UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K/A

     (Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2004

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from                      to

Manhattan Associates, Inc.

(Exact Name of Registrant As Specified in Its Charter)

Georgia		58-2373424
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)
2300 Windy Ridge Parkway, Suite 700
Atlanta, Georgia		30339
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (770) 955-7070

Title of Each Class		Name of Each Exchange on Which Registered
None		None

Securities registered pursuant to Section 12(g) of the Act:

     Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ       No £

     Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes £      No þ

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.

     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 þ       No £

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

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer þ    Accelerated filer £    Non-accelerated filer £

     Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o       No þ

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based upon the closing sales price of the Common Stock on June 30, 2004 as reported by the Nasdaq Stock Market, was approximately $919,214,409. As of March 14, 2005, the Registrant had outstanding 29,591,324 shares of Common Stock.

     The Registrant’s definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 20, 2005 is incorporated by reference in Part III of this Form 10-K/A to the extent stated herein.

 

 

EXPLANATORY NOTE

     This Amendment No. 1 on Form 10-K/A (“Form 10-K/A”) to our Annual Report on Form 10-K for the year ended December 31, 2004, initially filed with the U.S. Securities and Exchange Commission on March 16, 2005 (“Original Filing”), reflects a restatement (“Restatement”) of our Consolidated Financial Statements for the years ended December 31, 2000 through December 31, 2004. The determination by management to restate those financial statements was made as a result of net income in those years being overstated by a total of approximately $7.4 million, resulting primarily from an error in the method of computing our research and development income tax credit following a small acquisition in 1998 and for not providing the appropriate liability for sales taxes in certain states (“Restatement Items”). Although it is possible to recover some, if not all, of the lost tax credits through a retroactive relief request from the Internal Revenue Service and some of the sales taxes from our customers who contractually agreed to be responsible for these taxes, the amount of recovery cannot be estimated precisely and at this time collection is not considered probable.

     This Form 10-K/A only amends and restates Items 6, 7, 8 and 9A of Part II of the Original Filing, and references to this “Form 10-K” have been revised to refer to this “Form 10-K/A.” Except for the items described above, no other information in the Original Filing, including the exhibits thereto, is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, Item 15 of Part IV of the Original Filing has been amended to contain the consent of our independent registered public accounting firm and currently dated certifications from our Chief Executive Officer and Chief Financial Officer, as required by Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, and Section 906 of the Sarbanes-Oxley Act of 2002. An updated consent of our independent registered public accounting firm and the certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form 10-K/A as Exhibits 23.1, 31.3, 31.4, and 32.2.

     This Form 10-K/A is being filed to reflect and effect the Restatement for the affected periods, and as such, our previously issued consolidated financial statements and related financial information for the years ended December 31, 2000 through December 31, 2004 should no longer be relied upon.

Forward-Looking Statements

     In addition to historical information, this Annual Report may contain “forward-looking statements” relating to Manhattan Associates, Inc. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are delays in product development, undetected software errors, competitive pressures, technical difficulties, market acceptance, availability of technical personnel, changes in customer requirements and general economic conditions. Additional factors are set forth in “Safe Harbor Compliance Statement for Forward-Looking Statements” included as Exhibit 99.1 to the Annual Report on Form 10-K. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results. Our Annual Report on Form 10-K is available through our Web site at www.manh.com.

PART II

Item 6.		Selected Consolidated Financial Data

     You should read the following selected consolidated financial data in conjunction with our restated Consolidated Financial Statements and related Notes thereto and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K/A. The statement of income data for the years ended December 31, 2002, 2003 and 2004, and the balance sheet data as of December 31, 2003 and 2004, are derived from, and are qualified by reference to, the audited financial statements included elsewhere in this Form 10-K/A. The statement of income data for the years ended December 31, 2000 and 2001, and the balance sheet data as of December 31, 2000, 2001 and 2002, are derived from the audited financial statements not included herein, as adjusted for the Restatement Items. Historical results are not necessarily indicative of results to be expected in the future.

		Year Ended December 31,
		2000				2001				2002				2003				2004
		(unaudited)				(unaudited)
		(In thousands, except per share data)
Statement of Income Data (1):
Revenue:
Software and hosting fees		$	26,190			$	35,436			$	40,233			$	43,229			$	49,886
Services			81,085				97,510				110,516				129,320				141,492
Hardware and other			31,344				27,760				22,675				23,417				23,541
Recovery (allowance) relating to bankrupt customer (2)			—				(4,328	)			2,297				848				—
Total revenue			138,619				156,378				175,721				196,814				214,919
Costs and expenses:
Cost of software and hosting fees			1,239				1,455				1,927				4,470				4,085
Amortization of acquired developed technology			250				1,500				1,500				1,999				2,079
Cost of services			34,299				42,372				46,611				54,218				65,853
Cost of hardware and other			26,345				23,092				19,027				20,123				20,071
Research and development			16,106				19,413				20,780				26,982				28,822
Sales and marketing			18,051				22,334				26,413				31,200				34,049
General and administrative			17,268				20,186				22,136				24,117				26,855
In-process research and development and acquisition-related charges			3,001				—				1,470				885				—
Restructuring charge			—				—				—				893				—
Amortization of acquisition-related intangibles			915				3,740				272				1,433				1,496
Total costs and expenses			117,474				134,092				140,136				166,320				183,310
Income from operations			21,145				22,286				35,585				30,494				31,609
Other income, net			2,718				2,059				2,801				2,746				3,257
Income before income taxes			23,863				24,345				38,386				33,240				34,866
Income tax expense			9,153				9,197				14,781				12,659				13,232
Net income		$	14,710			$	15,148			$	23,605			$	20,581			$	21,634
Diluted net income per share		$	0.48			$	0.49			$	0.78			$	0.67			$	0.70
Shares used in computing diluted net income per share			30,453				30,742				30,451				30,882				31,067

		December 31,
		2000				2001				2002				2003				2004
		(In thousands)
Balance Sheet Data (1):
Cash, cash equivalents and investments		$	67,667			$	104,189			$	121,857			$	155,403			$	172,656
Working capital			67,933				97,926				119,790				154,858				133,628
Total assets			153,540				182,179				221,864				266,608				290,239
Long-term portion of capital lease obligations and note payable			5,866				2,182				240				288				148
Total shareholders’ equity			106,994				137,127				179,618				224,158				239,017

Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

     All statements, trend analyses and other information contained in the following discussion relative to markets for our products and trends in revenue, gross margins and anticipated expense levels, as well as other statements including words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” and “intend” and other similar expressions constitute forward-looking statements. These forward-looking statements are subject to business and economic risks and uncertainties, and our actual results of operations may differ materially from those contained in the forward-looking statements.

     The following management’s discussion and analysis of financial condition and results of operations set forth in this Item 7 is restated to reflect the correction of errors that were contained in our Consolidated Financial Statements and other financial information for the years ended December 31, 2002, 2003 and 2004 as discussed below and in Note 2 of the restated Consolidated Financial Statements set forth in Item 8. The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our restated Consolidated Financial Statements and the related notes thereto.

Business

     We are a global leader in providing supply chain execution and optimization solutions. Our integrated logistics solutions leverage a comprehensive set of applications that can be implemented as an integrated whole or as individual point solutions to better manage the supply chain. This platform for logistics is comprised of various applications including warehouse management, transportation management, distributed order management, reverse logistics and trading partner management along with Radio Frequency Identification (“RFID”) and performance management. Our solution offering is comprised of software, services, and hardware.

     Our warehouse management solutions (“WMS”) manage the processes that take place within the distribution center, from receipt of goods to fulfillment of orders, and include applications for optimizing labor and slotting. With our transportation management solutions (“TMS”), companies can optimally procure, plan and execute transportation services across transportation modes, such as air, ship and ground. Our distributed order management solution enables companies to balance supply with demand and source goods to meet customer needs in a timely and cost effective manner. With our reverse logistics management solutions, companies can effectively manage the returns process and improve net asset recovery. Our trading partner management solutions (“TPM”) provide Web-based synchronization between trading partners, improving communication and visibility across the entire supply chain. Our RFID solutions offer a flexible, scalable and modular solution that provide an integration and reporting platform between RFID chip readers and supply chain execution and enterprise resource planning systems. Finally, our performance management applications include event management, alerting and reporting modules, which use analytic tools and alerting processes to monitor and proactively respond to events within the supply chain cycle, analyze historical and operational data and generate reports.

     In addition to our software solutions, we also offer a variety of services to enhance the value we provide customers. Our offerings include design, configuration, implementation, training, product assessment, customer support, hardware, consulting services and software enhancement subscriptions.

Application of Critical Accounting Policies and Estimates

     The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. In preparing these financial statements, management has made estimates and judgments relating to certain amounts included in the financial statements. As a result, application of these accounting policies, could cause actual results to differ from these estimates.

     We have identified the following as our critical accounting policies:

Revenues and Revenue Recognition

     Our revenue is derived from (i) Software and Hosting Fees, which consist of revenue from the licensing and hosting of software and revenue from funded research and development efforts; (ii) Services Revenue, which consist of fees from consulting, implementation and training services (collectively, “professional services”), plus customer support services and software enhancement subscriptions; and (iii) Hardware and Other Revenue, which consists of sales of hardware and reimbursed project expenses.

     Revenue recognition rules for software companies are very complex. We recognize software fees in accordance with Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”). Although we follow very specific and detailed guidelines in measuring revenue, the application of those guidelines requires judgment including: (i) whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence of fair value exists for those elements; (ii) whether customizations or modifications of the software are significant; and (iii) whether collection of the software fee is probable. Additionally, we specifically evaluate any other elements in our license transactions, including but not limited to options to purchase additional software at a future date, extended payment terms, functionality commitments not delivered with the software and existing outstanding receivable balances in making the determination of the amount and timing of revenue recognition.

     Most of our software arrangements include professional services. Professional services revenues are generally accounted for separately from the software license revenues because the arrangements qualify as “service transactions” as defined by SOP 97-2. The most significant factors considered in determining whether the revenue should be accounted for separately include the nature of the services (i.e., consideration of whether the services are essential to the functionality of the licensed product), degree of risk, availability of services from other vendors and timing of payments. We provide our professional services under services agreements on a time and material basis or based on a fixed-price and/or fixed-time arrangement. The revenues from our time and material based professional consulting and implementation services are recognized as the work is performed, provided that the customer has a contractual obligation to pay, the fee is non-refundable and collection is probable. Delays in project implementation will result in delays in revenue recognition. For our professional consulting services under fixed-price and/or fixed-time arrangements, we recognize the related revenues using the percentage-of-completion method, with progress-to-completion measured by using labor costs input compared to estimated cost of completion. Revisions to the estimates are reflected in the period in which changes become known. Project losses are provided for in their entirety in the period they become known, without regard to the percentage-of-completion. If we do not accurately estimate the resources required or the scope of work to be performed, or if we do not manage our projects properly within the planned periods of time, then future consulting margins on our projects may be negatively affected or losses on existing contracts may need to be recognized.

     Hardware revenue is generated from the resale of a variety of hardware products, developed and manufactured by third parties, which are integrated with and complementary to our software solutions. These products include computer equipment, radio frequency terminal networks, RFID chip readers, bar code printers and scanners and other peripherals. We generally purchase hardware from our vendors only after receiving an order from a customer, and revenue is recognized upon shipment by the vendor to the customer.

Accounts Receivable

     We continuously monitor collections and payments from our customers and maintain an allowance for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. Additions to the allowance for doubtful accounts generally represent a sales allowance on services revenue, which are recorded to operations as a reduction to services revenue. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Our top five customers in aggregate accounted for 16%, 16% and 14% of total revenue for each of the years ended December 31, 2002, 2003, and 2004, respectively. No single customer accounted for more than 10% of revenue in 2002, 2003 or 2004.

     On January 22, 2002, a significant customer from 2001 filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. As a result of the filing, the uncertainties around the bankruptcy proceedings and the

ultimate timing of payment, we recorded an allowance of $4.3 million in 2001 to effectively defer revenues arising in the fourth quarter of 2001 from the significant customer, but unpaid at the time of the bankruptcy declaration. We recorded a recovery of approximately $2.3 million of the receivable in the fourth quarter of 2002. Upon receiving the final cash settlement in June 2003, subsequent to the significant customer emerging from bankruptcy, we recovered an additional $848,000 of the receivable during the second quarter of 2003. The recoveries were recorded as separate revenue line items in the Consolidated Statements of Income and reductions to the allowance for doubtful accounts in the Consolidated Balance Sheets during the respective quarters.

Valuation of long-lived and intangible assets and goodwill

     In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), we do not amortize goodwill and other intangible assets with indefinite lives. Our long-lived and intangible assets and goodwill are subject to annual impairment tests, which require us to estimate the fair value of our business compared to the carrying value. The impairment reviews require an analysis of future projections and assumptions about our operating performance. Should such review indicate the assets are impaired, we would record an expense for the impaired assets.

     Annual tests or other future events could cause us to conclude that impairment indicators exist and that our goodwill is impaired. For example, if we had reason to believe that our recorded goodwill and intangible assets had become impaired due to decreases in the fair market value of the underlying business, we would have to take a charge to income for that portion of goodwill or intangible assets that we believed was impaired. Any resulting impairment loss could have a material adverse impact on our financial position and results of operations. At December 31, 2004, our goodwill balance was $32.5 million and our intangible assets with definite lives balance was $8.3 million, net of accumulated amortization.

Income Taxes

     We provide for the effect of income taxes on our financial position and results of operations in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this accounting pronouncement, income tax expense is recognized for the amount of income taxes payable or refundable for the current year and for the change in net deferred tax assets or liabilities resulting from events that are recorded for financial reporting purposes in a different reporting period than recorded in the tax return. Management must make significant assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws, allowable deductions, projected tax credits and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our financial position and results of operations. Our assumptions, judgments and estimates relative to the value of our net deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate, thus materially impacting our financial position and results of operations.

Restatement of Financial Statements

     In connection with the financial reporting close process for the year ended December 31, 2005, we became aware of certain tax accounting issues related to prior years and determined that a restatement of our previously issued Consolidated Financial Statements for the years ended December 31, 2000 through December 31, 2004 (the “Restatement Period”) was necessary. As a result, we are filing this Form 10-K/A for the year ended December 31, 2004 to restate our Consolidated Financial Statements as of and for the years ended December 31, 2002, 2003, and 2004.

     The restatements are primarily the result of certain errors made in connection with the calculation of our income tax credits and evaluation of sales tax expenses. The net income during the Restatement Period was overstated by a total of approximately $7.4 million, resulting primarily from an error in the method of computing its research and development income tax credit following a small acquisition in 1998 and from not providing the appropriate liability for sales taxes in certain states.

     The following table summarizes the net impact of the restatement corrections for selected balance sheet line items as of December 31, 2003 and 2004 (in thousands):

																		Total				Total Liabilities
		Total Current								Total Current				Retained				Shareholders				& Shareholders
December 31, 2003		Assets				Total Assets				Liabilities				Earnings				Equity				Equity
As previously reported		$	193,459			$	264,882			$	35,296			$	83,653			$	228,242			$	264,882
Adjustments			2,901				1,726				6,206				(6,932	)			(4,084	)			1,726
As restated		$	196,360			$	266,608			$	41,502			$	76,721			$	224,158			$	266,608

																		Total				Total Liabilities
		Total Current								Total Current				Retained				Shareholders				& Shareholders
December 31, 2004		Assets				Total Assets				Liabilities				Earnings				Equity				Equity
As previously reported		$	183,563			$	290,501			$	44,803			$	105,762			$	244,627			$	290,501
Adjustments			682				(262	)			5,814				(7,407	)			(5,610	)			(262	)
As restated		$	184,245			$	290,239			$	50,617			$	98,355			$	239,017			$	290,239

     The following table summarizes the net impact of the restatement corrections for selected income statement line items for the three years ended December 31, 2002, 2003, and 2004 (in thousands, except per share data):

										Diluted
						Basic Earnings				Earnings per
Year ended December 31, 2002		Net Income				per Share				Share
As previously reported		$	25,196			$	0.88			$	0.83
Adjustments			(1,591	)			(0.06	)			(0.05	)
As restated		$	23,605			$	0.82			$	0.78

										Diluted
						Basic Earnings				Earnings per
Year ended December 31, 2003		Net Income				per Share				Share
As previously reported		$	21,845			$	0.74			$	0.71
Adjustments			(1,264	)			(0.04	)			(0.04	)
As restated		$	20,581			$	0.70			$	0.67

										Diluted
						Basic Earnings				Earnings per
Year ended December 31, 2004		Net Income				per Share				Share
As previously reported		$	22,109			$	0.74			$	0.71
Adjustments			(475	)			(0.02	)			(0.01	)
As restated		$	21,634			$	0.72			$	0.70

     For further details on the restatement adjustments, see Note 2 to the restated Consolidated Financial Statements in Item 8.

     Pursuant to the Public Company Accounting Oversight Board Standards and following a further review and examination of the Company’s internal controls, the management has determined that a material weakness existed in the Company’s internal controls with respect to processes surrounding the calculation of the income tax provision and the accrual for sales taxes. See Item 9A “Controls and Procedures —Management’s Report on Internal Control over Financial Reporting” for further information regarding our reassessment of material weaknesses in internal control over financial reporting.

Results of Operations

Overview

     Over the past several years, our primary goal has been and continues to be to expand of our position as a leading provider of supply chain execution and optimization solutions by delivering integrated, modular solutions to our customers. With the addition and integration of new products resulting from the acquisitions completed during 2002, 2003 and 2004, as discussed above, along with the synchronized release of new versions of our product suite with enhanced functionality, we were able to accomplish continued revenue growth.

     During 2004, we continued to experience the effects of a weak spending environment for information technology in the United States and Europe, in the form of delayed and cancelled buying decisions by customers for our software, services and hardware, deferrals by customers of service engagements previously scheduled and pressure by our customers and competitors to discount our offerings. We believe that a deterioration in the current business climates or continued delay in capital spending within the United States and/or other geographic regions in which we operate, principally the United Kingdom and continental Europe, could have a material adverse impact on our future operations.

     In 2005, we plan to continue to enhance our solutions, expand globally and further develop our sales and marketing, including strategic alliances and indirect sales channels. Our success could be limited by several factors, including spending on information technology, the timely release of quality new products and releases, continued market acceptance of our solutions and the introduction of new products by existing or new competitors.

     On December 31, 2002, we acquired certain assets of Logistics.com, Inc. for a cash payment of approximately $21.3 million. The acquisition has been accounted for under the purchase method of accounting; thus the results of operations reflect the incremental effect beginning January 1, 2003. $1.5 million of the purchase price was allocated to acquired in-process research and development. Values assigned to the acquired in-process research and development (“IPRD”) were determined using the income approach. To determine the value of the IPRD, we considered, among other factors, the state of development of each project, the time and costs required to complete each project, expected income and associated risks, which included the inherent difficulties and uncertainties in completing the project and achieving technological feasibility and risks related to the viability of and potential changes in future target markets. This analysis resulted in amounts assigned to IPRD for projects that had not yet reached technological feasibility and do not have alternative future uses.

Revenue

		Year Ended								Year Ended								Year Ended
		December 31,				% Change				December 31,				% Change				December 31,
		2002				2002 to 2003				2003				2003 to 2004				2004
Software and hosting fees		$	40,233				7	%		$	43,229				15	%		$	49,886
Percentage of total revenues			23	%							22	%							23	%
Services			110,516				17	%			129,320				9	%			141,492
Percentage of total revenues			63	%							66	%							66	%
Hardware and other			22,675				3	%			23,417				1	%			23,541
Percentage of total revenues			13	%							12	%							11	%
Recovery relating to bankrupt customer			2,297				*				848				*				—
Total revenue		$	175,721				12	%		$	196,814				9	%		$	214,919

     Our revenue consists of fees generated from the licensing and hosting of software; fees from professional services, customer support services and software enhancement subscriptions; and sales of complementary radio frequency and computer equipment, which are considered non-strategic. We believe our revenue growth in the last two years is attributable to several factors, including, among others, increased sales of our expanded product suite, geographic expansion, our market leadership positions as to breadth of product offerings and financial stability and a compelling return on investment proposition for our customers.

     Software and hosting fees. The increase in software and hosting fees from 2002 to 2003 was due to sales of newer products, hosting fees and funded development, relating primarily to the TMS products obtained through the acquisition of Logistics.com. Sales of our solution groups other than our warehouse management solution group increased by $10.9 million, or 166%, from 2002 to 2003, while sales of our warehouse management solution group decreased by $7.9 million, or 24%, from 2002 to 2003. The increase from 2003 to 2004 was attributable to an increase of $2.8 million, or 11%, in sales of our warehouse management solution group and an increase of $3.9 million, or 22%, for all other solution groups. Sales outside of North America also impacted the increase from 2003 to 2004 as sales increased from 18% of total software and hosting fees in 2003 to 28% in 2004.

     Services revenue. The increases in services revenue from 2002 to 2003 and 2003 to 2004 were principally due to: (i) increases of 14% and 13% in 2003 and 2004, respectively, in the number of active engagements required to implement the increased amount of software sold and to upgrade existing customers to more current versions of our offerings; and (ii) renewals of customer support services and software enhancement subscription agreements on a growing installed base. Revenue from software enhancement subscription agreements increased by 30% and 20% during 2003 and 2004, respectively. During the economic downturn, we have experienced some pricing pressures with regard to our services. We believe that the pricing pressures are attributable to global macro-economic conditions and competitive pressures. Our services revenue growth has been and will likely continue to be affected by the mix of products sold. The individual engagements involving our newer products, including TMS, RFID and TPM, typically require less implementation services; however, the number of engagements continue to grow.

     Hardware and other. Sales of hardware are non-strategic and largely dependent upon customer-specific desires. Sales of hardware decreased $0.4 million, or 2%, from approximately $17.3 million in 2002 to approximately $16.9 million in 2003 and decreased an additional $0.4 million, or 2%, to approximately $16.5 million in 2004. The decreases in hardware sales from 2002 to 2003 and 2003 to 2004 are attributable to customers’ desires in the current macro-economic environment to buy hardware from other suppliers offering greater discounts, combined with increased sales of our optimization and transportation products, which require less hardware than our core warehouse management products. As described in the Notes to Consolidated Financial Statements, reimbursements for out-of-pocket expenses are required to be classified as revenue and are included in hardware and other revenue. For 2002, 2003 and 2004, reimbursements by customers for out-of-pocket expenses were approximately $5.4 million, $6.5 million and $7.0 million, respectively.

     Recovery relating to bankrupt customer. On January 22, 2002, a significant customer for 2001 filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. As a result of the filing, the uncertainties around the bankruptcy proceedings and the ultimate timing of payment, we recorded an allowance of $4.3 million in 2001 to effectively defer revenues arising in the fourth quarter of 2001 from the significant customer, but unpaid at the time of the bankruptcy declaration. We recorded a recovery of approximately $2.3 million of the receivable in the fourth quarter of 2002. Upon receiving the final cash settlement in June 2003, subsequent to the significant customer emerging from bankruptcy, we recovered an additional $848,000 of the receivable during the second quarter of 2003. The recoveries were recorded as separate revenue line items in the Consolidated Statements of Income and reductions to the allowance for doubtful accounts in the Consolidated Balance Sheets during the respective quarters.

Costs and Expenses

		Year Ended								Year Ended								Year Ended
		December 31,				% Change				December 31,				% Change				December 31,
		2002				2002 to 2003				2003				2003 to 2004				2004
Cost of software and hosting fees		$	1,927				132	%		$	4,470				(9	%)		$	4,085
Percentage of software and hosting fees			5	%							10	%							8	%
Amortization of acquired developed technology			1,500				33	%			1,999				4	%			2,079
Percentage of software and hosting fees			4	%							5	%							4	%
Cost of services			46,611				16	%			54,218				21	%			65,853
Percentage of services revenues			42	%							42	%							47	%
Cost of hardware and other			19,027				6	%			20,123				0	%			20,071
Percentage of hardware and other revenues			84	%							86	%							85	%
Research and development			20,780				30	%			26,982				7	%			28,822
Percentage of total revenues			12	%							14	%							13	%
Sales and marketing			26,413				18	%			31,200				9	%			34,049
Percentage of total revenues			15	%							16	%							16	%
General and administrative – (restated)			22,136				9	%			24,117				11	%			26,855
Percentage of total revenues			13	%							12	%							12	%
Amortization of acquisition-related intangibles			272				427	%			1,433				4	%			1,496
Percentage of total revenues			0	%							1	%							1	%
In-process research and development and acquisition-related charges			1,470				*				885				*				—
Restructuring charge			—				*				893				*				—

     Cost of Software and Hosting Fees. Cost of software and hosting fees consists of the costs associated with software reproduction; hosting services; funded development; media, packaging and delivery, documentation and other related costs; royalties on third-party software sold with or as part of our products; and the amortization of capitalized research and development costs. The increase in cost of software fees, as a percent of software and hosting fees and in absolute dollars, in 2003 is principally attributable to the costs associated with hosting certain of our software solutions, which was approximately $1.7 million in 2003. As discussed above, we did not offer hosting services during 2002. In addition, sales of our open systems products as a percentage of total revenue from all products sold, increased from approximately 50% in 2002 to approximately 80% in 2003 which resulted in higher royalties paid to third parties during 2003. The decrease in cost of software fees, as a percentage of software and hosting fees and in absolute dollars, in 2004 is attributable to lower telecommunication costs associated with hosting certain of our software solutions and lower amortization expense. There was approximately $300,000 of amortization expense in 2003 associated with capitalized development costs, which were fully amortized by the end of 2003.

     Amortization of Acquired Developed Technology. Amortization of acquired developed technology increased from $1.5 million in 2002 to $2.0 million in 2003 to $2.1 million in 2004. The increases were the result of the acquisitions of Logistics.com in December 2002, ReturnCentral in June 2003, Streamsoft in October 2003 and Avere in January 2004.

     Cost of Services. Cost of services consists primarily of salaries and other personnel-related expenses of employees dedicated to professional and technical services and customer support services. The increases in cost of services from 2002 to 2003 and 2003 to 2004 were principally due to increases in salary-related costs resulting from: (i) increases of 11% and 19%, respectively, in the number of personnel dedicated to the delivery of professional and technical services; and (ii) annual compensation increases. The decrease in the services gross margin from 58% in 2002 and 2003 to 53.5% during 2004 was attributable to the shift in product mix to open systems, fixed price contracts, including unusually high costs associated with the implementation for one particularly challenging customer, and increased costs due to international expansion and training. The implementation of our warehouse management open systems products is more costly than the implementation of our legacy warehouse management product, the iSeries or AS400, due to the lower maturity level of the product and limited experience of the services

personnel and integration requirements with multiple third party hardware and software products. Due to the shift towards open systems sales and less implementation services on our other products outside of warehouse management, we do not anticipate our services gross margin to return to the 2002 and 2003 levels, although some improvement is anticipated.

     Cost of Hardware and other. Cost of hardware decreased from approximately $13.6 million in 2002 and 2003 to approximately $13.1 million in 2004 as a direct result of lower sales of hardware. Cost of hardware and other includes out-of-pocket expenses to be reimbursed by customers of approximately $5.4 million, $6.5 million and $7.0 million for 2002, 2003 and 2004, respectively. The increase in reimbursed out-of-pocket expenses is due to increased travel related to the increase in services projects.

     Research and Development. Research and development expenses primarily consist of salaries and other personnel-related costs for personnel involved in our research and development activities. The increases in research and development expenses from 2002 to 2003 and 2003 to 2004 are principally attributable to: (i) increases in the number of full-time and contracted personnel dedicated to our ongoing research and development activities; (ii) the expansion of our offshore development center in India, which was formed in 2002; and (iii) annual compensation increases. Domestic research and development personnel increased by approximately 11% from the end of 2002 to the end of 2003 and 4% from the end of 2003 to the end of 2004. The number of personnel related to our offshore development center increased from 32 at December 31, 2002 to 164 at December 31, 2003 to 279 at December 31, 2004. Our principal research and development activities in 2004 focused on the expansion and integration of new products and the synchronized product release, which included expanded product functionality, interoperability and testing.

     Computer software development costs are charged to research and development expense until technological feasibility is established, after which remaining software production costs are capitalized. We have defined technological feasibility as the point in time at which we have a detailed program design or a working model of the related product, depending upon the type of development effort. For the years ended December 31, 2002, 2003 and 2004, we capitalized no research and development costs because the costs between the attainment of technological feasibility for the related software product through the date of general release were insignificant.

     Sales and Marketing. Sales and marketing expenses include salaries, commissions, travel and other personnel-related costs of sales and marketing personnel and the costs of our marketing and alliance programs and related activities. The increases in sales and marketing expenses from 2002 to 2003 and 2003 to 2004 are principally attributable to: (i) an increase in salary-related costs resulting from a 9% increase in the average number of international and domestic sales and marketing personnel in 2003 compared to 2002 and no increase in 2004 compared to 2003; (ii) greater incentive compensation paid on 7% and 15% higher license and hosting fees in 2003 over 2002 and 2004 over 2003, respectively; and (iii) continued global expansion of our sales and marketing programs.

     General and Administrative. General and administrative expenses consist primarily of salaries and other personnel-related costs of executive, financial, human resources, information technology and administrative personnel, as well as facilities, depreciation, legal, insurance, accounting and other administrative expenses. The increases in general and administrative expenses from 2002 to 2003 and 2003 to 2004 were principally attributable to increases in salary-related costs from increases of approximately 16% each year in the average number of general and administrative personnel, primarily from our international expansion, and increased audit and outside consulting costs associated with Sarbanes-Oxley compliance. The increases in general and administrative expenses from 2002 to 2003 and 2003 to 2004 were partially offset by decreases in the amount of expense recorded to provide for sales taxes on consulting and maintenance services performed in those years by our employees for our customers where the collectibility of those taxes from our customers is uncertain. During 2002 and 2003, we recorded sales tax expense of approximately $1.2 million and $30,000, respectively, and in 2004, we recorded a reduction in sales tax expense of approximately $191,000. The sales tax expense decreased as a result of the expiration of certain state sales tax statutes, which resulted in the reversal of previously recorded sales tax liabilities. Depreciation expense is included in general and administrative expenses and was $6.3 million, $7.6 million and $7.2 million during 2002, 2003 and 2004, respectively.

     Amortization of Acquisition-Related Intangibles. We have recorded goodwill and other acquisition-related intangible assets as part of the purchase accounting associated with various acquisitions, including the acquisitions of Logistics.com in December 2002, ReturnCentral in June 2003, Streamsoft in October 2003, Avere in January 2004, and eebiznet in July 2004. The increase in the amortization of acquisition-related intangibles is the result of amortization of intangible assets with finite lives that were purchased as part of the various acquisitions. Effective January 1, 2002, we adopted SFAS No. 142, which requires that goodwill and certain intangible assets no longer be amortized to earnings, but instead be tested for impairment at least annually.

     In-Process Research and Development and Acquisition-Related Charges. On December 31, 2002, we acquired certain assets of Logistics.com, Inc. from Internet Capital Group for a cash payment of approximately $21.3 million. The acquisition was accounted for under the purchase method of accounting. The purchase price was allocated to net assets acquired of $1.2 million, acquired in-process research and development of $1.5 million, acquired developed technology of $1.5 million, and other intangible assets of $17.1 million.

     During the third quarter of 2003, we recorded expenses of $885,000 relating to fees incurred in connection with two potential acquisitions that we decided not to consummate. The acquisition-related charges are presented as a separate line item in the Consolidated Statements of Income and consist primarily of legal, accounting and travel expenses associated with the two transactions.

     Restructuring Charge. During the second quarter of 2003, we recorded a restructuring charge of $893,000 relating to an internal reorganization. The reorganization more closely aligned our implementation teams and customer support organization with our technical teams. The charge consisted primarily of severance payments. Approximately $857,000 was paid prior to December 31, 2003 and the remaining $36,000 was and paid out in January 2004.

		Year Ended								Year Ended								Year Ended
		December 31,				% Change				December 31,				% Change				December 31,
		2002				2002 to 2003				2003				2003 to 2004				2004
Income from operations (restated)		$	35,585				(14	%)		$	30,494				4	%		$	31,609
Percentage of total revenues			20	%							15	%							15	%
Other income, net			2,801				(2	%)			2,746				19	%			3,257
Percentage of total revenues			2	%							1	%							2	%
Income tax provision (restated)			14,781				(14	%)			12,659				5	%			13,232
Percentage of income before income taxes			39	%							38	%							38	%

     Income from Operations. The decrease in operating income from 2002 to 2003 was attributable to a lower margin on our software fees resulting from our hosting services, a $1.5 million decrease in the amount recovered relating to the bankrupt customer and an overall increase in operating expenses from the continued investment in global expansion initiatives and the further development of our product suite. Operating income for 2002 reflects a recovery relating to the bankrupt customer totaling $2.3 million; a charge for in-process research and development totaling $1.5 million associated with the acquisition of Logistics.com, $1.2 million of sales tax expense on consulting and maintenance services performed for customers and non-cash, acquisition-related intangible asset amortization totaling $1.8 million. Operating income for 2003 reflects a recovery relating to the bankrupt customer totaling $0.8 million; acquisition-related expenses of $0.9 million; a restructuring charge of $0.9 million; and non-cash, acquisition-related intangible asset amortization totaling $3.4 million. The increase in operating income from 2003 to 2004 resulted from the growth in higher margin software fees. Operating income for 2004 reflects acquisition-related intangible asset amortization totaling $3.6 million.

     Other Income, Net. Other income, net includes interest income and interest expense and foreign currency gains and losses. Interest income decreased from $2.1 million in 2002 to $1.5 million in 2003 due to an overall decline in market interest rates, and increased to $2.4 million in 2004 due to an overall increase in market interest rates along with an increase in the cash available to invest. The weighted-average interest rate on investment securities at December 31, 2002 was approximately 1.4%, as compared to 1.1% at December 31, 2003 and 2.2% at December 31, 2004. Interest expense was $147,000 in 2002, $13,000 in 2003, and $26,000 in 2004. We recorded net foreign currency gains of $0.8 million in 2002, $1.3 million in 2003, and $0.9 million in 2004. The foreign

currency gains resulted from gains on intercompany transactions denominated in U.S. dollars with subsidiaries due to the weakening of the U.S. dollar relative to other foreign currencies, primarily the British Pound and Euro.

     Income Tax Provision. The fluctuation in the income tax provision during 2003 and 2004 is directly attributable to the decrease during 2003 and increase during 2004 of income before income taxes. Our effective income tax rates were 38.5%, 38.1% and 38.0% in 2002, 2003 and 2004, respectively. Our effective income tax rate takes into account the source of taxable income, domestically by state and internationally by country, and available income tax credits. The decrease in the tax rates in 2003 was attributable to an increase in income generated in countries with lower tax rates. The impact of the restatement on the 2002, 2003 and 2004 income tax rates was an increase of approximately 2.2%, 3.9% and 1.6% from the previously reported income tax rates. The provisions for income taxes for 2002, 2003 and 2004 do not include the $14.0 million, $14.2 million and $9.7 million of tax benefits realized from stock options exercised during the years, respectively. These tax benefits reduce our income tax liabilities and are included in additional paid-in capital.

Liquidity and Capital Resources

     During 2003 and 2004, we funded our operations primarily through cash generated from operations. As of December 31, 2003, we had $155.4 million in cash, cash equivalents and investments compared to $172.7 million at December 31, 2004.

     Our operating activities provided cash of $45.5 million in 2002, $37.0 million in 2003 and $44.5 million in 2004. Cash from operating activities for 2002 arose principally from a substantial increase in operating income, the income tax benefits arising from exercises of stock options by employees, partially off-set by the increase in accounts receivable. Cash from operating activities for 2003 arose principally from operating income, the income tax benefits arising from exercises of stock options by employees, the increase in deferred revenue and rent, partially off-set by the increase in accounts receivable and decreases in accounts payable and accrued liabilities. Days sales outstanding increased from 65 days at December 31, 2002 to 76 days at December 31, 2003, as a result of slower collections associated with international revenues. Cash from operating activities for 2004 arose principally from operating income, the income tax benefits arising from exercises of stock options by employees, increases in deferred revenue, accounts payable and accrued liabilities, partially off-set by the increase in accounts receivable. Days sales outstanding was 76 days at December 31, 2004, consistent with the prior year.

     Our investing activities used approximately $65.7 million, $77.8 million, and $20.9 million of cash during the years ended December 31, 2002, 2003 and 2004, respectively. During 2002, our principal uses of cash were $21.2 million for the acquisition of Logistics.com, $6.0 million for purchases of capital equipment to support our business and infrastructure and net purchases of $38.6 million in investments. During 2003, our principal uses of cash were for net purchases of $65.3 million in investments, purchases of capital equipment of $7.7 million to support our business and infrastructure, $2.6 million for the acquisitions of ReturnCentral and Streamsoft, and the $2.0 million investment in Alien Technology. During 2004, our principal uses of cash were $7.6 million for purchases of capital equipment to support our business and infrastructure, $1.7 million for acquisitions and net purchases of $11.6 million in investments.

     Our financing activities used cash of approximately $0.9 million in 2002 and $17.9 million in 2004 and provided approximately $9.0 million of cash in 2003. The principal uses of cash for financing activities in 2002 was for the repurchase of 260,000 shares of our common stock for approximately $4.1 million and the repayment of $5.3 million relating to the note payable issued in conjunction with the acquisition of Intrepa, L.L.C. in October 2000. The principal source of cash provided by financing activities in 2003 was $9.3 million in proceeds from the issuance of common stock pursuant to the exercise of stock options. The principal uses of cash for financing activities in 2004 was for repurchase of 885,400 shares of our common stock for approximately $21.8 million, partially off-set by the proceeds from the issuance of common stock pursuant to the exercise of stock options of approximately $4.0 million. The stock purchases in 2002 and 2004 were through open market transactions as part of a publicly-announced repurchase program.

     We believe there are opportunities to grow our business through the acquisition of complementary and synergistic companies, products and technologies. Any material acquisition could result in a decrease to our working capital depending on the amount, timing and nature of the consideration to be paid. Our Board of Directors has approved a stock repurchase program covering up to $20 million of our common stock over a period ending no

later than July 21, 2005, of which $4.2 million in approved but unspent stock repurchases remains at December 31, 2004. In February 2005, our Board of Directors authorized us to purchase up to $20 million of our common stock, including the amount that had previously been approved but not yet spent, over a period ending no later than February 3, 2006. We expect to fund purchases under the program through existing cash, cash equivalents and investments.

     We believe that our existing liquidity and expected cash flows from operations will satisfy our capital requirements for normal operations for the foreseeable future. We believe that existing balances of cash, cash equivalents and short-term investments will be sufficient to meet our working capital and capital expenditure needs at least for the next twelve months, although there can be no assurance that this will be the case.

New Accounting Pronouncements

     In March 2004, the Financial Accounting Standards Board (“FASB”) approved the consensus reached on the EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The accounting provisions of EITF 03-1 were effective for all reporting periods beginning after June 15, 2004, while the disclosure requirements were effective only for annual periods ending after June 15, 2004. The adoption of EITF 03-1 did not have a material effect on the Consolidated Statements of Income, financial position or liquidity.

     In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

     Statement 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued.

     Statement 123(R) permits public companies to adopt its requirements using one of two methods:

     1. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of Statement 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of Statement 123 for all awards granted to employees prior to the effective date of Statement 123(R) that remain unvested on the effective date.

     2. A “modified retrospective” method, which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.

     We will adopt Statement 123(R) beginning on July 1, 2005 and are currently in the process of evaluating which method we will adopt.

     As permitted by Statement 123, we currently account for share-based payments to employees using Opinion 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method will have a significant impact on our results of operations. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income and earnings per share in Note 1. Pro forma net loss for 2002, 2003 and 2004 was $1.4 million, $7.7 million and $9.0 million, respectively, compared to reported net income of $23.6 million, $20.6 million and $21.6 million in 2002, 2003 and 2004, respectively. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This

requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $14.0 million, $14.2 million, and $9.7 million in 2002, 2003 and 2004, respectively.

     In December 2004, the FASB issued FASB Staff Position (“FSP”) Financial Accounting Standard (“FAS”) 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (the Act)” that provides tax relief to U.S. domestic manufacturers. The FSP states that the manufacturers’ deduction provided for under the Act should be accounted for as a special deduction in accordance with Statement 109 rather than as a tax rate reduction. Also in December 2004, the FASB issued FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” addressing accounting and disclosure guidance relating to a company’s repatriation program. The additional disclosures required under this FSP are included in Note 3, Income Taxes. Both FSPs were effective upon issuance.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

     Our principal commitments as of December 31, 2004, consist of obligations under operating leases. We expect to fulfill all of the following commitments from our working capital.

Lease Commitments

     We lease certain of our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2008. Rent expense for these leases aggregated $4.0 million, $5.0 million and $5.9 million during fiscal 2002, 2003 and 2004, respectively.

     The following table summarizes our contractual commitments as of December 31, 2004 (in thousands):

																										After
		Total				2005				2006				2007				2008				2009				2009
Non-cancelable operating leases		$	22,233			$	5,554			$	6,373			$	6,007			$	2,715			$	1,298			$	286
Capital leases		$	304			$	152			$	152			$	—			$	—			$	—			$	—

Indemnifications

     Our sales agreements with customers generally contain infringement indemnity provisions. Under these agreements, we agree to indemnify, defend and hold harmless the customer in connection with patent, copyright or trade secret infringement claims made by third parties with respect to the customer’s authorized use of our products and services. The indemnity provisions generally provide for our control of defense and settlement and cover costs and damages finally awarded against the customer, as well as our modification of the product so it is no longer infringing or, if it cannot be corrected, return of the product for a refund. Our sales agreements with customers sometimes also contain indemnity provisions for death, personal injury or property damage caused by our personnel or contractors in the course of performing services to customers. Under these agreements, we agree to indemnify, defend and hold harmless the customer in connection with death, personal injury and property damage claims made by third parties with respect to actions of our personnel or contractors. The indemnity provisions generally provide for our control of defense and settlement and cover costs and damages finally awarded against the customer. The indemnity obligations contained in sales agreements generally have no specified expiration date and no specified monetary limitation on the amount of award covered. We have not previously incurred costs to settle claims or pay awards under these indemnification obligations. We account for these indemnity obligations in accordance with SFAS No. 5, Accounting for Contingencies, and record a liability for these obligations when a loss is probable and reasonably estimable. We have not recorded any liabilities for these agreements as of December 31, 2004.

     We warrant to our customers that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products to the customer for 90 days after first use of the licensed products, but no more than 24 months after execution of the license agreement. Additionally, we warrant to our customers that our services will be performed consistent with generally accepted industry standards or specific service levels through completion of the agreed upon services. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. However, we have not incurred significant recurring expense under our product or service warranties. As a result,

we believe the estimated fair value of these agreements is nominal. Accordingly, we have no liabilities recorded for these agreements as of December 31, 2004.

Item 8.		Financial Statements and Supplementary Data

     Financial Statements

Index		Page
Management’s Annual Report on Internal Control over Financial Reporting			17
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting			19
Report of Independent Registered Public Accounting Firm on the Consolidated Financial Statements			21
Consolidated Balance Sheets as of December 31, 2003 and 2004 (Restated)			22
Consolidated Statements of Income for the Years Ended December 31, 2002, 2003 and 2004 (Restated)			23
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2002, 2003 and 2004 (Restated)			24
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2002, 2003 and 2004 (Restated)			25
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004 (Restated)			26
Notes to Consolidated Financial Statements (Restated)			27

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (AS REVISED)

     Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

     Under the supervision and with the participation of our management, including our Chief Financial Officer and Principal Accounting Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2004 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2004 due to material weaknesses.

     A material weakness is a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As of December 31, 2004, management has determined that:

	§		The Company’s controls over monitoring vendor-specific objective evidence of fair value for undelivered elements related to sales contracts with multiple revenue elements were insufficient. Although no material misstatements related to revenue recognition were discovered, until this deficiency is remediated, there is a more than remote likelihood that a material misstatement of the annual or interim consolidated financial statements could occur and not be prevented or detected by the Company’s controls in a timely manner.
	§		The Company’s controls over monitoring the completeness and accuracy of the determination and reporting of sales tax payable were insufficient. Specifically, the Company did not have personnel with sufficient skills and experience to enable the Company to properly determine whether certain consulting and maintenance services were considered taxable transactions in certain states. As a result, the Company concluded that its previously reported general and administrative expenses and accrued liabilities had been understated. These control deficiencies resulted in the restatement of the annual consolidated financial statements for 2002, 2003 and 2004 and for each of the quarters in the years ended December 31, 2003 and 2004.
	§		The Company’s review and approval controls over the accounting for income taxes, including the determination and reporting of income taxes payable, deferred income tax assets and liabilities and the related income tax provision were insufficient. Specifically, the Company did not have personnel with sufficient skills and experience to enable the Company to properly consider and apply generally accepted accounting principles for taxes, and ensure that the rationale for certain tax positions was adequately documented and appropriately communicated. Additionally, the Company did not maintain effective controls to review and monitor the accuracy of the components of the income tax provision calculations and the related deferred income taxes and income taxes payable. As a result, the Company concluded that its previously reported income tax provision, current and noncurrent deferred income taxes, and income taxes payable had been misstated. These control deficiencies resulted in the restatement of the annual consolidated financial statements for 2002, 2003 and 2004 and for each of the quarters in the years ended December 31, 2003 and 2004.

     Because of these material weaknesses, we have concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 based on the criteria in the Internal Control – Integrated Framework. We previously had concluded that the Company did not maintain effective internal control over financial reporting because of the material weakness related to insufficient controls over monitoring vendor-specific objective evidence of fair value for undelivered elements related to sales contracts with multiple revenue elements as described above. In connection with the restatement of the Company’s consolidated financial statements as discussed in Note 2 to the consolidated financial statements, we have determined that the additional material weaknesses described above also existed at December 31, 2004. Accordingly, we have revised our annual report on internal control over financial reporting.

     Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, the independent registered public accounting firm who also audited the Company’s consolidated financial statements. Ernst & Young’s attestation report on management’s assessment of the Company’s internal controls over financial reporting appears beginning on page 19 hereof.

		/s/ Steven R. Norton
		Steven R. Norton
		Senior Vice President and Chief Financial Officer
		/s/ Peter F. Sinisgalli
		Peter F. Sinisgalli
		President and Chief Executive Officer

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders
Manhattan Associates, Inc.

     We have audited management’s assessment, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, that Manhattan Associates, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, because of the effect of the material weaknesses identified in management’s assessment and described below, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Manhattan Associates, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:

     The Company’s controls over monitoring vendor-specific objective evidence of fair value for undelivered elements related to sales contracts with multiple revenue elements were insufficient. Although no material misstatements related to revenue recognition were discovered, until this deficiency is remediated, there is a more than remote likelihood that a material misstatement to the annual or interim consolidated financial statements could occur and not be prevented or detected by the Company’s controls in a timely manner.

     The Company’s controls over monitoring the completeness and accuracy of the determination and reporting of sales tax payable were insufficient. Specifically, the Company did not have personnel with sufficient skills and experience to enable the Company to properly determine whether certain consulting and maintenance services were considered taxable transactions in certain states. As a result, the Company concluded that its previously reported general and administrative expenses and accrued liabilities had been understated. These control

deficiencies resulted in the restatement of the annual consolidated financial statements for 2002, 2003 and 2004 and for each of the quarters in the years ended December 31, 2003 and 2004.

     The Company’s review and approval controls over the accounting for income taxes, including the determination and reporting of income taxes payable, deferred income tax assets and liabilities and the related income tax provision were insufficient. Specifically, the Company did not have personnel with sufficient skills and experience to enable the Company to properly consider and apply generally accepted accounting principles for taxes, and ensure that the rationale for certain tax positions was adequately documented and appropriately communicated. Additionally, the Company did not maintain effective controls to review and monitor the accuracy of the components of the income tax provision calculations and the related deferred income taxes and income taxes payable. As a result, the Company concluded that its previously reported income tax provision, current and noncurrent deferred income taxes, and income taxes payable had been misstated. These control deficiencies resulted in the restatement of the annual consolidated financial statements for 2002, 2003 and 2004 and for each of the quarters in the years ended December 31, 2003 and 2004.

     Management previously had concluded that the Company did not maintain effective internal control over financial reporting because of the material weakness related to insufficient controls over monitoring vendor-specific objective evidence of fair value for undelivered elements related to sales contracts with multiple revenue elements as described above. In connection with the restatement of the Company’s consolidated financial statements as discussed in Note 2 to the consolidated financial statements, management has determined that the additional material weaknesses described above also existed at December 31, 2004. As a result, management has revised its assessment to include these additional material weaknesses in their conclusion that the Company’s internal control over financial reporting was not effective as of December 31, 2004. Accordingly, we have revised our annual report on internal control over financial reporting to include a description of these additional material weaknesses.

     These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements (as restated), and this report does not affect our report dated March 16, 2005, except for Note 2 as to which the date is February 28, 2006, on those consolidated financial statements (as restated).

     In our opinion, management’s assessment that Manhattan Associates, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO control criteria. Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Manhattan Associates, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on the COSO control criteria.

		/s/ ERNST & YOUNG LLP

Atlanta, Georgia
March 16, 2005, except for the effect of the material
weaknesses described in the seventh, eighth, and ninth
paragraphs above, as to which the date is February 28, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON THE CONSOLIDATED FINANCIAL STATEMENTS

The Board of Directors and Shareholders
Manhattan Associates, Inc. and Subsidiaries

     We have audited the accompanying consolidated balance sheets of Manhattan Associates, Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2004 (as restated), and the related consolidated statements of income, shareholders’ equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2004 (as restated). Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2003 and 2004 (as restated), and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 (as restated), in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

     The consolidated financial statements as of December 31, 2003 and 2004 and for each of the three years in the period ended December 31, 2004 have been restated as discussed in Note 2.

     We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2005, except for the effect of the material weaknesses described in the seventh, eighth, and ninth paragraphs in that report, as to which the date is February 28, 2006, expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

		/s/ ERNST & YOUNG LLP

Atlanta, Georgia
March 16, 2005, except for
Note 2, as to which the date is February 28, 2006

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (RESTATED)
(In thousands, except share and per share data)

		December 31,
		2003				2004
ASSETS
Current assets:
Cash and cash equivalents		$	31,407			$	37,429
Short-term investments			114,549				88,794
Accounts receivable, net of a $3,181 and $4,171 allowance for doubtful accounts in 2003 and 2004, respectively			40,790				45,996
Deferred income taxes			4,987				4,939
Refundable income taxes			—				776
Prepaid expenses and other current assets			4,627				6,311
Total current assets			196,360				184,245
Property and equipment, net			13,015				13,598
Long-term investments			9,447				46,433
Acquisition-related intangible assets, net			10,942				8,320
Goodwill, net			31,688				32,469
Deferred income taxes			2,935				2,639
Other assets			2,221				2,535
Total assets		$	266,608			$	290,239
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	5,235			$	6,800
Accrued compensation and benefits			6,702				6,639
Accrued liabilities			10,376				12,647
Current portion of capital lease obligations			132				139
Income taxes payable			917				1,479
Deferred rent			203				203
Deferred revenue			17,937				22,710
Total current liabilities			41,502				50,617
Long-term portion of capital lease obligations			288				148
Deferred rent			660				457
Commitments and contingencies (see footnote 6)
Shareholders’ equity:
Preferred stock, no par value; 20,000,000 shares authorized, no shares issued or outstanding in 2003 or 2004			—				—
Common stock, $.01 par value; 100,000,000 shares authorized, 30,086,164 shares issued and outstanding in 2003 and 29,580,724 shares issued and outstanding in 2004			301				296
Additional paid-in-capital			146,614				139,871
Retained earnings			76,721				98,355
Accumulated other comprehensive income			720				882
Deferred compensation			(198	)			(387	)
Total shareholders’ equity			224,158				239,017
Total liabilities and shareholders’ equity		$	266,608			$	290,239

The accompanying notes are an integral part of these Consolidated Balance Sheets.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (RESTATED)
(In thousands, except per share data)

		Year Ended December 31,
		2002				2003				2004
Revenue:
Software and hosting fees		$	40,233			$	43,229			$	49,886
Services			110,516				129,320				141,492
Hardware and other			22,675				23,417				23,541
Recovery relating to bankrupt customer			2,297				848				—
Total revenue			175,721				196,814				214,919
Costs and expenses:
Cost of software and hosting fees			1,927				4,470				4,085
Amortization of acquired developed technology			1,500				1,999				2,079
Cost of services			46,611				54,218				65,853
Cost of hardware and other			19,027				20,123				20,071
Research and development			20,780				26,982				28,822
Sales and marketing			26,413				31,200				34,049
General and administrative			22,136				24,117				26,855
In-process research and development and other acquisition-related charges			1,470				885				—
Restructuring charge			—				893				—
Amortization of acquisition-related intangibles			272				1,433				1,496
Total operating expenses			140,136				166,320				183,310
Income from operations			35,585				30,494				31,609
Interest income			2,098				1,503				2,383
Interest expense			(147	)			(13	)			(26	)
Other income, net			850				1,256				900
Income before income taxes			38,386				33,240				34,866
Income tax provision			14,781				12,659				13,232
Net income		$	23,605			$	20,581			$	21,634
Basic net income per share		$	0.82			$	0.70			$	0.72
Diluted net income per share		$	0.78			$	0.67			$	0.70
Weighted average shares:
Basic			28,653				29,532				30,056
Diluted			30,451				30,882				31,067

The accompanying notes are an integral part of these Consolidated Statements of Income.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (RESTATED)
(In thousands, except share data)

																		Accumulated
																		Other
										Additional								Comprehensive								Total
		Common Stock								Paid-In				Retained				Income				Deferred				Shareholders’
		Shares				Amount				Capital				Earnings				(Loss)				Compensation				Equity
Balance, December 31, 2001			27,719,753			$	277			$	104,445			$	32,535			$	(25	)		$	(105	)		$	137,127
Cancellation of common stock options			—				—				(5	)			—				—				5				—
Exercise of common stock options			1,571,354				16				8,620				—				—				—				8,636
Buyback of Manhattan common stock			(260,000	)			(3	)			(4,107	)			—				—				—				(4,110	)
Tax benefit from stock options exercised			—				—				14,024				—				—				—				14,024
Amortization of deferred compensation			—				—				—				—				—				58				58
Foreign currency translation adjustment			—				—				—				—				306				—				306
Unrealized loss on investments			—				—				—				—				(28	)			—				(28	)
Net income			—				—				—				23,605				—				—				23,605
Balance, December 31, 2002			29,031,107				290				122,977				56,140				253				(42	)			179,618
Cancellation of common stock options			—				—				(24	)			—				—				24				—
Exercise of common stock options			1,046,948				11				9,259				—				—				—				9,270
Issuance of restricted Stock			8,109				—				232				—				—				(232	)			—
Tax benefit from stock options exercised			—				—				14,170				—				—				—				14,170
Amortization of deferred compensation			—				—				—				—				—				52				52
Foreign currency translation adjustment			—				—				—				—				482				—				482
Unrealized loss on investments			—				—				—				—				(15	)			—				(15	)
Net income			—				—				—				20,581				—				—				20,581
Balance, December 31, 2003			30,086,164				301				146,614				76,721				720				(198	)			224,158
Exercise of common stock options			334,157				3				4,036				—				—				—				4,039
Issuance of restricted Stock			45,803				1				1,289				—				—				(1,290	)			—
Buyback of Manhattan common stock			(885,400	)			(9	)			(21,754	)			—				—				—				(21,763	)
Tax benefit from stock options exercised			—				—				9,686				—				—				—				9,686
Amortization of deferred compensation			—				—				—				—				—				1,101				1,101
Foreign currency translation adjustment			—				—				—				—				421				—				421
Unrealized loss on investments			—				—				—				—				(259	)			—				(259	)
Net income			—				—				—				21,634				—				—				21,634
Balance, December 31, 2004			29,580,724			$	296			$	139,871			$	98,355			$	882			$	(387	)		$	239,017

The accompanying notes are an integral part of these Consolidated Statements of Shareholders’ Equity.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (RESTATED)
(In thousands)

		Year Ended December 31,
		2002				2003				2004
Net income		$	23,605			$	20,581			$	21,634
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of tax expense of $174, $248, and $222 in 2002, 2003 and 2004, respectively			306				482				421
Unrealized loss on investments, net of tax benefit of $16, $8, and $136 in 2002, 2003 and 2004, respectively			(28	)			(15	)			(259	)
Other comprehensive income			278				467				162
Comprehensive income		$	23,883			$	21,048			$	21,796

The accompanying notes are an integral part of these Consolidated Statements of Comprehensive Income.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
(In thousands)

		Year Ended December 31,
		2002				2003				2004
Cash flows from operating activities:
Net income		$	23,605			$	20,581			$	21,634
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			6,801				7,982				7,207
Amortization of acquired developed technology and acquisition-related intangibles			1,772				3,432				3,575
Stock compensation			58				52				1,101
Loss (gain) on disposal of equipment			(8	)			—				42
Unrealized foreign currency gain			(520	)			(281	)			(643	)
Acquired in-process research and development			1,470				—				—
Tax benefit of options exercised			14,024				14,170				9,686
Deferred income taxes			(1,081	)			(586	)			286
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net			(3,685	)			(6,814	)			(4,018	)
Other assets			1,437				(1,345	)			(1,878	)
Accounts payable			(2,237	)			(1,750	)			1,413
Accrued liabilities			176				(628	)			1,898
Income taxes			3,166				(1,048	)			(175	)
Deferred rent			—				863				(203	)
Deferred revenue			468				2,367				4,556
Net cash provided by operating activities			45,446				36,995				44,481
Cash flows from investing activities:
Purchases of property and equipment			(5,990	)			(7,733	)			(7,572	)
Purchases of investments			(114,728	)			(609,078	)			(1,095,608	)
Maturities and sales of investments			76,151				543,751				1,083,982
Payments in connection with the investment in Alien Technologies			—				(2,000	)			—
Payments in connection with various acquisitions, net of cash acquired (see footnote 7)			(21,163	)			(2,750	)			(1,698	)
Net cash used in investing activities			(65,730	)			(77,810	)			(20,896	)
Cash flows from financing activities:
Repayment of note payable			(5,250	)			—				—
Payment of capital lease obligations			(191	)			(234	)			(133	)
Purchase of Manhattan common stock			(4,110	)			—				(21,763	)
Proceeds from issuance of common stock from option exercises			8,636				9,270				4,039
Net cash provided by (used in) financing activities			(915	)			9,036				(17,857	)
Foreign currency impact on cash			334				22				294
Increase (decrease) in cash and cash equivalents			(20,865	)			(31,757	)			6,022
Cash and cash equivalents, beginning of year			84,029				63,164				31,407
Cash and cash equivalents, end of year		$	63,164			$	31,407			$	37,429
Supplemental cash flow disclosures:
Cash paid for interest		$	248			$	14			$	26
Cash paid (refund received) for income taxes		$	(2,478	)		$	163			$	2,816
Non-cash transaction:
Issuance of restricted stock		$	—			$	232			$	1,290

The accompanying notes are an integral part of these Consolidated Statements of Cash Flows.

MANHATTAN ASSOCIATES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)

December 31, 2002, 2003 and 2004

1. Organization and Summary of Significant Accounting Policies

Organization and Business

     Manhattan Associates, Inc. (“Manhattan” or the “Company”) is a provider of technology-based solutions to improve supply chain effectiveness and efficiencies across the supply chain. The Company’s solutions are designed to optimize the receipt, storage, assembly and distribution of inventory and the management of equipment and personnel within a distribution center, enhance the management of transportation costs and transportation providers, and improve the management of trading partners. The Company’s solutions consist of software, including, the licensing or hosting of a comprehensive suite of robust and modular software products; services, including design, configuration, implementation and training services, plus customer support services and software enhancements subscriptions; and hardware.

     The Company’s operations are in North America, Europe and Asia/Pacific. Its European operations are conducted through its wholly-owned subsidiaries, Manhattan Associates Limited, Manhattan Associates Europe B.V., Manhattan France SARL, and Manhattan Associates GmbH, in the United Kingdom, the Netherlands, France, and Germany, respectively. The Company’s Asia/Pacific operations are conducted through its wholly-owned subsidiaries, Manhattan Associates Pty Ltd., Manhattan Associates KK, Manhattan Associates Software (Shanghai), Co. Ltd., Manhattan Associates Software Pte Ltd., and Manhattan Associates (India) Development Centre Private Limited in Australia, Japan, China, Singapore, and India, respectively. The Company occasionally sells its products and services in other countries, such as countries in Latin America, through its direct sales channel as well as various reseller channels.

Principles of Consolidation and Foreign Currency Translation

     The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

     The financial statements of foreign subsidiaries have been translated into United States dollars in accordance with Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 52, Foreign Currency Translation. Revenues and expenses from international operations were denominated in the respective local currencies and translated using the average monthly exchange rates for the year. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date and the effect of changes in exchange rates from year to year are disclosed as a separate component of shareholders’ equity and comprehensive income.

Summary of Significant Accounting Policies

     Cash and Cash Equivalents

     The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash or cash equivalents.

1. Organization and Summary of Significant Accounting Policies (continued)

     Concentrations of Credit Risk

     Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, short- and long-term investments and accounts receivable. The Company maintains cash and cash equivalents and short- and long-term investments with various financial institutions. The Company’s sales are primarily to companies located in the United States, Europe and Asia. The Company performs periodic credit evaluations of its customers’ financial condition and does not require collateral. Accounts receivable are due principally from large U.S., European and Asia Pacific companies under stated contract terms. Accounts receivable as of December 31, 2003 for the United States, Europe and Asia Pacific companies were $31.1 million, $9.3 million and $0.4 million, respectively. Accounts receivable as of December 31, 2004 for the United States, Europe and Asia Pacific companies were $32.3 million, $11.0 million and $2.7 million, respectively. The Company provides for estimated uncollectible amounts and credit losses at the time of sale.

     The Company’s top five customers in aggregate accounted for 16%, 16% and 14% of total revenue for each of the years ended December 31, 2002, 2003, and 2004, respectively. No single customer accounted for more than 10% of revenue in the years ended December 31, 2002, 2003, and 2004. On January 22, 2002, a significant customer for 2001 filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code. As a result of the filing, the uncertainties around the bankruptcy proceedings and the ultimate timing of payment, we recorded an allowance of $4.3 million in 2001 to effectively defer revenues arising in the fourth quarter of 2001 from the significant customer, but unpaid at the time of the bankruptcy declaration. The allowance included approximately $2.3 million of software fees, $1.6 million of fees for professional services and $0.4 million of hardware. In September 2002, the United States Bankruptcy Court for the Northern District of Illinois Eastern Division authorized the significant customer’s request to assume the software license, services, support and enhancement agreement. With the appeals process completed in October 2002, the Company recovered approximately $2.3 million of the receivable during the fourth quarter of 2002. Upon receiving the final cash settlement in June 2003, subsequent to the significant customer emerging from bankruptcy, the Company recovered an additional $848,000 of the receivable during the second quarter of 2003. The recoveries were recorded as separate revenue line items in the Consolidated Statements of Income and reductions to the allowance for doubtful accounts in the Consolidated Balance Sheets during the respective quarters.

     Investments

     The Company’s investments in marketable securities consist of debt instruments of the U.S. Treasury, U.S. government agencies, state and local government agencies and corporate commercial paper. These investments are categorized as available-for-sale securities and recorded at fair market value, as defined by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Investments with original maturities of 90 days or less are classified as cash equivalents; investments with original maturities of greater than 90 days but less than one year are classified as short-term investments; and those with original maturities of greater than one year are classified as long-term investments. The long-term investments consist of debt instruments of U.S. government agencies and mature after one year through five years. The Company holds investments in Auction Rate Securities, which have original maturities greater than one year, but which have auctions to reset the yield every 7 to 35 days. The Company has classified these assets as short-term investments. Unrealized holding gains and losses are reflected as a net amount in a separate component of shareholders’ equity until realized. For the purposes of computing realized gains and losses, cost is identified on a specific identification basis.

1. Organization and Summary of Significant Accounting Policies (continued)

     The following is a summary of the available-for-sale securities (in thousands):

						Unrealized				Unrealized				Market				Cash and				Short-term				Long-term
December 31, 2003		Cost				gains				losses				Value				Equivalents				Investments				Investments
Investments:
U.S. government obligations		$	25,823			$	14			$	9			$	25,828			$	13,150			$	4,231			$	8,447
State and local obligations			110,909				—				—				110,909				—				109,909				1,000
U.S. corporate commercial paper			12,580				—				—				12,580				12,171				409				—
Total		$	149,312			$	14			$	9			$	149,317			$	25,321			$	114,549			$	9,447

						Unrealized				Unrealized				Market				Cash and				Short-term				Long-term
December 31, 2004		Cost				gains				losses				Value				Equivalents				Investments				Investments
Investments:
U.S. government obligations		$	7,659			$	—			$	16			$	7,643			$	—			$	—			$	7,643
State and local obligations			87,450				—				1				87,449				—				85,949				1,500
U.S. corporate commercial paper			66,568				—				373				66,195				26,060				2,845				37,290
Total		$	161,677			$	—			$	390			$	161,287			$	26,060			$	88,794			$	46,433

     As of December 31, 2004, $38.1 million, $35.7 million, $0 and $87.5 million of the Company’s investments mature within 1 year, after 1 year through 5 years, after 5 years through 10 years and after 10 years, respectively.

     On July 11, 2003, the Company made a cash investment of $2 million in Alien Technology Corp. (“Alien”), a provider of ultra-low cost radio frequency identification (RFID) tags and hardware. The investment represents approximately a 1.5% ownership interest in the privately-held corporation. The Company’s maximum exposure to loss as a result of its involvement with Alien is its investment of $2 million. The investment has been accounted for under the cost method, and is included in “Other Assets” on the Consolidated Balance Sheets. The fair value of this investment is not estimated as there were no identified events or changes in circumstances that had a significant adverse effect on the fair value of the investment.

     Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates include the allowance for doubtful accounts, which is based upon an evaluation of historical amounts written-off, the Company’s customers’ ability to pay and general economic conditions; the useful lives of intangible assets; self insurance accruals; the recoverability or impairment of intangible asset values; and the Company’s effective income tax rate and deferred tax assets, which are based upon the Company’s expectations of future taxable income, allowable deductions, and projected tax credits. Actual results could differ from these estimates.

     Fair Value of Financial Instruments

     The carrying values of cash, accounts receivable, accounts payable, and other financial instruments included in the accompanying Consolidated Balance Sheets approximate their fair values principally due to the short-term maturities of these instruments. Unrealized gains and losses on investments are included as a separate component of “Accumulated other comprehensive income”, net of any related tax effect, in the Consolidated Balance Sheets.

1. Organization and Summary of Significant Accounting Policies (continued)

     Risks Associated with Single Business Line, Technological Advances, and Foreign Operations

     The Company currently derives a substantial portion of its revenues from sales of its software and related services and hardware. The markets for supply chain execution are subject to rapid technological change, changing customer needs, frequent new product introductions, and evolving industry standards that may render existing products and services obsolete. As a result, the Company’s position in these markets could be eroded rapidly by unforeseen changes in customer requirements for application features, functions, and technologies. The Company’s growth and future operating results will depend, in part, upon its ability to enhance existing applications and develop and introduce new applications that meet changing customer requirements that respond to competitive products and that achieve market acceptance. Any factor adversely affecting the markets for supply chain execution solutions could have an adverse effect on the Company’s business, financial condition, and results of operations.

     The Company’s international business is subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, the future results could be materially adversely impacted by changes in these or other factors. The Company recognized foreign exchange rate gains of approximately $830,000 in 2002, $1,283,000 in 2003 and $927,000 in 2004, classified in “Other income, net” on the Consolidated Statements of Income.

     Revenue Recognition

     The Company’s revenue consists of revenues from the licensing and hosting of software; fees from consulting, implementation and training services (collectively, “professional services”), plus customer support services and software enhancement subscriptions; and sales of hardware.

     The Company recognizes software license revenue under Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”), as amended by Statement of Position No. 98-9, “Software Revenue Recognition, With Respect to Certain Transactions” (“SOP 98-9”), specifically when the following criteria are met: (1) a signed contract is obtained; (2) delivery of the product has occurred; (3) the license fee is fixed or determinable; and (4) collectibility is probable. SOP 98-9 requires recognition of revenue using the “residual method” when (1) there is vendor-specific objective evidence of the fair values of all undelivered elements in a multiple-element arrangement that is not accounted for using long-term contract accounting; (2) vendor-specific objective evidence of fair value does not exist for one or more of the delivered elements in the arrangement; and (3) all revenue-recognition criteria in SOP 97-2, other than the requirement for vendor-specific objective evidence of the fair value of each delivered element of the arrangement are satisfied. For those contracts that contain significant customization or modifications, license revenue is recognized under the percentage of completion method.

     The Company’s services revenue consists of fees generated from professional services, customer support services and software enhancement subscriptions related to the Company’s software products. Fees from professional services performed by the Company are generally billed on an hourly basis, and revenue is recognized as the services are performed. Professional services are sometimes rendered under agreements in which billings are limited to contractual maximums or based upon a fixed-fee for portions of or all of the engagement. Revenue related to fixed-fee based contracts is recognized on a percent complete basis based on the hours incurred. Project losses are provided for in their entirety in the period in which they become known. Revenue related to customer support services and software enhancement subscriptions are generally paid in advance and recognized ratably over the term of the agreement, typically 12 months.

     Hardware revenue is generated from the resale of a variety of hardware products, developed and manufactured by third parties, that are integrated with and complementary to the Company’s software solutions. As part of a complete solution, the Company’s customers frequently purchase hardware from the Company in conjunction with the licensing of software. These products include computer hardware, radio frequency terminals networks, RFID chip readers, bar code printers and scanners, and other peripherals. Hardware revenue is recognized upon shipment to the customer when title passes. The Company generally purchases hardware from its vendors only after receiving an order from a customer. As a result, the Company does not maintain significant hardware inventory.

1. Organization and Summary of Significant Accounting Policies (continued)

     In accordance with the FASB’s Emerging Issues Task Force Issue No. 01-14 (“EITF No. 01-14”), “Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred,” the Company recognizes amounts associated with reimbursements from customers for out-of-pocket expenses as revenue. Such amounts have been classified to hardware and other revenue. The total amount of expense reimbursement recorded to revenue was $5.4 million, $6.5 million and $7.0 million for 2002, 2003 and 2004, respectively.

     Deferred Revenue

     Deferred revenue represents amounts collected prior to having completed performance of professional services, customer support services and software enhancement subscriptions and significant remaining obligations under license agreements. The Company expects to complete such services or obligations within the next twelve months.

     Returns and Allowances

     The Company has not experienced significant returns or warranty claims to date and, as a result, has not recorded a provision for the cost of returns and product warranty claims at December 31, 2003 or 2004.

     The Company records an allowance for doubtful accounts based on the historical experience of write-offs and a detailed assessment of accounts receivable. Additions to the allowance for doubtful accounts generally represent a sales allowance on services revenue, which are recorded to operations as a reduction to services revenue. The total amounts charged to operations were $3.1 million, $3.5 million and $4.0 million for 2002, 2003 and 2004, respectively. In estimating the allowance for doubtful accounts, management considers the age of the accounts receivable, the Company’s historical write-offs, and the credit worthiness of the customer, among others. Should any of these factors change, the estimates made by management will also change accordingly, which could affect the level of the Company’s future provision for doubtful accounts. Uncollectible accounts are written off when it is determined that the specific balance is not collectible.

     Property and Equipment

     Property and equipment consists of furniture, computers, other office equipment, purchased software for internal use, and leasehold improvements recorded at cost. The Company depreciates the cost of furniture, computers, other office equipment and purchased software on a straight-line basis over their estimated useful lives (three years for computer equipment and software, five years for office equipment, seven years for furniture). Leasehold improvements are depreciated over the lesser of their useful lives or the term of the lease. Included in computer equipment and software are assets under a capital lease of approximately $247,000 as of December 31, 2003 and 2004. Accumulated depreciation relating to the assets under a capital lease was $0 and $82,000 as of December 31, 2003 and 2004, respectively. Depreciation and amortization expense for property and equipment, including assets under a capital lease, for the years ended December 31, 2002, 2003 and 2004 was approximately $6,275,000, $7,639,000 and $7,207,000, respectively, and was included in general and administrative expenses in the Consolidated Statements of Income.

     Property and equipment, at cost, consist of the following (in thousands):

		December 31,
		2003				2004
Computer equipment and software		$	23,624			$	29,198
Furniture and office equipment			7,432				8,221
Leasehold improvements			4,743				5,258
			35,799				42,677
Less accumulated depreciation and amortization			(22,784	)			(29,079	)
		$	13,015			$	13,598