Updated from 7:29 a.m. EDT

Soon after Michael McGrath took the helm of

i2 Technologies

( ITWO) in early March, he held his first conference call with Wall Street analysts. It was not a great success.

Only one analyst showed up, and McGrath was reduced to asking -- and answering -- his own questions.

The veteran executive wasn't surprised. After all, in mid-February, i2, which traded for more than $2,000 an adjusted share during the Internet bubble, was languishing on the pink sheets with a price of 42 cents.

What's more, the Dallas-based software vendor had been forced to restate years of earnings and pay $10 million to settle accusations by the

Securities and Exchange Commission

involving the misstatement of $1 billion in revenue.

"We were in disgrace," McGrath said during an extensive interview. Not only was the shadow of the accounting scandal poisoning the atmosphere, customers also took one look at the debt-heavy balance sheet and ran for cover.

"

SAP

(SAP) - Get Report

salesmen would tell potential customers that we were going out of business. And no one will risk deploying mission-critical applications if they think the vendor won't be there," the CEO said.

i2 sells supply-chain management software used for ordering, planning and analysis -- mission-critical functions by anyone's definition.

Now, six months after that first embarrassing meeting with Wall Street, i2's calls are still sparsely attended -- only six sell-side analysts cover the company -- but much has changed. Most notably the share price.

The stock, now back on the

Nasdaq

, closed Thursday at $22.92 a share, about $1.50 below its 52-week high. The company is significantly smaller. Unlike his predecessors, McGrath was willing to concede that i2 was too large, and he trimmed the workforce by about 15%, a cut that included managers as well as the rank and file.

Additionally, on a GAAP basis, the company earned a profit of $31.5 million, or $1.66 per diluted share compared with a net of $11.9 million and EPS of 62 cents a share the year before.

As for McGrath, who left a cushy retirement on the coast of Maine to run i2, the 56-year-old CEO is getting high marks from the few analysts who are paying attention.

"We like this stock because we believe

McGrath is turning around the business and finally unlocking i2's valuable intellectual property and customer-relationship assets," says JMP Securities analyst Patrick Walravens, who was one of the first -- if not

the

first -- sell-sider to support the stock and whose firm has no investment-banking relationship with i2.

But hold on to those checkbooks. This is not your feel-good, Cinderella recovery story. i2 is back, to be sure, but all is not what it seems.

Stock price

. Yes, it's way up. But it a took a 25-for-1 reverse split in February to pull it out of the penny-stock zone. At that point, hedge fund operators noticed that i2's convertible debentures were selling at a deep discount. So they bought them and shorted the stock as a hedge.

As the bonds gained value, says Martin Schutz of Hochfeld Independent Research Group, the hedge funds sold the bonds and covered their short positions, giving the stock a significant boost.

How much of the appreciation was attributable to the hedge fund maneuvers and how much to investors deciding the company is a good bet is impossible to determine.

But one thing is certain: Now that the reverse split is history, and the bonds are selling at close to par value, the days of relatively easy gains are over. The stock will rise and fall on the company's fundamentals.

Opaque financial reporting

. "Everyone says they can't understand our financials. And I don't blame them," says McGrath. Among the difficulties is a category on the income statement called "contract revenue."

Simply put, it represents proceeds from deals during the restatement period that may not have been accounted for properly at the time they were executed and booked.

Since the first quarter of 2004, revenue has totaled $576 million. But that included $91.3 million of contract revenue, which the company concedes is old and nonrepeatable. Back it out and the company is left with $484.7 million of "real" revenue over the same period. To be fair, McGrath is quick to say that he thinks the company's revenue line does not reflect the company's current operations, and i2's earnings releases disclose both types of revenue.

Contract revenue, not to be confused with deferred revenue, which represents ongoing business, creates other complications as well. And those won't disappear until the remaining $31.8 million of leftover revenue is finally used up. The oddities on the top line, of course, have a significant impact on the bottom line. i2's GAAP EPS was $1.33 in the second quarter. But backing out contract revenue and a few related complications, the company really earned 33 cents in the quarter on a pro forma basis, according to Walravens.

Schutz's estimate is a bit higher, but both analysts agree that the larger revenue and earnings numbers are of little real use.

McGrath says he hopes to give investors a clean income statement and balance sheet by the end of the year. "I want to do it all at once. Not piecemeal." For now, i2 does not give a pro forma earnings number, but it may in the future, the CEO says.

Also coming soon: restructuring or deferral of the company's $317 million debt due at the end of 2006. The company may go to the capital markets, raise additional equity or use other methods, McGrath says, noting that he was able to eliminate $40 million of the debt earlier this year. His goal is to bring the debt in line with the company's cash balance of $298 million.

Slow Growth and Consolidation

. Despite a big black eye caused by the woeful performance of vendors during the Internet bubble (their products cost too much and did too little) the supply-chain management software market has not disappeared. But it's not growing that fast either.

In 2003, the SCM market totaled about $5.7 billion; in 2004 it rose to $5.8 billion, according to analyst Albert Pang of market researcher IDC. Pang figures that business will pick up in the next few years and is looking for a compound annual growth rate of about 6% through 2009.

Meanwhile, though, the sector is consolidating fast, and pure plays such as i2 and

Manugistics

(MANU) - Get Report

are facing severe competition from giants SAP and

Oracle

(ORCL) - Get Report

.

Although new market-share numbers have not yet been published, AMR Research Analyst Lora Cecere figures that i2 will fall to third place in market share, with SAP on top by the end of this year.

What's driving the market? In part, says Cecere, it's the rapid growth of contract manufacturing, both onshore and offshore. "Companies need much better, much faster planning and management of their supply chains," she says.

And megaretailers such as

Wal-Mart

or

Target

demand lightning responses from vendors, who must shift through mountains of point-of-sales data as they race to get products to the shelves.

Although Cecere is impressed by i2's turnaround so far, she is not convinced that the company will be able to change its DNA fast enough to stave off the challengers.

"Can Mike be successful in driving revenue with the current products? The answer is still open," she says. Cecere notes that i2's product line is ageing and wonders if the company's workforce has the right set of skills.

Walravens is more optimistic. Late last month he reiterated his strong buy on the stock and raised his target price to $28 a share, noting that i2's pro forma operating profit in the second quarter was $15 million, five times his estimate, which in turn was higher than consensus at the time.

"In the end, we believe i2 can become a highly differentiated supply-chain solutions provider with operating margins in the high teens. You have not missed it," he wrote in a note to clients, in which he also warned of the stock's volatility.

There's been some speculation that i2 would be a logical acquisition target for one of its larger rivals, but McGrath says a sale is not on his agenda. "I expect to be a consolidator, not one of the consolidated. We're spending money on the future, not prettying up for a sale."

It will take a while to see if the bull case stands up. i2 is likely to have a seasonally slower third quarter, and it's in the midst of a complex transition from a direct sales force organized along geographical lines, to a consulting model organized by industry verticals.

But if McGrath can deliver on even part of his aggressive growth promises, he's not likely to be so lonely the next time he holds an analyst call.