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South Tower | 3877 Fairfax Ridge Road | Fairfax, Virginia 22030

703.460.2500 | 703.460.2599 Fax

www.webMethods.com

October 14, 2005

VIA EDGAR AND FAX

Mr. Brad Skinner

Accounting Branch Chief

Division of Corporation Finance

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

    Re:

    webMethods, Inc.

Form 10-K for the Fiscal Year Ended March 31, 2005

Form 8-K filed August 1, 2005

File No. 1-15681

Dear Mr. Skinner:

We have reviewed the Staff’s comments set forth in its letter dated September 22, 2005 with respect
to the above-referenced filings. Enclosed herewith are the Staff’s comments followed by responses
by webMethods, Inc. (the “Company”).

Form 10-K for the Fiscal Year Ended March 31, 2005

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

Results of Operations

    COMMENT 1:

    You disclose on page 33 that maintenance revenue
increased in fiscal year 2005 primarily due to the
increase in customers licensing your software.
However, we note that license revenue decreased in
fiscal year 2005. Please explain to us how you
experienced an increase in software licensing when
revenue related to such licensing decreased. If the
changes are due to changes in price and or volume,
then you should consider addressing the reasons for
such changes. See Item 303(a)(3)(iii) of Regulation S-K.

RESPONSE:

The Company has carefully reviewed the requirements of Item 303(a)(3)(iii) of Regulation S-K and
believes that its disclosure of its license revenue accurately reflects the Company’s revenue over
this period. The Company licenses its software to its customers primarily on a perpetual basis.
As a result its annual license revenue is not directly related to the cumulative number of
customers who have licensed its software. Because the Company’s license fees are generally
one-time payments for a perpetual license to use its software, the cumulative number of customers
who have licensed the Company’s software at the end of a given fiscal year may increase while its
license revenue for that same fiscal year may remain the same or even decrease

Mr. Brad Skinner

Securities and Exchange Commission

October 14, 2005

Page 2

from prior years. In fiscal year 2005, even though the Company added approximately 145 new
customers who paid license fees and sold additional software to a number of existing customers,
many of the Company’s pre-existing customers were not required to pay additional license fees, yet
still were entitled to use the Company’s software under their licenses.

Separately from paying license fees, the Company’s customers also contract with the Company for
maintenance and support of the software they have licensed from the Company, which provides for
when-and-if-available software upgrades and technical support over a specified period for a
specified maintenance and support fee. Even where customers are no longer required to pay license
fees, customers generally continue to subscribe for maintenance and support with respect to
licensed copies of the Company’s software. As a result, maintenance revenue (unlike license
revenue) increases as the cumulative number of customers licensing the Company’s products
increases. Historically, only a small number of the Company’s customers choose not to renew
maintenance and support for their licensed copies of the Company’s software. Because of this, the
Company experienced an increase in maintenance revenue in fiscal year 2005 due primarily to the
increase in the cumulative number of customers licensing its software and the cumulative effect of
renewals of maintenance and support. In addition, the Company disclosed in its Form 10-K that
“more customers have moved to our 24x7 support plans”, which involve somewhat higher prices than
standard support plans, further increasing the Company’s maintenance revenue.

    COMMENT 2:

    We note that license revenues consistently and significantly declined over the three
reported periods but it appears that you do not address this trend in your results of
operations section. Please tell us how you have considered Item 303(a)(3) of Regulation S-K
and SEC Release No. 33-6835 Section III.B in disclosing the trend of declining license
revenues and all other material trends known to you that may affect your liquidity and results
of your future operations.

RESPONSE:

The Company has carefully reviewed the requirements of Item 303(a)(3) of Regulation S-K and the
guidance provided in Release No. 33-6835 Section III.B with respect to declines in license revenue
in the three most recent fiscal years in connection with its disclosures in its Form 10-K with
respect to license revenue fluctuations. The Company believes its disclosures accurately identify
the factors causing those fluctuations. License revenue decreased in each of the fiscal years
2003, 2004 and 2005 due primarily to the unexpected economic downturn and uncertainty in spending
on information technology, particularly with respect to enterprise software, and the Company
disclosed the effect of that economic downturn and the related uncertainty in spending in
Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 33 in
its Form 10-K.

The Company does not believe there is a currently known trend or identifiable change in demand for
the Company’s software that is reasonably expected to result in a material decrease in the
Company’s license revenue or operating results in the current fiscal year or in future fiscal
years,

Mr. Brad Skinner

Securities and Exchange Commission

October 14, 2005

Page 3

except as described in the Company’s Form 10-K. In that regard, the Company supplementally
advises the Staff that its license revenue in the trailing twelve month period ended June 30, 2005
rose 5% compared to license revenue in the trailing twelve month period ended June 30, 2004.

The Company also considered whether there are any trends, demands, commitments, events or
uncertainties known to its management that are reasonably likely to have a material effect on its
liquidity, financial condition or results of future operations, and the Company does not believe
there are any such trends, demands, commitments, events or uncertainties that are not already
identified in its Form 10-K.

    COMMENT 3:

    It appears that you do not quantify each of the multiple factors that contributed to
material year-to-year changes for each of your operating line items. For example, your
general and administrative expenses increased by $7.2 million in fiscal year 2005 but it does
not appear that you quantify the increase for each of the material cost components (e.g.
internal investigation of the Japanese subsidiary and Sarbanes Oxley compliance) that
contributed to such increases. Please tell us how you considered the requirements of SEC
Release No. 33-6835 Section III.D in quantifying the material year-to-year changes affecting
your operating line items.

RESPONSE:

The Company believes that its disclosure adequately identifies the material cost components that
contributed to material year-to-year changes in operating line items in descending order of
magnitude. In some instances, quantification of those factors was given elsewhere in the Company’s
discussion of operating expenses, such as the cost of the Company’s internal investigation of its
Japanese subsidiary and related costs of more than $2.5 million, which was supplied in the
discussion of operating expenses in fiscal year 2005 on page 35 of its Form 10-K, and not repeated
in the discussion of general and administrative expenses on page 36 of its Form 10-K. The Company
believes that this approach is consistent with SEC Release No. 33-6835 Section III.D.

However, as requested, in future filings the Company will present this information in a more direct
fashion and quantify principal factors contributing to material year-to-year changes in operating
line items, when possible, in order to offer a more complete understanding of material changes in
operating line items. The following is a sample disclosure of our general and administrative
expenses that the Company proposes for its future filings:

General and administrative expense as a percentage of total revenue was ___%,
12.5% and 9% for the fiscal years 2006, 2005 and 2004, respectively. In fiscal year
2006, general and administrative expenses decreased
___ million from fiscal year 2005
to $___ million in fiscal year 2006 due primarily to the elimination of $2.5 million
in costs incurred in 2005 related to our internal investigation of our Japanese
subsidiary and related costs and as a result of a cost reduction of $___
related to ___ in fiscal year 2006. In fiscal year 2005, general and
administrative expense increased $7.2 million from fiscal year 2004 to $25 million.

Mr. Brad Skinner

Securities and Exchange Commission

October 14, 2005

Page 4

Item 8. Financial Statements

Notes to Consolidated Financial Statements

Note 2. Summary of significant accounting policies

Revenue Recognition, page F-10

    COMMENT 4:

    You disclose on pages 7 and 17 that a
significant portion of your sales are secured
through several intermediaries including
distributors and resellers. If material, please
identify any contingencies such as price
protection, rights of return, conditions of
acceptance, warranties, etc., explain the
material terms of such provisions in your
arrangements and describe how these
contingencies affect revenue recognition related
to sales to or through such intermediaries.

RESPONSE:

The Company’s agreements with its distributors and resellers generally do not provide for rights of
return or other contingencies concerning price protection, conditions of acceptance or breach of
warranty. Based on its past experience and the terms of its agreements with resellers and
distributors, the Company believes that such contingencies are immaterial to its revenue and
results of operations. To the extent that any license agreement with a distributor or reseller
contains any of these conditions, in accordance with the Company’s revenue recognition policy, the
Company defers recognition of the revenue associated with such license until these conditions are
resolved. The Company believes that its disclosure in “Revenue Recognition” on page F-10 of its
Form 10-K that “the Company has not experienced significant returns or offered exchanges of its
products” is accurate and applicable to revenue derived from arrangements with resellers and
distributors.

Guarantees and indemnification, page F-12

    COMMENT 5:

    You disclose that you have historically received
only a limited number of requests for
indemnification and you have not been required to
make material payments. Accordingly you have not
recorded a liability related to such indemnification
provisions. However, you made a payment of $2.25
million to settle potential infringement claims on
behalf of five of your customers. In light of this
payment please explain the basis for your disclosure
indicating that indemnifications have not been
material. Also, tell us how you concluded that you
are not required to reserve for estimated future
infringement settlements.

Mr. Brad Skinner

Securities and Exchange Commission

October 14, 2005

Page 5

RESPONSE:

The Company’s payment of $2.25 million to a private company in an intellectual property dispute in
March 2004 was not pursuant to any Company indemnity. Although the private company made claims
against five parties who had licensed the Company’s software, the Company was not a party to those
infringement claims and, in a separate, contemporaneous litigation matter, the private company
conceded that the Company’s products did not infringe the private company’s patent. Further, it
became apparent that the defendants had licensed from third parties other than the Company or
otherwise implemented software that the private company could argue infringed its patent.

For business reasons, including, among others, the potential expense of the Company’s involvement
in various court proceedings, possible impacts on the Company’s existing customer relationships,
the potential impact of the infringement allegations on the Company’s prospective business and
potential impacts of various outcomes of the infringement allegations on the Company’s business,
the Company entered into an agreement with the private company whereby the Company paid the private
company $2.25 million for a license to the patent on behalf of itself and its customers despite the
Company’s belief that its software did not infringe the patent and that its customers held valid
defenses to the private company’s infringement claims.

Therefore, the Company believes that its statement in its Form 10-K is accurate that it “has not
been required to make material payments pursuant to these [indemnification] provisions.” To date,
the Company has not received valid demands for indemnification under the indemnification provisions
in its license agreements with customers and is not currently involved in any litigation in which
it is alleged that its software products infringe third party intellectual property rights that may
justify reserving for estimated future infringement settlements.

Note 8. Income taxes, page F-15

    COMMENT 6:

    We note that you disclose deferred tax assets net of
deferred tax liabilities. Please tell us how you
considered the disclosure requirements of paragraph 43 of
SFAS 109 in segregating total deferred tax assets from
total deferred tax liabilities.

RESPONSE:

In Note 8 on page F-15 of its Form 10-K, the Company disclosed all material components of deferred
tax assets and deferred tax liabilities. Because the valuation allowance reduced the total
deferred tax assets and liabilities to zero in both fiscal years 2004 and 2005, the Company did not
provide subtotals of total deferred tax assets and total deferred tax liabilities.

In future filings, the Company will segregate deferred tax assets and deferred tax liabilities and
provide subtotals of total deferred tax assets and total deferred tax liabilities. The Company
proposes the following sample disclosure as an example for its next filing of Form 10-K:

Mr. Brad Skinner

Securities and Exchange Commission

October 14, 2005

Page 6

    March 31,

    2006

    2005

    (In thousands)

    Deferred tax assets

    Net operating loss carryforwards

    $

    $

    Accrued expenses

    Deferred revenue

    Accounts receivable

    Impairment loss in equity investments

    Property and equipment

    Stock option compensation

    Acquired intangibles

    Research and development credit

    Other

    Total deferred tax assets

    Deferred tax liabilities

    Property and equipment

    Acquired intangibles

    Other

    Total deferred tax liabilities

    Valuation allowance

    Net deferred tax assets

    $
    —

    $
    —

Note 11. Stockholder’s equity, page F-17

    COMMENT 7:

    We note that you entered into a reseller agreement
with i2 Technologies (i2) where you issued 710,000
warrants, as amended, to i2 and in return you will
receive approximately $8.8 million, as amended, in
OEM fees. Please provide us with a comprehensive
analysis of your accounting for this transaction
in accordance with EITF 01-09. In your analysis,
justify the classification of the amortization of
the deferred warrant charge as sales and marketing
expense.

RESPONSE:

The Company’s analysis of the accounting for this transaction was undertaken pursuant to EITF Issue
00-25 (Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s
Products), which was effective at the time we executed the reseller agreement and warrant agreement
between the Company and i2 Technologies, Inc. (“i2”), and applies in our view equally under EITF
Issue 01-09 (Accounting f