INTRAWARE INC, 10-Q, 1999-07-15

INTRAWARE INC
10-Q, 1999-07-15
COMMUNICATIONS SERVICES, NEC

Previous: TENNECO INC /DE, 8-K, 1999-07-15

Next: OBIE MEDIA CORP, 10QSB, 1999-07-15

<PAGE>

U.S. 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 May 31, 1999

- ---- 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 _________

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

DELAWARE 68-0389976
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

25 ORINDA WAY
ORINDA, CA 94563
(Address of principal executive offices)

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

Indicate by check (X) whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the 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 31, 1999 there were 24,057,296 shares of the registrant's Common
Stock outstanding.

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements

Balance Sheets as of May 31, 1999 and
February 28, 1999........................................................ 1

Statements of Income for the
Three Months Ended May 31, 1999 and May 31, 1998......................... 2

Statements of Cash Flows for the
Three Months Ended May 31, 1999 and May 31, 1998......................... 3

Notes to Interim Financial Statements........................................ 4

Item 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................................ 7

Risk Factors................................................................. 9

Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 19

PART II OTHER INFORMATION 20

Item 1. Legal Proceedings............................................................ 18

Item 2. Changes in Securities and Use of Proceeds.................................... 19

Item 3. Defaults Upon Senior Securities.............................................. 19

Item 4. Submission of Matters to a Vote of Securities Holders........................ 19

Item 5. Other Information............................................................ 19

Item 6. Exhibits and Reports on Form 8-K............................................. 19

Signatures................................................................... 21
</TABLE>

<PAGE>

PART FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

<TABLE>
INTRAWARE, INC.
BALANCE SHEETS
(IN THOUSANDS)

May 31, 1999 February 28, 1999
(unaudited)
- --------------------------------------------------------------------------------------------------------

ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 58,533 $ 1,792
Accounts receivable, net 14,106 11,422
Prepaid licenses and services 11,036 16,864
Other current assets 2,415 2,614
------------------------------------------
Total current assets 86,000 32,692
Property and equipment, net 4,019 1,962
Other Assets 117 352
------------------------------------------
$ 90,136 35,006
==========================================

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank Borrowings $ 500 $ 1,371
Accounts Payable 8,921 17,667
Accrued Expenses 2,529 1,400
Deferred Revenue 15,308 13,218
Short-term obligations 198 213
------------------------------------------
Total current liabilities 27,456 33,869
Long-term obligations 147 168
27,603 34,037
------------------------------------------

Shareholders' equity:
Common stock; $0.0001 par value; 250,000
shares authorized, 24,057 issued and
outstanding; 250,5000 shares authorized,
23,756 shares outstanding 2 2
Additional paid-in-capital 93,059 87,912
Unearned compensation (9,703) (10,399)
Initial public offering proceeds receivable -- (59,520)
Accumulated deficit (20,825) (17,026)
------------------------------------------
Total shareholders' equity 62,533 969
------------------------------------------
Total liabilities and shareholders' equity $ 90,136 $ 35,006
</TABLE>

See notes to unaudited interim financial statements.

<PAGE>

<TABLE>
INTRAWARE, INC.

STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

Three Months Ended
31-May-99 31-May-98
<S> <C> <C>
Net Revenues
Software product sales $ 13,984 $ 5,002
Online services 2,474 16
------------------------------------------
Total net revenues 16,458 5,018
Cost of net revenues:
Software product sales 12,378 3,939
Online services 373 68
------------------------------------------
Total cost of net revenues 12,751 4,007
------------------------------------------
Gross Profit 3,707 1,011
------------------------------------------
Operating expenses:
Sales and marketing 5,419 1,703
Product development 967 353
General and administrative 1,057 528
Stock option compensation 756 122
------------------------------------------
Total operating expenses 8,199 2,706
------------------------------------------
Loss from operations (4,492) (1,695)
Interest and other income(expense),net 693 (45)
------------------------------------------
Net Loss $ (3,799) $ (1,740)
==========================================

Basic and diluted net loss per share $ (0.17) $ (0.54)
Shares used in computing basic and diluted net loss per share 22,068 3,251
</TABLE>

See notes to unaudited interim financial statements.

<PAGE>

<TABLE>
<CAPTION>
INTRAWARE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

THREE MONTHS ENDED
-----------------------------
MAY 31, 1999 MAY 31, 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities

Net loss $ (3,799) $ (1,740)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 272 207
Amortization of unearned compensation 697 122
Provision for Doubtful accounts 25 4
Changes in assets and liabilities:
Accounts receivable (2,619) (3,622)
Prepaid license and services 5,828 1,196
Other current assets 198 (246)
Other assets 235 (5)
Accounts payable (8,746) (5,249)
Accrued expenses 1,129 (20)
Deferred revenue 2,090 2,272
-----------------------------
Net cash used in operating activities (4,690) (7,181)
-----------------------------

Cash flows from investing activities:
Purchase of property and equipment (2,328) (283)
-----------------------------

Cash flows from financing activities:
Proceeds from IPO 59,520 -
Proceeds from bank borrowings - 2,359
Payments on bank borrowings (871) (2,942)
Proceeds from preferred stock, net 11,714
Proceeds from common stock 5,146 6
Principal payments on capital lease obligation (36) 150
-----------------------------
Net cash provided by financing activities 63,759 11,287
-----------------------------
Increase in cash and cash equivalents 56,741 3,823
Cash and cash equivalents at beginning of period 1,792 612
-----------------------------
Cash and cash equivalents at end of period $ 58,533 $ 4,435
=============================

Cash paid for interest $ 35 $ 62
</TABLE>

See notes to interim financial statements.

<PAGE>

INTRAWARE, INC.

NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

INTRAWARE

The accompanying financial statements for the three months ended May 31, 1999
and 1998 are unaudited and reflect all normal recurring adjustments which are,
in the opinion of management, necessary for their fair presentation. These
financial statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1999. The results of operations for
the interim period ended May 31, 1999 are not necessarily indicative of results
to be expected for the full year.

NOTE 2. NET LOSS PER SHARE

Intraware computes net loss per share in accordance with SFAS No. 128,
"Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic and diluted net loss per share
is computed by dividing the net loss available to common stockholders for the
period by the weighted average number of shares of common stock outstanding
during the period. The calculation of diluted net loss per share excludes
potential common shares if the effect is antidilutive. Potential common shares
are composed of common stock subject to repurchase rights and incremental shares
of common stock issuable upon the exercise of stock options.

The following table sets forth the computation of basic and dilutive
net loss per share for the periods indicated,

<TABLE>
<CAPTION>
THREE MONTHS ENDED MAY 31,
1999 1998
----------------------------------------
(in thousands, except per share amounts)
<S> <C> <C>
Numerator
Net Loss (3,799) (1,740)
Denominator
Weighted average shares 24,068 5,396
Weighted average unvested shares
subject to repurchase (2,000) (2,145)
Denominator for basic and diluted calculation 22,068 3,251
Net loss per share:
</TABLE>

NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS

In March, 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
is effective for financial statements for years beginning after December 15,
1998. SOP98-1 provides guidance over accounting for computer software developed
or obtained for internal use including the requirement to capitalize specific
costs and amortization of such costs. The company adopted the provisions of SOP
98-1 in its fiscal year beginning March 1, 1999, and does not expect the
adoption to have a material effect on the Company's results of operations,
financial position and cash flows.

4
<PAGE>

In April, 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of
Start-Up Activities". Start-up activities are defined broadly as those one-time
activities related to opening a new facility, introducing a new product or
service, commencing some new operation or organizing a new entity. Under SOP
98-5, the cost of start-up activities should be expenses as incurred. The
company adopted the provisions of SOP 98-5 in its fiscal year beginning March 1,
1999, and does not expect the adoption to have a material effect on the
Company's results of operations, financial position and cash flows.

In June, 1998, the AICPA issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for all
fiscal quarters beginning with the quarter ending June 30, 2000. SFAS 133
establishes accounting and reporting standards of derivative Instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company will adopt SFAS in its quarter ending August 31,
2000 and does not expect such adoption to have an impact on the Company's
results of operations, financial position or cash flows.

NOTE 4. CHANGES IN OF STOCKHOLDERS' EQUITY

During the three months ended 5/31/99, the Company Stockholders' Equity
changed as follows (in thousands):

<TABLE>
<CAPTION>
Initial Public
Common Stock Additional offering
---------------- Paid-In proceeds Unearned Accumulated
Shares Amount Capital receivable compensation Deficit Total
------ ------ ------- ---------- ------------ ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 28, 1999 23,756 $ 2 $87,912 $ (59,520) $ (10,399) $(17,026) $ 969

Exercise of stock options 19 0 4 - - - $ 4

Repurchase of stock options (68) 0 (13) - - - $ (13)

Issuance of Common Stock 350 0 5,096 - - - $ 5,096

Cash received from IPO - - - 59,520 - - $ 59,520

Unearned Compensation - - 60 - (60) - $ 0

Amortization of unearned compensation - - - - 756 - $ 756

Net Loss - - - - - (3,799) $ (3,799)

-------------------------------------------------------------------------------
Balance at May 31, 1999 24,057 $ 2 $93,059 $ - $ (9,073) $(20,825) $ 62,533
-------------------------------------------------------------------------------
</TABLE>

5
<PAGE>

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

THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS CONTAINS 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 SUBJECT TO RISKS AND UNCERTAINTIES. THESE FORWARD-LOOKING
STATEMENTS ARE TYPICALLY DENOTED IN THIS REPORT BY THE PHRASES "ANTICIPATES,"
"BELIEVES," "EXPECTS," "PLANS" AND SIMILAR PHRASES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
THE FACTORS SET FORTH IN "RISK FACTORS" BEGINNING ON PAGE OF THIS QUARTERLY
REPORT ON FORM 10-K, INCLUDING, WITHOUT LIMITATION, THOSE ENTITLED "-ACCOUNTING
CHARGES FROM ACQUISITIONS WILL DELAY AND REDUCE PROFITABILITY," "-IN ORDER TO
CONTINUE TO GROW, INTRAWARE WILL NEED MORE FINANCING," "-INTRAWARE'S FINANCIAL
RESULTS WILL VARY," "-IF INTRAWARE CANNOT REVIEW EXISTING OR ENTER INTO NEW
AGREEMENTS WHICH RESULT IN USER TRAFFIC, OR IF SITES THAT PROVIDE TRAFFIC TO
INTRAWARE ARE NOT SUCCESSFUL, INTRAWARE'S ADVERTISING REVENUE WILL DECREASE."
"-INTRAWARE HAS HAD LOSSES IN THE PAST AND HAS DIFFICULTY PREDICTING FUTURE
RESULTS BUT EXPECTS FLUCTUATIONS AND LOSSES IN THE FUTURE," "-IF INTRAWARE DOES
NOT ACHIEVE REVENUE MINIMUMS UNDER REPRESENTATION AGREEMENTS, IT MAY INCUR
LOSSES UNDER THESE AGREEMENTS," "-IF INTRAWARE ADVERTISING AND RELATED
SPONSORSHIP OF INTRAWARE SERVICES ARE NOT ACCEPTED, INTRAWARE'S REVENUES WILL BE
ADVERSELY AFFECTED." THE DISCUSSION OF THOSE RISK FACTORS IS INCORPORATED HEREIN
BY THIS REFERENCE AS IF SAID DISCUSSION WAS FULLY SET FORTH AT THIS POINT.

EXPLANATORY NOTE

INTRAWARE OVERVIEW

Intraware, Inc. is the leading online provider of business software and services
for the IT community. The company enables IT professionals worldwide to
efficiently and cost-effectively research, evaluate, purchase, download, and
update business-class software online. As a business-to-business e-commerce
company, Intraware provides software through its premiere online purchasing
service, intraware.shop, comprehensive IT information and interactive research
services through the Intraware IT Knowledge Center, and software update
management services through Intraware SubscribNet.

Intraware generates software product revenues from the sale of third
party software and related maintenance products. Of these revenues, sales of
software licenses are recognized when there is evidence of an arrangement for a
fixed and determinable fee that is probable of collection and the software is
available for customer download through INTRAWARE.SHOP. Related maintenance
revenues are recognized ratably over the terms of the underlying service
contract. Online services revenues are derived primarily from delivery of
SUBSCRIBNET, and other fee-based information services. Online services revenues
are recognized ratably over the term of the underlying service contracts. See
Note 1 of Notes to Financial Statements.

The Company has a limited operating history upon which investors may
evaluate its business and prospects. Since inception, the Company has incurred
significant losses, and as of May 31, 1999, had an accumulated deficit of
approximately $20.8 million. The Company intends to expend significant financial
and management resources on the development of additional services, sales and
marketing, technology and operations to support larger-scale operations and
greater service offerings. As a result, the Company expects to incur additional
losses and continued negative cash flow from operations for the foreseeable
future, and such losses are anticipated to increase significantly from current
levels. There can be no assurance that the Company's sales will increase or even
continue at their current level or that the Company will achieve or maintain
profitability or generate cash from operations in future periods. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. To address these risks, the Company must, among other things, maintain
existing and develop new relationships with software publishers, continue to
improve upon existing and develop new services, implement and successfully
execute its business and

6
<PAGE>

marketing strategy, continue to develop and upgrade its technology and
transaction-processing systems, provide superior customer service, respond to
competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that the Company will be successful in
addressing such risks, and the failure to do so would have a material adverse
effect on the Company's business, financial condition and results of
operations. The Company's current and future expense levels are based largely
on its planned operations and estimates of future sales. Sales and operating
results generally depend on the volume and timing of orders received, which
are difficult to forecast. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall.
Accordingly, any significant shortfall in sales would have an immediate
adverse effect on the Company's business, financial condition and results of
operations. In view of the rapidly evolving nature of the Company's business
and its limited operating history, the Company is unable to accurately
forecast its sales and believes that period-to-period comparisons of its
operating results are not necessarily meaningful and should not be relied
upon as an indication of future performance.

RESULTS OF OPERATIONS

For the Three Months Ended May 31, 1999 and 1998

TOTAL REVENUE

Intraware's revenues for the three months ended May 31, 1999 were $16.5
million, which represents a 230% increase over revenues for three months ended
May 31, 1998 of $5.0 million. Product revenue, represented by intraware.shop,
accounted for $14.0 million or 85% of quarterly revenue, while services such as
IT Knowledge Center and Intraware SubscribNet, accounted for $2.5 million or 15%
of quarterly revenue. The increase for the period was primarily due to an
increase in sales of third-party software products .

TOTAL COST OF REVENUE

INTRAWARE'S TOTAL COST OF REVENUE FOR THE THREE MONTHS ENDED MAY 31,
1999 WAS $12.8 MILLION OR A GROSS MARGIN OF 23% COMPARED TO MAY 31, 1998 WHICH
WAS $4.0 MILLION OR A GROSS MARGIN OF 20%. COST OF NET REVENUES CONSISTS
PRIMARILY OF THE COST OF THIRD-PARTY SOFTWARE AND MAINTENANCE PRODUCTS SOLD,
COSTS FOR CONTENT DEVELOPMENT AND ACQUISITION, AND INTERNET CONNECTIVITY AND
ALLOCATED OVERHEAD CHARGES. INTRAWARE PURCHASES SOFTWARE PRODUCTS AT A DISCOUNT
TO THE SOFTWARE VENDORS' ESTABLISHED LIST PRICES ACCORDING TO STANDARD RESELLER
TERMS. . THIS INCREASE IN TOTAL COST OF NET REVENUES WAS PRIMARILY ATTRIBUTABLE
TO INCREASES IN THE VOLUME OF THIRD-PARTY SOFTWARE AND MAINTENANCE PRODUCTS SOLD
BY INTRAWARE

SALES AND MARKETING

Sales and marketing costs were $5.4 million for the three months ended
May 31, 1999, or 33% of revenues, compared to $1.7 million, or 33% of revenues,
for the three months ended May 31, 1998. Sales and marketing expenses primarily
consist of compensation of sales and marketing personnel, advertising,
promotional expenses, training and other marketing related costs. The increase
is primarily the result of additional advertising and marketing expenditures as
well as the addition of personnel and external sales offices throughout the
United States.. The Company expects that sales and marketing expense will
continue to increase in absolute dollars as the Company continues to make
significant investments in sales and marketing as we expand our direct sales
force, increase our marketing expenditures and continue to develop strategic
relationships to drive traffic and generate leads for our products and services.

RESEARCH AND DEVELOPMENT

Research and development costs were $1.0 million for the three months
ended May 31, 1999, or 6% of revenues, compared to $0.4 million, or 7% of net
revenues for the three months ended May 31, 1998. Research and development
expenses primarily consist of personnel costs, consulting and equipment
depreciation. Costs related to research, design

7
<PAGE>

and development of products and services have been charged to research and
development expense as incurred. The increase was primarily due to an
increase in the number of product development personnel employed to support
expansion of Intraware's SUBSCRIBNET online service and its other online
service offerings. Intraware believes significant investment in product
development is essential to its future success and expects that the dollar
amount of product development expenses will increase in future periods

GENERAL AND ADMINISTRATIVE

General and administrative costs were $1.1 million for the three months
ended May 31, 1999, or 6% of revenues, compared to $0.6 million, or 12% of
revenues, for the three months ended May 31, 1998. General and administrative
expenses consist primarily of compensation of administrative and executive
personnel, facility costs and fees for professional services. The increase in
dollars is primarily the result of additional staff required in both Human
Resources and Systems Administration to support our increase in personnel as
well as additional expenditures in accounting and legal for partnership deals
and compliance with our reporting obligations as a public company. Management
expects general and administrative expenses to increase in dollar amount in
future periods.

STOCK COMPENSATION

Stock Compensation expense was $0.8 million for the three months ended
May 31, 1999, or 5% of revenues compared to $0.1 million for the three months
ended May 31, 1998, or 2% of revenues. This is an ongoing charge through August
2002 which is related to employee stock options granted while Intraware was a
private company.

INTEREST EXPENSE

For the three months ended May 31, 1999 and May 31, 1998, interest
expense was $35,000 and $62,000, respectively. The reduction in interest expense
is primarily the result of funds received the initial public offering. The
expenses relate to obligations under capital leases and borrowings under a bank
line.

INTEREST INCOME

For the three months ended May 31, 1999 and May 31, 1998, Intraware
earned interest income of approximately $728 thousand and $17 thousand,
respectively. The increase in net interest income is primarily the result of
funds received in the initial public offering.

INCOME TAXES

Due to Intraware's loss position, there was no provision for income
taxes for any of the periods presented. At May 31, 1999, Intraware had federal
and state net operating loss carry forwards of approximately $13 million and $7
million, respectively. The federal net operating loss carry forwards will expire
in varying amounts beginning in 2012 if not utilized, and the state net
operating loss carry forwards will expire in the year 2005.

LIQUIDITY AND CAPITAL RESOURCES

Intraware has satisfied its current cash requirements through the
initial public offering, which was effective on February 25, 1999. As of May 31,
1999 the Company had approximately $58.5 million of cash and cash equivalents.
The

Company's principal commitments consisted of obligations outstanding
under bank credit lines, capital and operating leases. Although the Company has
no material commitments for capital expenditures, it anticipates an increase in
the rate of capital expenditures consistent with its anticipated growth in
operations, infrastructure and personnel.

Intraware believes that it has sufficient cash, short-term investments
and availability from its bank line of credit to meet its anticipated liquidity
needs for working capital and capital expenditures for at least the next twelve
months. Intraware's future liquidity and capital requirements will depend upon
numerous factors. The pace of expansion of

8
<PAGE>

Intraware's operations will affect Intraware's capital requirements.
Intraware may also have increased capital requirements in order to respond to
competitive pressures. Additionally, Intraware may need additional capital to
fund acquisitions of complementary businesses and technologies. Intraware's
forecast of the period of time through which its financial resources will be
adequate to support its operations is a forward-looking statement that
involves risks and uncertainties, and actual results could vary materially as
a result of the factors described above. If Intraware requires additional
capital resources, Intraware may seek to sell additional equity or debt
securities or to increase its bank line of credit. The sale of additional
equity or convertible debt securities could result in additional dilution to
Intraware's stockholders. There can be no assurance that any financing
arrangements will be available in amounts or on terms acceptable to
Intraware, if at all.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software products used by many companies may need to be upgraded to
comply with these year 2000 requirements. Intraware's services, including
SUBSCRIBNET, INTRAWARE.SHOP, COMPARISCOPE, IT KNOWLEDGE CENTER, VIRTUALEXPRESS
and their associated and supporting tools, Web sites, and infrastructure were
designed and developed to be year 2000 compliant. Intraware's internal systems
used to deliver its services, however, utilize third-party hardware and
software. Intraware has contacted these infrastructure products' vendors in
order to gauge their year 2000 compliance. Based on these vendors'
representations, Intraware believes that the third-party hardware and software
it uses are year 2000 compliant. There can be no assurance, however, that
Intraware will not experience unanticipated negative consequences, including
material costs caused by undetected errors or defects in the technology used in
its internal systems. If, in the future, it comes to Intraware's attention that
certain of its services need modification, or certain of its third-party
hardware and software are not year 2000 compliant, then Intraware will seek to
make modifications to its systems. In such case, Intraware expects such
modifications to be made on a timely basis and Intraware does not believe that
the cost of such modifications will have a material effect on its operating
results. There can be no assurance, however, that Intraware will be able to
modify such products, services and systems in a timely and successful manner to
comply with the year 2000 requirements, which could have a material adverse
effect on its business and operating results.

Further, while Intraware typically has received warranties and
indemnities from its software vendors with respect to year 2000 compliance of
the software products, Intraware resells but does not independently verify the
year 2000 compliance of these products. If such software products nevertheless
require modification to be year 2000 compliant, demand for such products could
decline if such modifications are not timely made by the software vendors. This,
in turn, could adversely affect Intraware's business and results of operations.
Intraware has no contingency plan to address the effect of year 2000
noncompliance of the software products it resells. However, Intraware, in the
normal course of its business, seeks to identify additional software products
that are year 2000 compliant and to enter into arrangements to resell these
products. There can be no assurance that Intraware's efforts to identify and
resell additional software products would timely address revenue shortfalls that
could result from software products of one or more of its vendors being
noncompliant.

Year 2000 issues also could cause a significant number of companies,
including our current customers, to reevaluate their current system needs and,
as a result, consider switching to other systems and suppliers. Any of these
events could result in a material adverse effect on Intraware's business,
operating results and financial condition.

RISK FACTORS

YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING A
DECISION TO INVEST IN INTRAWARE. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE
NOT THE ONLY ONES FACING INTRAWARE. ADDITIONAL RISKS AND UNCERTAINTIES NOT
PRESENTLY KNOWN TO US OR THAT WE DO NOT CURRENTLY BELIEVE ARE IMPORTANT TO AN
INVESTOR MAY ALSO HARM OUR BUSINESS OPERATIONS. IF ANY OF THE EVENTS,
CONTINGENCIES, CIRCUMSTANCES OR CONDITIONS DESCRIBED IN THE FOLLOWING RISKS
ACTUALLY

9
<PAGE>

OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OUR RESULTS OF OPERATIONS COULD
BE SERIOUSLY HARMED. IF THAT OCCURS, THE TRADING PRICE OF INTRAWARE COMMON
STOCK COULD DECLINE, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.

WE HAVE A HISTORY OF LOSSES, WE EXPECT FUTURE LOSSES AND WE MAY NOT EVER BECOME
PROFITABLE.

We have not achieved profitability, expect to incur net losses in the
foreseeable future and may not ever become profitable in the future. We incurred
net losses of $3.8 million for the quarter end May 31, 1999, $12 million for the
year ended February, 28, 1999, $4.0 million for the year ended February 28, 1998
and $944,000 for the period from August 14, 1996 through February 28, 1997. As
of May 31, 1999, we had an accumulated deficit of $21 million. Net losses have
increased for each of our quarters since inception and we cannot assure you this
trend will not continue. We expect to continue to increase our sales and
marketing, product development and administrative expenses. As a result we will
need to generate significant additional revenues to achieve and maintain
profitability.

We were founded in August 1996, and are an early stage company. We have
a limited operating history that makes it difficult to forecast our future
operating results. Although our revenues have grown in recent quarters, we
cannot be certain that such growth will continue or that we will achieve
sufficient revenues for profitability. If we do achieve profitability in any
period, we cannot be certain that we will sustain or increase such profitability
on a quarterly or annual basis. For more detailed information regarding our
operating results and financial condition, please see "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

WE ARE SUBSTANTIALLY DEPENDENT ON NETSCAPE COMMUNICATIONS CORPORATION AND THE
TERMINATION OF THIS RELATIONSHIP WOULD HAVE A SUBSTANTIAL, IMMEDIATE ADVERSE
EFFECT ON OUR BUSINESS.

For the year ended February 28, 1999, we generated over 90% of our
software product revenues from the sale of Netscape software, and 92% of our
online service revenues from the outsourcing of Intraware SUBSCRIBNET services
to Netscape. As a result, transactions with Netscape and the sale of Netscape
products accounted for over 90% of our total net revenues in the year ended
February 28, 1999. Through the quarter ending May 31, 1999, and to date, we
continue to be dependent upon revenues derived from our relationship with
Netscape.. We cannot assure you that Netscape will continue to sell its software
through us and if Netscape limited or discontinued selling its software through
us, our business would be adversely affected.

We provide online software update and license management services to
Netscape customers through our SUBSCRIBNET service under a one-year agreement
with Netscape entered into effective October 1, 1998. In March 1999, Netscape
extended the agreement for an additional year. Netscape has the right, however,
to terminate this agreement upon 180 days notice. We cannot assure you that
Netscape will not terminate this agreement. Substantially all of our SUBSCRIBNET
revenues to date have been generated through this Netscape contract, and our
failure to renew this contract at the end of the one year term could have a
material adverse effect on our SUBSCRIBNET revenues and on our business as a
whole.

Netscape was acquired by America Online, Inc. We do not currently know
whether this acquisition, or Netscape's relationship with Sun Microsystems, will
have an adverse effect on our relationship with Netscape. If Netscape chose to
offer its own electronic software delivery, tracking, maintenance or other
services, which it is permitted to do under the current agreements, it would
have a substantial and immediate adverse effect on our business, results of
operations and financial condition.

THE LOSS OF ONE OR MORE OF OUR KEY CUSTOMERS WOULD ADVERSELY AFFECT OUR
REVENUES.

We believe that a substantial amount of revenue from software product
sales in any given future period may come from a relatively small number of
customers. If one or more major customers were to substantially cut back
software purchases or stop using our products or services, our operating results
would be materially adversely affected. We do not have long-term contractual
relationships with any of these customers because our customers purchase
software on a transaction by transaction basis. As a result, we cannot assure
you that any of our customers who purchase software through us will purchase
from us in future periods.

10
<PAGE>

OUR QUARTERLY FINANCIAL RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS BECAUSE
OF MANY FACTORS AND ANY OF THESE COULD ADVERSELY AFFECT OUR STOCK PRICE.

We believe that quarter-to-quarter comparisons of our operating results
are not a good indication of our future performance. It is likely that in some
future quarter our operating results may be below the expectations of public
market analysts and investors and as a result, the price of our common stock may
fall. Our operating results have varied widely in the past, and we expect that
they will continue to vary significantly from quarter to quarter due to a number
of risk factors, including:

- demand for our online services and the products of our
software vendors;

- the timing of sales of our online services and the products of
our software vendors;

- loss of strategic relationships with major software vendors;

- the mix of our proprietary online services vs. software
products sold;

- delays in introducing our online services or our vendors'
software products according to planned release schedules;

- our ability to retain existing customers and attract new
customers;

11
<PAGE>

- changes in our pricing policies or the pricing policies of our
software vendors;

- changes in the growth rate of Internet usage and acceptance by
customers of electronic software delivery for large software
purchases, particularly for international customers;

- technical difficulties, system failures or Internet downtime;

- the mix of domestic and international sales;

- certain government regulations;

- our ability to upgrade and develop our information technology
systems and infrastructure;

- costs related to acquisitions of technology or businesses; and

- general economic conditions as well as those specific to the
Internet and related industries.

We have experienced declining gross margins on revenues derived from
software product sales and anticipate that such declines may continue. Also, as
we broaden our sales and marketing efforts to support our recently introduced
online services, such as SUBSCRIBNET and COMPARISCOPE, we may experience one or
more quarters of reduced software product sales. Any shortfall in our revenues
would directly adversely affect our operating income or loss, and these
fluctuations could affect the market price of our common stock.

We plan to significantly increase our operating expenses to expand our
sales and marketing operations, broaden our customer support capabilities, and
fund greater levels of product development. Our operating expenses, which
include sales and marketing, product development and general and administrative
expenses, are based on our expectations of future revenues and are relatively
fixed in the short term. If revenues fall below our expectations and we are not
able to quickly reduce our spending in response, our operating results would be
adversely affected.

OUR NEWLY INTRODUCED ONLINE SERVICES MAY NOT BE ABLE TO GENERATE ANTICIPATED
REVENUES.

We have only recently started selling a number of online services such
as SUBSCRIBNET and COMPARISCOPE. We cannot assure you that these online services
will result in additional customers and customer loyalty, significant additional
revenues or improved operating margins in future periods. Additionally, we
cannot assure you software vendors will continue to find it strategically or
economically justifiable for us to deliver these services, particularly
SUBSCRIBNET, to their customers.

We had no significant online services revenues until the quarter ended
November 30, 1998, and for the year ended February 28, 1999, revenues from these
online services totaled only $3.7 million, which constituted 9.6% of our total
revenues for that period. For the quarter ended May 31, 1999 online service
revenues were $2.5 million, which constituted 15% of our total revenues for that
quarter. We do not expect these online services to constitute a significant
portion of our total revenues in any given quarter until at least the first half
of calendar 2000. This projection, however, is a forward-looking statement and
our actual results could differ materially from those anticipated as a result of
a number of factors, including demand for our online services and the
competitive service offerings of others. These online services are not only
important to improving our operating results but also to continuing to attract
and retain both our software vendor and corporate information technology
professional customers, and in differentiating our online service offerings from
those of our competitors.

12
<PAGE>

OUR INDUSTRY IS HIGHLY COMPETITIVE AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE
TO EFFECTIVELY COMPETE.

The market for selling software products and related online services is
highly competitive. We expect competition to intensify as current competitors
expand their product offerings and new competitors enter the market. We have
recently experienced, and expect to continue to experience, price competition on
our software sales, particularly on large sales transactions. We cannot assure
you that we will be able to compete successfully against current or future
competitors, or that competitive pressures faced by us will not adversely affect
our business and results of operations.

Our current competitors include a number of companies offering one or
more solutions for the evaluation, purchase, deployment and maintenance of
business software. Because there are relatively low barriers to entry in the
software and Internet services markets, we expect additional competition from
other established and emerging companies. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could have a significant adverse effect on our business and results of
operations.

Many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, better name recognition, and a larger installed base of customers
than we do. Many of our competitors may also have well-established relationships
with our existing and prospective customers.

Our current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to increase the
ability of their products to address customer needs and compete with our
products. We also expect that the competition will increase as a result of
software industry consolidations. As a result, we may not be able to effectively
compete for customers.

WE ARE DEPENDENT ON MARKET ACCEPTANCE OF ELECTRONIC SOFTWARE DELIVERY, AND IF IT
DOES NOT ACHIEVE WIDESPREAD ACCEPTANCE, OUR BUSINESS WILL BE ADVERSELY AFFECTED.

Our success will depend in large part on acceptance by information
technology professionals of electronic software delivery as a method of buying
business software. If electronic software delivery does not achieve widespread
market acceptance, our business will be adversely affected. Electronic software
delivery is a relatively new method of selling software products and the growth
and market acceptance of electronic software delivery is highly uncertain and
subject to a number of risk factors. These factors include:

- the potential for state and local authorities to levy taxes on
Internet transactions;

- the availability of sufficient network bandwidth to enable
purchasers to rapidly download software;

- the number of software packages that are available for
purchase through electronic software delivery as compared to
those available through traditional delivery methods;

- the level of customer confidence in the process of downloading
software; and

- the relative ease of such a process and concerns about
transaction security.

13
<PAGE>

Even if electronic software delivery achieves widespread acceptance, we
cannot be sure that we will overcome the substantial technical challenges
associated with electronically delivering software reliably and consistently on
a long-term basis. Furthermore, the proliferation of software viruses poses a
risk to market acceptance of electronic software delivery. Any well-publicized
transmission of a computer virus by us or another company using electronic
software delivery could deter information technology professionals from
utilizing electronic software delivery technology and our business could be
adversely affected.

CONTINUED ADOPTION OF THE INTERNET AS A METHOD OF CONDUCTING BUSINESS IS
NECESSARY FOR OUR FUTURE GROWTH.

The widespread acceptance and adoption of the Internet by traditional
businesses for conducting business and exchanging information is likely only in
the event that the Internet provides these businesses with greater efficiencies
and improvements. The failure of the Internet to continue to develop as a
commercial or business medium would adversely affect our business.

FAILURE TO EXPAND INTERNET INFRASTRUCTURE COULD LIMIT OUR FUTURE GROWTH.

The recent growth in Internet traffic has caused frequent periods of
decreased performance, and if Internet usage continues to grow rapidly, its
infrastructure may not be able to support these demands and its performance and
reliability may decline. If outages or delays on the Internet occur frequently
or increase in frequency, overall Web usage including usage of our Web site in
particular could grow more slowly or decline. Our ability to increase the speed
and scope of our services to customers is ultimately limited by and dependent
upon the speed and reliability of both the Internet and our customers' internal
networks. Consequently, the emergence and growth of the market for our services
is dependent on improvements being made to the entire Internet as well as to our
individual customers' networking infrastructures to alleviate overloading and
congestion.

INCREASED SECURITY RISKS OF ONLINE COMMERCE MAY DETER FUTURE USE OF OUR
SERVICES.

Concerns over the security of transactions conducted on the Internet
and the privacy of users may also inhibit the growth of the Internet and other
online services generally, and online commerce in particular. Our failure to
prevent security breaches could significantly harm our business and results of
operations. We cannot be certain that advances in computer capabilities, new
discoveries in the field of cryptography, or other developments will not result
in a compromise or breach of the algorithms we use to protect our customers'
transaction data or our software vendors' products. Anyone who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. We may be required to incur significant
costs to protect against security breaches or to alleviate problems caused by
breaches. Any well-publicized compromise of security could deter people from
using the Web to conduct transactions that involve transmitting confidential
information or downloading sensitive materials.

WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND OUR
ABILITY TO MANAGE THIS GROWTH WILL AFFECT OUR BUSINESS.

Our ability to successfully offer products and services and implement
our business plan in a rapidly evolving market requires an effective planning
and management process. We have increased, and plan to continue to increase, the
scope of our operations domestically and internationally. These expansion
efforts could be expensive and put a strain on management, and if we do not
manage growth properly, it could adversely affect our business. Our headcount
has grown and will continue to grow substantially. In particular, we will need
to expand our technology infrastructure, which will include making certain key

14
<PAGE>

employee hires in product development. These hires historically have been
difficult and we can not assure you that we will be able to successfully attract
and retain a sufficient number of qualified personnel.

WE NEED TO EXPAND OUR MANAGEMENT SYSTEMS AND CONTROLS IN ORDER TO SUPPORT OUR
ANTICIPATED GROWTH.

Our growth has placed, and our anticipated future growth will continue
to place a significant strain on our management systems and controls. We cannot
assure you that we will be able to adequately expand our technology resources to
support our anticipated growth. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures. Furthermore, we expect that we will be required to manage multiple
relationships with various software vendors, customers and other third parties.

WE MAY NOT BE ABLE TO HIRE AND RETAIN SUFFICIENT SALES, MARKETING AND SUPPORT
PERSONNEL THAT WE NEED TO SUCCEED.

If we fail to hire and retain sufficient numbers of sales, marketing
and support personnel, our business and results of operations would be adversely
affected. Competition for qualified sales and marketing and support personnel is
intense, and we might not be able to hire and retain sufficient numbers of
qualified sales and marketing and support personnel. We need to substantially
expand our sales operations and marketing efforts, both domestically and
internationally, in order to increase market awareness and sales of the products
and services we offer. These products and services require a sophisticated sales
effort targeted at several people within the information technology departments
of our prospective customers. We have recently expanded our direct sales force
and plan to hire additional sales personnel.

We currently have a small customer service and support organization and
will need to increase our staff to support new customers and the expanding needs
of existing customers. Hiring customer service and support personnel is very
competitive in our industry due to the limited number of people available with
the necessary technical skills and understanding of the Internet. We cannot
assure you that we will be able to hire and retain sufficient numbers of
qualified customer service and support personnel.

OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
AND THESE OFFICERS AND KEY PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.

Our future success depends upon the continued service of our executive
officers and other key technology, sales, marketing and support personnel and
none of our officers or key employees is bound by an employment agreement for
any specific term. If we lost the services of one or more of our key employees,
or if one or more of our executive officers or employees decided to join a
competitor or otherwise compete directly or indirectly with us, this could have
a significant adverse effect on our business. In particular, the services of
Peter Jackson, Chief Executive Officer, and Paul Martinelli, Chief Technology
Officer, would be difficult to replace.

WE INTEND TO EXPAND INTERNATIONAL OPERATIONS AND UNCERTAINTY OF INTERNATIONAL
SALES EFFORTS COULD ADVERSELY AFFECT OUR BUSINESS.

We may not be able to successfully market, sell, deliver and support
our services and our vendors' software products internationally. Our planned
international expansion will require significant management attention and
financial resources. If we are unable to expand our international operations
successfully and in a timely manner, our business and operating results could be
adversely affected.

15
<PAGE>

To date, we have not had substantial revenues from sales to
international customers. We intend to expand the scope of sales to international
customers in future periods. In calendar 1999, we intend to open international
offices and hire international sales personnel, including the establishment of
at least one European office. We have only limited experience in marketing,
selling and supporting our services and our vendors' software products overseas.
Additionally, we do not have any experience in developing foreign language
versions of our services. This may be more difficult or take longer than we
anticipate especially due to international problems, such as language barriers
or currency exchange, and the fact that the Internet infrastructure in such
foreign countries may be less advanced than the domestic Internet infrastructure
and may result in longer response time and less accurate or consistent
electronic software delivery.

In addition, our contracts with Netscape currently do not allow us to
market or sell Netscape products, other than in connection with our SUBSCRIBNET
service, in Europe. Revenues from European customers may not be able to grow as
planned unless we can obtain the rights to market Netscape products in Europe.

OUR ACQUISITIONS COULD BE DIFFICULT TO INTEGRATE, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE AND ADVERSELY AFFECT OUR OPERATING RESULTS.

We currently intend to make investments in complementary companies,
services and technologies. These acquisitions and investments could disrupt our
ongoing business, distract our management and employees and increase our
expenses. If we acquire a company, we could face difficulties in assimilating
that company's personnel and operations. In addition, the key personnel of the
acquired company may decide not to work for us. Acquisitions of additional
services or technologies also involve risks of incompatibility and the need for
integration into our existing services and marketing, sales and support efforts.
Also, if we finance the acquisitions by incurring debt or issuing equity
securities, this could dilute our existing stockholders. Any amortization of
goodwill or other assets, or other charges resulting from the costs of such
acquisitions, could adversely affect our operating results.

WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY
INFRINGEMENT THAT COULD ADVERSELY AFFECT OUR BUSINESS.

Our services operate in part by making software products and other
content available to our customers. This creates the potential for claims to be
made against us, either directly or through contractual indemnification
provisions with vendors. Any claims could result in costly litigation and be
time-consuming to defend, divert management's attention and resources, cause
delays in releasing new or upgrading existing services or require us to enter
into royalty or licensing agreements. These claims could be made for defamation,
negligence, copyright or trademark infringement, personal injury, invasion of
privacy or other legal theories based on the nature, content or copying of these
materials.

Litigation regarding intellectual property rights is common in the
Internet and software industries. We expect that Internet technologies and
software products and services may be increasingly subject to third-party
infringement claims as the number of competitors in our industry segment grows
and the functionality of products in different industry segments overlaps. There
can be no assurance that our services do not infringe on the intellectual
property rights of third parties.

In addition, we may be involved in litigation involving the software of
third party vendors that we electronically distribute. Royalty or licensing
agreements, if required, may not be available on acceptable terms, if at all. A
successful claim of infringement against us and our failure or inability to
license the infringed or similar technology could adversely affect our business.
Although we carry general liability

16
<PAGE>

insurance, our insurance may not cover all potential claims or may not be
adequate to protect us from all liability that may be imposed.

Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
copyright, trade secret and trademark law. We have no patents issued or applied
for to date on our technology. We are aware that certain other companies are
using or may have plans to use the name "Intraware" as a company name or as a
trademark or servicemark. While we have received no notice of any claims of
trademark infringement, we cannot assure you that certain of these companies may
not claim superior rights to "Intraware" or to other marks we use. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our services or technology and we cannot be
certain that the steps we have taken will prevent misappropriation of our
technology.

POTENTIAL YEAR 2000 PROBLEMS WITH OUR INTERNAL OPERATING SYSTEMS OR THE SOFTWARE
PRODUCTS THAT WE RESELL COULD ADVERSELY AFFECT OUR BUSINESS.

We cannot assure you that we will not experience unanticipated negative
consequences from year 2000 problems, including material costs caused by
undetected errors or defects in the technology used in our internal systems.
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. As a result, computer systems and/or
software products used by many companies may need to be upgraded to solve this
problem.

Our online services, including IT KNOWLEDGE CENTER, COMPARISCOPE,
INTRAWARE.SHOP, VIRTUALEXPRESS, SUBSCRIBNET and their associated and supporting
tools, Web sites, and infrastructure were designed and developed to be year 2000
compliant. Our internal systems, including those used to deliver our services,
utilize third-party hardware and software. We have contacted these
infrastructure products' vendors in order to gauge their year 2000 compliance.
Based on our vendors' representations, we believe that the third-party hardware
and software we use is year 2000 compliant.

If it comes to our attention that certain of our services need
modification, or certain of our third-party hardware and software is not year
2000 compliant, then we will try to make modifications to our services and
systems on a timely basis. We do not believe that the cost of such modifications
will materially affect our operating results. Yet, we cannot assure you that we
will be able to modify such products, services and systems in a timely and
successful manner and the failure to do so could have a material adverse effect
on our operating results.

Also, even though we typically receive warranties and indemnities from
our software vendors with respect to year 2000 compliance of the software
products we resell, we have not independently verified the year 2000 compliance
of these products. If these software products nevertheless require modification
to be year 2000 compliant, demand for them could decline precipitously if
modifications are not timely made by the software vendors. As a result, these
modifications could adversely affect our business and results of operations. In
addition, if software products we resell are not year 2000 compliant and are
installed at customer sites, we cannot assure you that the indemnities we
receive from our vendors would protect us from customer claims. Any claims could
divert significant management, financial and other resources and our commercial
insurance coverages may not be adequate to cover such claims.

We have no contingency plan to address the effect of year 2000
noncompliance of software products we resell. In the normal course of our
business we seek to identify additional software products that are year 2000
compliant and to enter into arrangements to resell these products. We cannot
assure you

17
<PAGE>

that these efforts will timely address any revenue shortfalls that could
result from software products of one or more of our software vendors being
noncompliant.

SPENDING BY OUR CUSTOMERS TO EVALUATE AND ADDRESS YEAR 2000 COMPLIANCE COULD
RESULT IN LOWER DEMAND FOR OUR PRODUCTS AND SERVICES.

Year 2000 compliance issues also could cause a significant number of
companies, including our current customers, to reevaluate their current system
needs and, as a result, consider switching to other systems and suppliers. This
could result in a material adverse effect on our business, operating results and
financial condition. Also, during the next twelve months there is likely to be
an increased customer focus on addressing year 2000 compliance issues, creating
the risk that customers may reallocate capital expenditures to fix year 2000
problems of existing systems. Although we have not experienced these effects to
date, if customers defer purchases of business software and related services
because of such a reallocation, it would adversely affect our operating results.

OUR MARKET MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND OUR FUTURE SUCCESS WILL
DEPEND ON OUR ABILITY TO MEET THE CHANGING NEEDS OF OUR INDUSTRY.

Our market is characterized by rapidly changing technology, evolving
industry standards and frequent new product announcements. To be successful, we
must adapt to our rapidly changing market by continually improving the
performance, features and reliability of our services. We could incur
substantial costs to modify our services or infrastructure in order to adapt to
these changes. Our business could be adversely affected if we incur significant
costs without adequate results, or find ourselves unable to adapt rapidly to
these changes.

WE DO NOT HAVE A DISASTER RECOVERY PLAN OR BACK UP SYSTEMS AND A DISASTER COULD
SEVERELY DAMAGE OUR OPERATIONS.

We currently do not have a disaster recovery plan in effect and do not
have fully redundant systems for our service at an alternate site. A disaster
could severely damage our business and results of operations because our service
could be interrupted for an indeterminate length of time. Our operations depend
upon our ability to maintain and protect our computer systems, all of which are
located in our principal headquarters in Orinda, California and at an offsite
location managed by a third party in Santa Clara, California. Orinda and Santa
Clara exist on or near known earthquake fault zones. Although the outside
facility, which hosts our primary Web and database servers, is designed to be
fault tolerant, the system is vulnerable to damage from fire, floods,
earthquakes, power loss, telecommunications failures, and similar events.
Although we maintain insurance against fires, floods, earthquakes and general
business interruptions, there can be no assurance that the amount of coverage
will be adequate in any particular case.

ADDITIONAL GOVERNMENT REGULATIONS MAY INCREASE OUR COSTS OF DOING BUSINESS.

The law governing Internet transactions remains largely unsettled, even
in areas where there has been some legislative action. The adoption or
modification of laws or regulations relating to the Internet could adversely
affect our business by increasing our costs and administrative burdens. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet.

Laws and regulations directly applicable to communications or commerce
over the Internet are becoming more prevalent. The most recent session of the
United States Congress resulted in Internet laws regarding children's privacy,
copyrights and taxation. The European Union has enacted its own data

18
<PAGE>

protection and privacy directive, which required all 15 European Union Member
States to implement laws relating to the processing and transmission of
personal data by October 25, 1998. We must comply with these new regulations
in both Europe and the United States, as well as any other regulations
adopted by other countries where we may do business. The growth and
development of the market for online commerce may prompt calls for more
stringent consumer protection laws, both in the United States and abroad.
Compliance with any newly adopted laws may prove difficult for us and may
negatively affect our business.

YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY
UNCERTAIN.

You should not rely on forward-looking statements in this 10Q. This 10Q
also contains forward-looking statements that involve risks and uncertainties.
We use words such as "anticipates," "believes," "plans," "expects," "future,"
"intends" and similar expressions to identify such forward-looking statements..
You should not place undue reliance on these forward-looking statements, which
apply only as of the date hereof. Our actual results could differ materially
from those anticipated in these forward-looking statements for many reasons,
including the risks faced by us described above and elsewhere in this 10Q.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INTEREST RATE RISK. The Company's exposure to market risk for changes
in interest rates relates primarily to the the Company's investment portfolio.
The Company has not used derivative financial instruments in its investment
portfolio. The Company places its investments with high quality issuers and, by
policy, limits the amount of credit exposure to any one issue or issuer. At May
31, 1999, $58.6 million of the company's cash, cash equivalents and investment
portfolio carried maturities of less than 90 days. The Company has the ability
to hold the portfolio to maturity, if deemed necessary. The effect of changes in
interest rates of +/- 10% over a six month horizon would not have a material
effect on the fair market value of the portfolio.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As of the date hereof, there is no material litigation pending against
Intraware. From time to time, Intraware may be a part to litigation and claims
incident to the ordinary course of its business. Although the results of
litigation and claims cannot be predicted with certainty, the Intraware believes
that the final outcome of such matters will not have a material adverse effect
on Intraware's business, results of operations, financial condition or
prospects.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On February 25, 1999, Intraware commenced the initial public offering
of 4,600,000 shares of common stock, including 600,000 shares subject to an
overallotment option on behalf of certain selling stockholders pursuant to a
registration statement on Form S-1 (Commission File No. 333-69261) declared
effective on February 25, 1999. The managing underwriters of the public offering
were Credit Suisse First Boston Corporation, BancBoston Robertson Stephens Inc.,
and Hambrecht & Quist LLC.

The 4,000,000 shares registered on Intraware's behalf and 600,000 shares
registered on the behalf of certain selling stockholders were sold at a price
per share of $16.00. The aggregate offering price of the shares

19
<PAGE>

offered by Intraware was $64,000,000, less underwriting discounts and
commissions of $4,480,000 and expenses of approximately $1,300,000. The
proceeds are to be used for general corporate purposes, principally working
capital, capital expenditures, potential acquisitions and additional sales
and marketing efforts. For the quarter ending May 31, 1999, net cash used
from the offering for operating activities totaled $4.7 million and
cash flows used for investing activities, principally the purchase of
computer equipment, totaled $2.3 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
3.1* Certificate of Incorporation of Intraware, Inc.
3.2* Bylaws of Intraware, Inc.
4.1* Specimen Common Stock Certificate.
10.1* Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2* 1996 Stock Option Plan (as amended on December 17, 1998) and
form of agreements thereunder.
10.3* 1998 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4* 1998 Director Option Plan and form of agreements thereunder.
10.5* Form of Registration and Information Rights Agreement.
10.6* Loan Agreement entered into as of July 29, 1998 between the
Registrant and Imperial Bank and related General Security
Agreement and Collateral Assignment as Collateral, Patent
Mortgage and Security Agreement.
10.7* Sleepy Hollow Investment Company Office Lease made August 23,
1996 between Sleepy Hollow Investment Company and Intraware,
Inc.
10.8* First Amendment to the Lease for Intraware, Inc. entered into as
of May 5, 1997 by and between the Registrant and Sleepy Hollow
Investment Company I.
10.9* Second Amendment to the Lease for Intraware, Inc. entered into
as of March 31, 1998 by and between the Registrant and Sleepy
Hollow Investment Company I.
10.10* Master Lease Agreement dated September 9, 1998 between Comdisco,
Inc. and Intraware, Inc.
10.11* Addendum and Equipment Schedules to the Master Lease Agreement
dated as of September 9, 1998 between Intraware, Inc., as Lessee
and Comdisco, Inc, as Lessor.
10.12+* Services Agreement between Netscape Communications Corporation
and Intraware, Inc. entered into as of October 1, 1998.

20
<PAGE>

10.13+* Netcenter Services Agreement between Netscape Communications
Corporation and Intraware, Inc. entered into as of September 3,
1998.
10.14+* Amended and Restated Electronic Distribution License Agreement
between Netscape Communications Corporation and Intraware, Inc.
entered into as of March 6, 1997.
10.15** Amendment to Netcenter Services Agreement of October 1, 1998
between Netscape Communications Corporation and Intraware, Inc.,
dated March 1, 1999.
27.1 Financial Data Schedules.
</TABLE>

+ Certain portions of this exhibit have been granted confidential
treatment by the Commission. The omitted portions have been separately
filed with the Securities and Exchange Commission.

* Incorporated by reference to Intraware's Registration Statement on Form
S-1 (File No. 333-69261) declared effective on February 25, 1999.

** Incorporated by reference to Intraware's Annual Report on Form 10-K
for the fiscal year ended February 28, 1999 (File No. 000-25249)
as filed with the Securities and Exchange Commission on May 28, 1999.

27.1 Financial Data Schedule

b) Reports on Form 8-K

The company filed no reports on Form 8-K as during the quarter ended May 31,
1999.

<PAGE>

SIGNATURES

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

INTRAWARE INC.

Dated: July 14, 1999 By: /s/ Donald M. Freed
-------------------------------------
Donald M. Freed
Executive Vice President and
Chief Financial Officer

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> FEB-28-1999
<PERIOD-END> MAY-31-1999
<CASH> 58,533
<SECURITIES> 0
<RECEIVABLES> 14,206
<ALLOWANCES> 190
<INVENTORY> 11,036
<CURRENT-ASSETS> 86,000
<PP&E> 5,161
<DEPRECIATION> (1,462)
<TOTAL-ASSETS> 90,136
<CURRENT-LIABILITIES> 24,456
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 62,531
<TOTAL-LIABILITY-AND-EQUITY> 90,136
<SALES> 16,458
<TOTAL-REVENUES> 16,458
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (4,492)
<INTEREST-EXPENSE> 35
<INCOME-PRETAX> (3,799)
<INCOME-TAX> (3,799)
<INCOME-CONTINUING> (3,799)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,799)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)

</TABLE>