ....................................... 3,815 5,170
Provision for doubtful accounts ..................................... 2,221 1,844
Amortization of deferred compensation ............................... 146 1,129
Deferred income taxes ............................................... (1,979) (44,253)
Tax benefit of stock options ........................................ 1,830 39,399
Changes in operating assets and liabilities:
Accounts receivable, net .......................................... 711 (31,323)
Prepaid and other assets .......................................... (5,373) (15,924)
Accounts payable .................................................. 247 2,426
Accrued liabilities ............................................... 7,267 33,076
Income taxes payable .............................................. 2,316 2,073
Deferred revenue .................................................. 10,718 61,302
------------ ------------
Net cash provided by operating activities ...................... 20,393 66,660

Cash flows from investing activities:
Long-term investments ................................................... -- (5,583)
Purchases of furniture and equipment .................................... (2,424) (13,955)
Net purchases of short-term investments ................................. (3,353) (56,658)
------------ ------------
Net cash used by investing activities .......................... (5,777) (76,196)

Cash flows from financing activities:
Proceeds from issuance of notes payable to stockholders ................. 500 --
Net proceeds from exercise of stock options ............................. 2,297 11,898
------------ ------------
Net cash provided by financing activities ...................... 2,797 11,898

Effect of exchange rates on cash ......................................... (49) (11)
------------ ------------

Net increase in cash and cash equivalents .................................. 17,364 2,351

Cash and cash equivalents at the beginning of the quarter .................. 62,611 454,585
------------ ------------
Cash and cash equivalents at the end of the quarter ........................ $ 79,975 $ 456,936
============ ============

Supplemental disclosure of cash flow information:

Common stock issued for acquisition of various IBM assets .............. $ -- $ 233,703
============ ============
</TABLE>

See accompanying notes.

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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 our wholly-owned 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 March 12, 2000, we entered into agreements to acquire Aspect
Development, Inc., a developer of collaborative solutions for
business-to-business marketplaces, and SupplyBase, Inc., a developer of
high-end, interactive database products, services and supply chain management
tools. Under the agreements, we will issue approximately 44.9 million and 1.8
million shares of our common stock to Aspect and SupplyBase, respectively, for
all of the outstanding capital stock and stock options of both companies. These
transactions will be recorded as a purchase. The SupplyBase transaction closed
on April 28, 2000 and the Aspect transaction is expected to close within the
second quarter of 2000.

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 and software licenses, to be amortized over three to five years,
based on preliminary estimates. A final valuation was received subsequent to the
quarter end, which indicated a write-off of in-process research and development
of $8.9 million. This charge will reduce the amount allocated to cross patent
rights and software licenses and will be recorded in the second quarter of 2000.
In addition, we will 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 will 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.

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

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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, $8.5 million of which were outstanding at March 31, 2000. At March
31, 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 the
securities Act of 1933, as amended provided by Section 144A thereof. In
connection with this transaction, each of the initial purchasers represented
that it was a "qualified institutional buyer" within the meaning of the
Securities and Exchange Act of 1934. The notes are convertible at the option of
the holder into share 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 using
the treasury stock method and shares issued assuming conversion of our
convertible debt, if dilutive.

Potentially dilutive securities are excluded from the net income per
share, assuming dilution computation when the exercise price of the securities
exceeds the average fair value of our common stock for a particular period. For
the quarter ended March 31, 2000, approximately 1.3 million stock options were
excluded from the net income per share, assuming dilution computation.

Reconciliations of net income per share and net income per share,
assuming dilution computations for the three months ended March 31, 1999 and
2000 are as follows (amounts in thousands, except per share amounts):

Three Months Ended
March 31,
1999 2000
------------ ------------
<S> <C> <C>
Weighted average common shares outstanding ............ 147,392 156,500
Common shares issuable upon exercise of stock options
net of shares assumed to be repurchased ........... -- 26,525
------------ ------------
Weighted average common shares outstanding,
assuming dilution ................................. 147,392 183,025
Net income (loss) ..................................... $ (1,526) $ 11,741
============ ============
Net income (loss) per share ........................... $ (0.01) $ 0.08
============ ============
Net income (loss) per share, assuming dilution ........ $ (0.01) $ 0.06
============ ============
</TABLE>

We incurred a net loss for the quarter ended March 31, 1999. 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.

7. STOCKHOLDERS EQUITY

On January 14, 2000, our Board 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.

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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 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 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.

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 second quarter of fiscal 2000. Management is
currently evaluating the impact of adopting SAB 101.

In June 1998, the Financial Accounting Standards Board issued SFAS No.
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
comprehensive income, depending on the type of hedging relationship that exists.
SFAS 133 will be effective for fiscal years beginning after June 15, 2000. SFAS
133 will not have a material effect on our consolidated financial position or
results of operations.

10. SUBSEQUENT EVENTS

On April 28, 2000, we acquired SupplyBase, Inc., a developer of
collaborative high-end interactive database products, services and supply chain
management tools. Pursuant to the agreement, we exchanged all of the outstanding
preferred and capital stock of SupplyBase and assumed all outstanding options of
SupplyBase, in exchange for approximately 1.8 million shares of our common stock
and options.

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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 significantly improve
efficiencies, collaborate with suppliers and customers, respond to market
demands and engage in dynamic business interactions over the Internet. Our
RHYTHM product suite principally includes solutions for supply chain management,
customer management, product lifecycle management, inter-process planning and
strategic planning. We are launching public and private Internet-based
marketplaces, or eMarketplaces, which consist of communities of trading partners
that, among other things, enable real-time collaboration and exchange of
information among suppliers, manufacturers, distributors, logistics providers
and customers. In addition, our recently 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.

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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.

THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 2000
-------- --------
<S> <C> <C>
Revenues:
Software licenses ..................................................... 63.0% 61.0%
Services .............................................................. 24.5 25.1
Maintenance ........................................................... 12.5 13.9
-------- --------
Total revenues ..................................................... 100.0 100.0
-------- --------
Costs and expenses:
Cost of software licenses ............................................. 2.7 2.9
Cost of services and maintenance ...................................... 24.6 22.1
Sales and marketing ................................................... 36.3 35.5
Research and development .............................................. 25.8 21.4
General and administrative ............................................ 10.3 8.9
In-process research and development and
acquisition-related expenses ........................................ 0.3 0.3
-------- --------
Total costs and expenses ........................................... 100.0 91.1
-------- --------
Operating income .......................................................... 0.0 8.9
Other income, net ......................................................... 0.9 1.3
-------- --------
Income before income taxes ................................................ 0.9 10.2
Provision for income taxes ................................................ 2.2 3.9
-------- --------
Net income (loss) ......................................................... (1.3%) 6.3%
======== ========
</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") SOP 97-2, "Software
Revenue Recognition." 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 and determinable, no significant production, modification or
customization of the software is required and collection is considered probable
by management. As of January 1, 1999, software license revenues are recognized
in accordance with SOP 97-2, as modified by SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition with Respect to Certain Transactions." 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 58% to $186.3 million for the quarter ended
March 31, 2000 from $117.6 million for the quarter ended March 31,1999. We
derived substantially all of our revenues from licenses associated with our
RHYTHM suite of software products, as well as related services and maintenance.

SOFTWARE LICENSES. Revenues from software licenses increased 53% to
$113.6 million for the quarter ended March 31, 2000 from $74.1 million for the
quarter ended March 31, 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. During the first quarter of 2000,
approximately 42% of our software license revenues were derived from repeat
sales. To date, sales of software licenses have been derived principally from
direct sales to customers. 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.

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SERVICES. Revenues from services increased 63% to $46.9 million for the
quarter ended March 31, 2000 from $28.8 million for the quarter ended March 31,
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 76% to $25.8 million
for the quarter ended March 31, 2000 from $14.7 million for the quarter ended
March 31, 1999. The increases in the dollar amount of maintenance revenues were
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 both in dollar amount and as a percentage of total revenues
will continue to increase from levels achieved in the quarter ended March 31,
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 each quarter of 1999,
one or more customers individually accounted for at least 10% of total software
license revenues. 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 quarter
ended March 31, 2000 were approximately 35% of total revenues, consistent with
the quarter ended March 31, 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.

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 $5.4 million and $3.2 million for the quarters
ended March 31, 2000 and 1999, representing 4.8% 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 $41.1 million and $29.0
million for the quarters ended March 31, 2000 and 1999, representing 56.5% and
66.7% of total services and maintenance revenues, 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.

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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
$66.2 million and $42.7 million in the quarters ended March 31, 2000 and 1999,
representing 35.5% and 36.3% of total revenues, respectively. The increases in
the dollar amount of sales and marketing expenses were 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 $39.8 million and $30.3 million for the quarters ended March 31, 2000 and
1999, representing 21.4% and 25.8% of total revenues, respectively. 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 SFAS 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 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 $16.6 million and $12.2 million in the
quarters ended March 31, 2000 and 1999, representing 8.9% and 10.3% of total
revenues, 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.

IN-PROCESS RESEARCH AND DEVELOPMENT AND ACQUISITION-RELATED EXPENSES.
In the recent past, we have sought to expand the depth and breadth of our
product offerings through various technology or business acquisitions. At the
time of acquisition, some of these acquisitions 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.

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 amount was recorded as acquired technology and cross patent rights and
software licenses, to be amortized over three to five years, based on
preliminary estimates. A final valuation was received subsequent to the quarter
end, which indicated a write-off of in-process research and development of $8.9
million. This charge will reduce the amount allocated to cross patent rights
and software licenses and will be recorded in the second quarter of 2000. For
the quarters ended March 31, 2000 and 1999, we incurred a total of $0.6 million
and $0.3 million, respectively, in acquisition-related expenses consisting
mostly of amortization of intangibles.

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 $2.5 million and $1.1 million in the quarters
ended March 31, 2000 and 1999, representing 1.3% and 0.9% of total revenues,
respectively. The increase in other income, net for the quarter ended March
31, 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, 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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PROVISION FOR INCOME TAXES

The effective income tax rates for the quarter ended March 31,
2000 was 38.6% compared to 251.4% for the quarter ended March 31, 1999. The
effective income tax rate for the quarter ended March 31, 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 quarters
ended March 31, 2000, and 1999 were 37.5% and 38.0%, respectively.

NET INCOME PER SHARE

Net income per share is calculated in accordance with SFAS 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 $589.7 million of working capital as of March 31, 2000 compared to
$585.0 million as of December 31, 1999. The increase in working capital was
primarily related to an increase in short-term investments to $181.5 million at
March 31, 2000 from $124.8 million at December 31, 1999 and an increase in
accounts receivable, net of allowance for doubtful accounts, to $187.1 million
at March 31, 2000 from $157.6 million at December 31, 1999, offset by an
increase in accrued liabilities to $114.3 million at March 31, 2000 from $81.2
million at December 31, 1999 and an increase in deferred revenue to $136.7
million at March 31, 2000 from $72.6 million at December 31, 1999. Cash flows
from operations were $66.6 million and $20.4 million for the quarters ended
March 31, 2000 and 1999, respectively. Operating cash flows resulting from
increased income and increases in deferred revenue, accrued liabilities and
stock option tax benefits were partially offset by increases in accounts
receivable, deferred income taxes and prepaid assets.

Deferred revenue increased as a result of the demand for market place
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 revenue will be recognized over time, based on the
individual contracts.

Quarter-end days' sales outstanding increased to 91 days at March 31,
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;

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 March 31, 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.

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Cash used in investing activities was $ 76.2 million for the quarter
ended March 31, 2000 as compared to $5.8 million for the quarter
ended March 31, 1999. Expenditures during the first quarter of 2000 consisted
mainly of purchases of short-term investments, purchases of furniture and
equipment and long-term investments.

On March 12, 2000, we entered into agreements to acquire Aspect
Development, Inc., a developer of collaborative solutions for
business-to-business marketplaces, and SupplyBase, Inc., a developer of
high-end, interactive database products, services and supply chain management
tools. Under the agreements, we will issue approximately 44.9 million shares and
1.8 million shares to Aspect and SupplyBase, respectively, for all of the
outstanding capital stock and stock options of these companies. Each of these
transactions will be recorded as a purchase. The SupplyBase transaction closed
on April 28, 2000 and the Aspect transaction is expected to close within the
second quarter of 2000.

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.
This amount was recorded as acquired technology and cross patent rights and
software licenses based on preliminary estimates. A final valuation was
received subsequent to the quarter end, which indicated a write-off of
in-process research and development of $8.9 million. This charge will reduce
the amount allocated to cross patent rights and software licenses and will be
recorded in the second quarter of 2000. In addition, we will 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 will 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.

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 $11.9 million for the
quarter ended March 31, 2000 as compared to $2.8 million for the quarter ended
March 31, 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, $8.5 million of which were outstanding at March 31, 2000.
At March 31, 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, with
the first interest payment due on June 15, 2000.

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

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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.

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

<PAGE> 16
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 we experience increased competition, substantial harm may result
to our business, operating results and financial condition.

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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 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 $186.3 million for the quarter ended March 31, 2000 from
approximately $117.6 million for the quarter ended March 31, 1999. Revenues
increased from approximately $571.1 millions in 1999, from approximately $369.2
million in 1998 and from approximately $221.8 million in 1997. Our employee
headcount has increased to approximately 3,393 at March 31, 2000 from
approximately 2,800 at December 31, 1999, from approximately 2,200 at December
31, 1998, and from approximately 1,200 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 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.

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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 set-up 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 utilization of the
digital marketplace services may be more robust. We can not 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 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

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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
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, and in
April 2000, we acquired SupplyBase, Inc. 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;

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<PAGE> 20

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 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 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 is expected to close during the
second quarter of 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. We expect that we
will be required to amortize a significant amount of goodwill and write-off
significant amounts of in-process research and development and other
acquisition-related expenses if we complete the pending Aspect acquisition.
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;

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

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<PAGE> 21

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 PricewaterhouseCoopers, 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 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.

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<PAGE> 22

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.

OUR EXECUTIVE OFFICERS AND DIRECTORS HAVE VOTING CONTROL.

Our executive officers and directors together beneficially own
approximately 42% 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

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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.

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<PAGE> 24
PART II

ITEM 2. CHANGES IN SECURITIES.

From January 1 through March 31, 2000, we issued approximately 550,650 of
common stock to employees pursuant to exercises of stock options (with exercise
prices ranging from $0.01 to $3.03 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 there under. 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 stock. In addition, we will 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 will be obligated to issue some or all of these shares in the
future based on the amount of revenue we derive from or through IBM during four
annual periods, with the first annual period ending December 31, 2000.

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

(a) Exhibit Index

Number Exhibit Description

27.1 Financial Data Schedule

(b) Reports on Form 8-K

During the quarter ended March 31, 2000, we filed the
following Current Reports on Form 8-K:

We filed a Form 8-K dated January 21, 2000 (Item 5)
announcing a two-for-one stock split.

We filed a Form 8-K dated March 14, 2000 (Item 5) as
amended on March 17, announcing the proposed
acquisition of SupplyBase, Inc. and Aspect
Development, Inc.

After March 31, 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.

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<PAGE> 25

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.

May 15, 2000 /s/ William M. Beecher
-------------- ------------------------
(Date) William M. Beecher
Executive Vice President and
Chief Financial Officer
(Principle financial officer)

May 15, 2000 /s/ Nancy F. Brigham
-------------- ------------------------
(Date) Nancy F. Brigham
Controller
(Principle accounting officer)

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<PAGE> 26

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 456,936
<SECURITIES> 181,464
<RECEIVABLES> 204,826
<ALLOWANCES> 17,761
<INVENTORY> 0
<CURRENT-ASSETS> 869,753
<PP&E> 102,228
<DEPRECIATION> (42,321)
<TOTAL-ASSETS> 1,260,014
<CURRENT-LIABILITIES> 280,059
<BONDS> 0
0
0
<COMMON> 39
<OTHER-SE> 629,955
<TOTAL-LIABILITY-AND-EQUITY> 1,260,014
<SALES> 113,584
<TOTAL-REVENUES> 186,280
<CGS> 5,366
<TOTAL-COSTS> 169,658
<OTHER-EXPENSES> 2,499
<LOSS-PROVISION> (2,820)
<INTEREST-EXPENSE> (1,067)
<INCOME-PRETAX> 19,121
<INCOME-TAX> 7,380
<INCOME-CONTINUING> 11,741
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,741
<EPS-BASIC> 0.08
<EPS-DILUTED> 0.06

</TABLE>