SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

COMMISSION FILE NUMBER 000-24677

BINDVIEW DEVELOPMENT CORPORATION

(713) 561-4000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes o  No þ

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes o  No þ

As of December 15, 2004, the Company had 47,807,758 shares of Common Stock, no par value, outstanding.

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BINDVIEW DEVELOPMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands)

See notes to unaudited consolidated financial statements.

1

BINDVIEW DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except per share amounts)

See notes to unaudited consolidated financial statements.

2

BINDVIEW DEVELOPMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)

See notes to unaudited consolidated financial statements.

3

BINDVIEW DEVELOPMENT CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

     The accompanying consolidated financial statements of BindView Development Corporation, a Texas corporation (the “Company” or “BindView”), included herein have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. The Company believes that the presentations and disclosures herein are adequate to make the information not misleading. The consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods. Certain reclassifications have been made to the prior year’s consolidated financial statements to conform with the current year presentation.

     The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K/A, Amendment No. 1 for the year ended December 31, 2003.

Recent Pronouncement

     In March 2004, the FASB issued EITF Issue No. 03-1 (“EITF 03-1”), “The Meaning of Other-Than-Temporary Impairment and Its application to Certain Investments” which provides new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance is issued.

     In December 2004, the FASB issued Statement No. 123R (revised 2004), “Share-Based Payment,” (FAS 123R) that addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. FAS 123R eliminates the ability to account for share-based compensation transactions using the intrinsic method that the Company currently uses and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the consolidated statement of operations. The effective date of FAS 123R is for interim and annual periods beginning after June 15, 2005. The Company is currently assessing the provisions of FAS 123R; however, the standard will have a significant impact on the consolidated statement of operations as the Company will be required to expense the fair value of stock option grants and stock purchases under its employee stock purchase plan.

2. LOSS PER SHARE

     Options to purchase 10.5 million shares of common stock for the three and nine months ended September 30, 2004 and 9.7 million shares of common stock for the three and nine months ended September 30, 2003 were outstanding, but were not included in the computation of diluted loss per share as their inclusion would have been anti-dilutive.

3. STOCK BASED COMPENSATION

     The Company accounts for all stock-based employee compensation plans under the recognition and measurement provisions of APB Opinion 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company’s common shares at the date of the grant over the amount an employee must pay to acquire the common shares. The Company generally grants options at prices equal to the market price of common shares on the date of the grant. However, if options are granted at a price below fair market value, compensation expense is recorded in accordance with the provisions of APB 25. Compensation expense may also be recognized for certain options which are considered variable option grants. Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – an Amendment to FAS 123,” requires companies that continue to account for stock-based compensation in accordance with APB 25 to disclose the effect on net loss and loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation (in thousands, except per share amounts):

4

4. RESTRUCTURING EXPENSES AND ASSET IMPAIRMENTS

     The Company recorded restructuring charges totaling $0.1 million and $0.5 million in the first nine months of 2004 and 2003, respectively. The 2004 charge was primarily attributable to reserves established against rent payments due from the Company’s sublease tenant which occupied its excess office space in Arlington, VA. The $0.5 million charge in 2003 was for the Company’s sales and marketing reorganization plan.

     In January 2003, the Company approved a sales and marketing reorganization plan (the “2003 Restructuring Plan”). The cost of this plan totaled approximately $0.5 million and consisted primarily of (i) involuntary employee separation for approximately 20 employees (a reduction in workforce of approximately 4 percent), (ii) closing the Company’s Netherlands sales office, and (iii) reserves for leasehold abandonment. All actions under the 2003 Restructuring Plan were completed by December 31, 2003.

     In July 2002, the Company approved a restructuring plan to improve operating efficiency and improve sales and marketing productivity (the “2002 Restructuring Plan”). The cost of this plan totaled approximately $1.9 million and consisted primarily of (i) involuntary employee separation for approximately 30 employees (a reduction in workforce of approximately 5 percent), (ii) closing the Company’s Boston development center and certain European sales offices, (iii) reserves for leasehold abandonment, and (iv) various non-personnel related cuts.

     The remaining accrual for the 2002 Restructuring Plan at December 31, 2003 was comprised of the estimated carrying costs for the Company’s remaining excess space in Houston, Texas. During the second quarter of 2004, the Company received letters of intent to sublease the remaining excess space. The Company recorded a $0.1 million adjustment to its restructuring accrual as a result of receiving these letters of intent. The remaining accrual at September 30, 2004 is comprised of the Company’s carrying costs for the remaining space in Houston that are in excess of anticipated sublease payments. Adjustments could be required in future periods if there are significant changes to the terms and conditions of the sublease arrangements.

     The 2002 Restructuring Plan activity from December 31, 2003 to September 30, 2004 was as follows (in thousands):

     In 2001, the Company completed a corporate reorganization and implemented a number of cost-cutting measures to improve operating efficiency and to accelerate our return to profitability (the “2001 Restructuring Plan”). The cost of this plan totaled approximately $6.6 million and consisted primarily of: (i) involuntary employee separation expenses for approximately 160 employees (a reduction in workforce of approximately 21 percent), (ii) downsizing or closing of the Company’s Boston and Arlington development centers and certain European sales offices, (iii) reserves for leasehold abandonment, and (iv) various non-personnel related costs. The restructuring costs included a $1.2 million charge related to asset impairments of leasehold improvements, equipment and other assets of the closed or downsized offices.

     The 2001 Restructuring Plan activity from December 31, 2003 to September 30, 2004 was as follows (in thousands):

5

     The remaining accrual for the 2001 Restructuring Plan consists of excess carrying costs for the Company’s Boston facility lease which expires in December 2004.

5. INVESTMENTS

     The Company’s short-term investments include commercial paper, corporate bonds and certificates of deposits that have original maturities of more than three months and less than one year. These investments are intended to be held to maturity.

6. INCOME TAXES

     The Company continues to provide a full valuation allowance against its deferred tax assets in accordance with Financial Accounting Standard No. 109, “Accounting for Income Taxes”. As in its prior assessments, the Company considered current and previous performance and other relevant factors in determining the sufficiency of its valuation allowance. Objective factors, such as current and previous operating losses, were given substantially more weight than management’s outlook for future profitability. Until such time as a consistent pattern of sufficient profitability is established, no tax benefit will be recognized associated with the Company’s pre-tax accounting losses and a full income tax provision will not be provided on any future pre-tax accounting income.

7. SHAREHOLDERS’ EQUITY

     Under terms of share repurchase programs approved by the Board of Directors for the second and third quarter of 2004, the Company has expended $2.3 million to purchase 0.8 million shares of common stock during the nine months ended September 30, 2004, at an average price per share of $2.87. The Company retired all of the 0.8 million shares of common stock held in treasury as of September 30, 2004.

6

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

     Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements which involve risks and uncertainties. The Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in the “Cautionary Statements” set forth in the Company’s Annual Report on Form 10-K/A, Amendment No. 1 for the year ended December 31, 2003. The following discussion should be read in conjunction with the Company’s consolidated financial statements included with this report and our consolidated financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2003 included in our Annual Report on Form 10-K/A, Amendment No. 1.

Overview

     See discussion under Item 1, “General” in our Annual Report on Form 10-K/A, Amendment No. 1 for the year ended December 31, 2003 for an overview of our business.

Critical Accounting Policies and Estimates

     There have been no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 2004 compared with those disclosed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A, Amendment No. 1 for the year ended December 31, 2003.

Results of Operations

Three Months Ended September 30, 2004 Compared with the Three Months Ended September 30, 2003

     Revenues. Revenues for the current quarter were $17.2 million compared with $15.6 million for the third quarter of 2003. The year-over-year improvement in revenues resulted from a stronger working sales pipeline entering the quarter, improved sales execution and strong demand for our products. License revenues for the third quarter of 2004 were $7.8 million, or 45.6 percent of total revenues, up from $7.4 million, or 47.2 percent of total revenues, in the third quarter of 2003. Services revenues for the third quarter of 2004 were $9.4 million, or 54.4 percent of total revenues, up from $8.2 million, or 52.8 percent of total revenues, in the third quarter of 2003. Services revenues for the third quarter of 2004 were comprised of maintenance revenues of $7.7 million and professional services revenues of $1.7 million, up from $7.0 million in maintenance revenues and $1.2 million in professional services revenues in the third quarter of 2003. The increase in services revenues was primarily due to an increase in our installed customer base and an increased focus on selling value-added consulting services.

     The average sales price for transactions in the third quarter of 2004 was $29 thousand, compared with $27 thousand in the third quarter of 2003 and $28 and $33 thousand in the first and second quarters of 2004, respectively. With respect to large transactions (sales greater than $130 thousand) we closed 25 during the current quarter having an average sales price of approximately $255 thousand, compared with 19 in the third quarter of 2003 having an average sales price of $284 thousand.

     During the third quarter of 2004, revenues from our products for Microsoft-based platforms totaled $11.1 million, an increase of 11 percent over the third quarter of 2003. Revenues from these products accounted for approximately 65 percent of total revenues in the current quarter, up slightly from 64 percent of total revenues for the same quarter in the prior year. License revenues for our Microsoft-related products for the third quarter of 2004 were $5.8 million compared with $5.6 million in the third quarter of 2003. Maintenance revenues for our Microsoft-related products in the third quarter of 2004 were $5.3 million compared with $4.4 million in the third quarter of 2003. We expect revenues from our products and maintenance for Microsoft-based platforms will continue to grow as a percentage of total revenues.

     Revenues from our products for Novell-based platforms for the current quarter were $2.6 million, or 15 percent of total revenues, compared with $3.0 million in the third quarter of 2003, or 20 percent of total revenues.

7

     Consistent with the trend seen in past quarters, total revenues from these products were down year-over-year, reflecting both the maturity and our penetration of the Novell market. License revenues for Novell-based platforms were $0.8 million in the third quarter of 2004 compared with $1.0 million in the third quarter of 2003. Maintenance revenues for Novell-based platforms in the third quarter of 2004 were $1.7 million compared with $2.0 million in the third quarter of 2003. While we expect our Novell revenues will continue to decline in the future, we expect the revenue decline will be modest relative to the declines over the past two years and expect the decline will be offset by higher revenues from our products and maintenance for other platforms.

     Sales of our security focused bv-Control product line accounted for approximately 83 percent of our license revenue in the current quarter, down slightly from 84 percent in the third quarter of 2003. Sales of our system administration focused bv-Admin product line accounted for approximately 13 percent of our license revenue in the third quarter of 2004 compared with 16 percent in the third quarter of 2003. The increase in our bv-Control product line revenues as a percentage of total revenue has increased year-over-year primarily due to the increased demand in the market for software to assist customers with policy compliance and vulnerability management requirements.

     No customer accounted for more than 10 percent of our revenues in the third quarter of 2004 or 2003. Revenues recognized from sales to customers outside North America, primarily in Europe, accounted for approximately 10 percent of total revenues in the current quarter, up from 8 percent in the third quarter of 2003.

     Gross Profit. Gross profit for the current quarter totaled $14.6 million, which was up from $13.5 million in the third quarter of 2003 due to the increase in revenues. Gross margin for the current quarter was 84.7 percent, down from 86.5 percent in the third quarter of 2003. This decline primarily related to a shift in business mix toward services revenues, which have a lower gross margin than license revenues, and an increase in technical support staff to improve the level of support provided to our customer base.

     Gross profit generated from license revenues for the third quarter of 2004 was $7.5 million, compared with $7.2 million for the third quarter of 2003. The gross margin from license revenues for the third quarter of 2004 was 95.0 percent, compared with 98.1 percent for the third quarter of 2003. The decline in gross margin was primarily due to an increase in royalty expenses of $0.3 million over the third quarter of 2003 for royalties on sales of our patch deployment offering under terms of a licensing agreement with the owner of the technology. Excluding these royalty payments and associated license revenues, gross margin from license revenues were 98.6 percent, which is comparable with the third quarter of 2003.

     Gross profit from services revenues for the third quarter of 2004 was $7.1 million, compared with $6.2 million for the third quarter of 2003. Gross margin from services revenues for the third quarter of 2004 was 76.0 percent compared with 76.2 percent for the third quarter of 2003. While we do not track and measure costs of performing services (i.e., technical support, professional services) by product platform (i.e., Microsoft, Novell, etc.), we do not believe there is a material difference in the gross margin by product line.

     Operating Costs and Expenses. Operating costs and expenses for the current quarter totaled $17.2 million, up from $14.7 million for the third quarter of 2003. The increase in operating costs and expenses is primarily due to (i) costs for the production of video-based training materials necessary to augment our existing capabilities and to fulfill the requirements of a multi-million dollar sales opportunity in the fourth quarter of 2004, (ii) severance costs for the elimination of positions in our R&D group, (iii) significant investments in sales and marketing since the third quarter of 2003, (iv) costs related to our planned expansion of our R&D operations in India and (v) and expenses associated with Sarbanes-Oxley compliance.

     Sales and marketing expenses for the current quarter were $9.6 million (55.9 percent of revenues), up from $8.3 million (53.2 percent of revenues) for the third quarter of 2003. The increase in sales and marketing expenses primarily related to investments in areas where we see long-term growth opportunities, specifically our Federal and European operations. We also added personnel to our inside sales force and increased spending on marketing programs to grow our working sales pipeline. As a result of these investments, our personnel related costs increased approximately $0.8 million over the third quarter of 2003. In addition, variable sales compensation expense increased $0.2 million as a result of the increase in revenues in the third quarter of 2004 as compared to the third quarter of 2003. We expect sales and marketing expenses as a percentage of revenues to be lower in the fourth quarter of 2004 as a result of anticipated revenue growth.

8

     Research and development expenses for the current quarter were $5.6 million (32.8 percent of revenues), up from $4.6 million (29.3 percent of revenues) for the third quarter of 2003. This increase related to (i) $0.9 million for the production of video-based training material necessary to augment our existing capabilities and to fulfill the requirements of a multi-million dollar sales opportunity in the fourth quarter of 2004; (ii) $0.2 million of severance costs for the elimination of positions in our R&D group; and (iii) our actions taken to affect the planned expansion of our R&D operations in India to better execute on our product strategy. The remaining costs of the video-based training materials is approximately $0.8 million, which will be incurred in the fourth quarter of 2004. These production costs are expensed as incurred. We estimate an annualized benefit on R&D expenses of approximately $0.8 million as a result of the elimination of R&D positions.

     General and administrative expenses for the current quarter were $1.9 million in both the third quarter of 2004 (11.2 percent of revenues) and 2003 (12.0 percent of revenues). We incurred approximately $0.4 million in external costs in connection with our efforts to comply with Sarbanes-Oxley section 404 during the third quarter of 2004. We anticipate approximately $0.3 million in additional external costs associated with our 404 efforts to be incurred during the fourth quarter of 2004. The increase in general and administrative expenses as a result of Sarbanes-Oxley compliance costs were partially offset by a $0.3 million reduction in our sales tax reserves initially established in 2001. We estimate professional service fees associated with our Latin America investigation (See Item 4-Controls and Procedures) will total $1.0 million during the fourth quarter of 2004, up from our initial estimate of $0.5 million.

     We recorded restructuring charges totaling $0.1 million in the second quarter of 2004 primarily to establish a reserve in connection with our sublease for excess office space in Arlington, VA.

     In January 2003, we approved a sales and marketing reorganization plan (the “2003 Restructuring Plan”). The cost of this plan totaled approximately $0.5 million and consisted primarily of (i) involuntary employee separation for approximately 20 employees (a reduction in workforce of approximately 4 percent), (ii) closing the Company’s Netherlands sales office, and (iii) reserves for leasehold abandonment. All actions under the 2003 Restructuring Plan were completed by December 31, 2003.

     In July 2002, we approved a restructuring plan to improve operating efficiency and improve sales and marketing productivity (the “2002 Restructuring Plan”). The cost of this plan totaled approximately $1.9 million and consisted primarily of (i) involuntary employee separation for approximately 30 employees (a reduction in workforce of approximately 5 percent), (ii) closing the Company’s Boston development center and certain European sales offices, (iii) reserves for leasehold abandonment, and (iv) various non-personnel related cuts.

     The remaining accrual for the 2002 Restructuring Plan at December 31, 2003 was comprised of the estimated carrying costs for our remaining excess space in Houston, Texas. During the second quarter of 2004, we received letters of intent to sublease the remaining excess space. We recorded a $0.1 million adjustment to our restructuring accrual as a result of receiving these letters of intent. The remaining accrual at September 30, 2004 is comprised of our carrying costs for the remaining space in Houston that are in excess of anticipated sublease payments. Adjustments could be required in future periods if there are significant changes to the terms and conditions of the sublease arrangements.

     The 2002 Restructuring Plan activity from December 31, 2003 to September 30, 2004 was as follows (in thousands):

     In 2001, we completed a corporate reorganization and implemented a number of cost-cutting measures to improve operating efficiency and to accelerate our return to profitability (the “2001 Restructuring Plan”). The cost of this plan totaled approximately $6.6 million and consisted primarily of: (i) involuntary employee separation expenses for approximately 160 employees (a reduction in workforce of approximately 21 percent), (ii) downsizing

9

or closing of the Company’s Boston and Arlington development centers and certain European sales offices, (iii) reserves for leasehold abandonment, and (iv) various non-personnel related costs. The restructuring costs included a $1.2 million charge related to asset impairments of leasehold improvements, equipment and other assets of the closed or downsized offices.

     The 2001 Restructuring Plan activity from December 31, 2003 to September 30, 2004 was as follows (in thousands):

     The remaining accrual for the 2001 Restructuring Plan consists of excess carrying costs for the Company’s Boston facility lease which expires in December 2004.

     Provision for Income Taxes. We did not record an income tax provision or benefit for our domestic operations in either the third quarter of 2004 or 2003, as we continue to provide a full valuation allowance against our deferred tax assets in accordance with Financial Accounting Standards No. 109, “Accounting for Income Taxes”. As in our prior assessments, we considered current and previous performance and other relevant factors in determining the sufficiency of our valuation allowance. Objective factors, such as current and previous operating losses, were given substantially more weight than our outlook for future profitability. Until such time as a consistent pattern of sufficient profitability is established, no tax benefit will be recognized associated with the Company’s pre-tax accounting losses and a full income tax provision will not be provided on any future pre-tax accounting income. A provision of $0.1 million was recorded for taxes related to our foreign operations during the third quarter of 2004.

     Net Loss. Due to the factors described above, net loss for the quarter ended September 30, 2004 was $2.6 million compared with $1.1 million for the quarter ended September 30, 2003.

Nine Months Ended September 30, 2004 Compared with the Nine Months Ended September 30, 2003

     Revenues. Revenues for the first nine months of 2004 were $49.9 million compared with $43.9 million for the first nine months of 2003. The year-over-year improvement in revenues resulted from a stronger working sales pipeline entering the year, improved sales execution and strong demand for our products. License revenues for the first nine months of 2004 were $22.4 million, or 44.9 percent of total revenues, up from $19.9 million, or 45.4 percent of total revenues, in the first nine months of 2003. Service revenues for the first nine months of 2004 were $27.5 million, or 55.1 percent of total revenues, up from $24.0 million, or 54.6 percent of total revenues, for the first nine months of 2003. Services revenues for the first nine months of 2004 were comprised of maintenance revenues of $23.0 million and professional services revenues of $4.5 million, up from $20.9 million in maintenance revenues and $3.1 million in professional services revenues in the first nine months of 2003. The increase in services revenues was primarily due to maintenance renewals on an increasing base of licensed customers and an increase in professional services revenues.

     With respect to large transactions (sales greater than $130 thousand) we closed 65 during the first nine months of 2004 having an average sales price of approximately $300 thousand, compared with 49 in the first nine months of 2003 having an average sales price of $280 thousand.

     During the first nine months of 2004, revenues from our products for Microsoft-based platforms totaled $33.6 million, an increase of 15 percent over the first nine months of 2003. Revenues from these products accounted for approximately 67 percent of total revenues in the first nine months of 2004, up from 66 percent of total revenues for the first nine months of the prior year. License revenues for our Microsoft-related products for the first nine months of 2004 were $18.0 million compared with $16.2 million in the first nine months of 2003. Maintenance revenues for our Microsoft-related products in the first nine months of 2004 were $15.5 million compared with $12.9 million in the first nine months of 2003. We expect revenues from our products and maintenance for Microsoft-based platforms will continue to grow as a percentage of total revenues.

10

     Revenues from our products for Novell-based platforms for the first nine months of 2004 were $7.7 million, or 15 percent of total revenues, compared with $8.6 million, or 20 percent of total revenues, in the first nine months of 2003. Consistent with the trend seen in past quarters, total revenues from these products were down year-over-year, reflecting both the maturity and our penetration of the Novell market. License revenues for Novell-based platforms were $2.3 million in both the first nine months of 2004 and 2003. Maintenance revenues for Novell-based platforms in the first nine months of 2004 were $5.4 million compared with $6.3 million in the first nine months of 2003. While we expect our Novell revenues will continue to decline in the future, we expect the revenue decline will be modest relative to the declines over the past two years and expect the decline will be offset by higher revenues from our products and maintenance for other platforms.

     Sales of our security focused bv-Control product line accounted for approximately 85 percent of our license revenue in the first nine months of 2004 compared with 80 percent in the first nine months of 2003. Sales of our system administration focused bv-Admin product line accounted for approximately 14 percent of our license revenue in the first nine months of 2004 compared with 20 percent in the first nine months of 2004. The increase in our bv-Control product line revenues as a percentage of total revenue has increased year-over-year primarily due to the increased demand in the market for software to assist customers with policy compliance and vulnerability management requirements.

     No customer accounted for more than 10 percent of our revenues in the first nine months of 2004 or 2003. Revenues recognized from sales to customers outside North America, primarily in Europe, accounted for approximately 11 percent of total revenues in the first nine months of 2004 up from 10 percent in the first nine months of 2003.

     Gross Profit. Gross profit for the first nine months of 2004 totaled $43.2 million, which was up from $38.5 million in the first nine months of 2003. Gross margin for the first nine months of 2004 was 86.6 percent, down from 87.6 percent in the first nine months of 2003. This decline primarily related to a shift in business mix toward services revenues, which have a lower gross margin than license revenues and an increase in technical support staff to improve the level of support provided to our customer base.

     Operating Costs and Expenses. Operating costs and expenses for the first nine months of 2004 totaled $50.2 million, up from $44.8 million for the first nine months of 2003. Operating costs included restructuring and severance charges of approximately $0.8 million in the first nine months of 2004 and $0.5 million in the first nine months of 2003. Excluding these charges, operating costs and expenses were approximately $4.8 million, or 10.9 percent, higher in the first nine months of 2004 due to significant investments in sales and marketing since the first nine months of 2003, costs related to our planned expansion of our R&D operations in India, production of video-based training material, higher wage and health care costs and expenses associated with Sarbanes-Oxley compliance.

     Sales and marketing expenses for the nine months ended September 30, 2004 were $28.5 million (57.2 percent of revenues), up from $25.3 million (57.6 percent of revenues) for the nine months ended September 30, 2003. The increase in sales and marketing expenses primarily related to investments in areas where we see long-term growth opportunities, specifically our Federal and European operations. We also added personnel to our inside sales force and increased spending on marketing programs to grow our working sales pipeline. As a result of these investments, our personnel related costs increased approximately $2.1 million over the first nine months of 2003. In addition, variable sales compensation expense increased $0.7 million as a result of the increase in revenues for the first nine months of 2004 as compared to the first nine months of 2003. We expect sales and marketing expenses as a percentage of revenues to be lower in the last quarter of 2004 as a result of anticipated revenue growth.

     Research and development expenses for the nine months ended September 30, 2004 were $15.6 million (31.3 percent of revenues), up from $13.4 million (30.4 percent of revenues) for the nine months ended September 30, 2003. This increase related to (i) our actions taken to affect the planned expansion of our R&D operations in India to better execute on our product strategy; (ii) $0.9 million in expense for the production of video-based training materials necessary to augment our existing capabilities and to fulfill the requirements of a multi-million dollar sales opportunity in the fourth quarter of 2004; and (iii) $0.2 million in severance costs related to management changes within R&D. We have incurred $0.7 million in expenses related to our planned expansion of our R&D operations in India for the first nine months of

11

     2004. The remaining costs of the video-based training materials is approximately $0.8 million, which will be incurred in the fourth quarter of 2004. These production costs are expensed as incurred. We incurred $0.5 million in severance costs during the first nine months of 2004 in connection with the elimination of positions in our R&D group. We estimate an annualized benefit on R&D expenses of approximately $1.1 million as a result of the elimination of these positions.

     General and administrative expenses for the nine months ended September 30, 2004 were $5.8 million (11.7 percent of revenues), up from $5.6 million (12.8 percent of revenues) for the nine months ended September 30, 2003. The increase is primarily related to a $0.5 million increase in external costs incurred in connection with our efforts to comply with Sarbanes-Oxley section 404. We anticipate approximately $0.3 million in additional external costs associated with our 404 efforts to be incurred during the fourth quarter of 2004. The increase in general and administrative expenses incurred during the first nine months of 2004 for our Sarbanes-Oxley compliance was partially offset by a $0.3 million reduction in our sales tax reserves initially established in 2001. We estimate professional services fees associated with our Latin America investigation (See Item 4-Controls and Procedures) will total $1.0 million during the fourth quarter of 2004, up from our initial estimate of $0.5 million.

     Provision for Income Taxes. We did not record an income tax provision for our domestic operations in either the first nine months of 2004 or 2003, as we continue to provide a full valuation allowance against our deferred tax assets in accordance with Financial Accounting Standards No. 109, “Accounting for Income Taxes”. As in our prior assessments, we considered current and previous performance and other relevant factors in determining the sufficiency of our valuation allowance. Objective factors, such as current and previous operating losses, were given substantially more weight than our outlook for future profitability. Until such time as a consistent pattern of sufficient profitability is established, no tax benefit will be recognized associated with the Company’s pre-tax accounting losses and a full income tax provision will not be provided on any future pre-tax accounting income. A provision of $0.3 million was recorded for taxes related to our foreign operations during the first nine months of 2004.

     Net Loss. Due to the factors described above, net loss for the nine months ended September 30, 2004 was $6.8 million compared with $6.0 million for the nine months ended September 30, 2003.

Liquidity and Capital Resources

     Our capital requirements have principally related to working capital needs and capital expenditures. These requirements have been met through a combination of issuances of securities and internally generated funds.

     We had cash, cash equivalents and short-term investments of $30.8 million at September 30, 2004 compared with $35.4 million at December 31, 2003.

     Cash flows used in operating activities were $2.0 million in the first nine months of 2004 compared with $2.1 million in the first nine months of 2003. The use of cash in operating activities during the first nine months of 2004 primarily related to $0.8 million in severance costs paid in connection with the elimination of certain positions and $0.7 million paid for video-based training materials.

     Cash flows used in investing activities were $10.9 million in the first nine months of 2004 compared with $1.5 million in the first nine months of 2003. The increase in cash used in investing activities was primarily due to net purchases of $8.5 million in short-term investments during the first nine months of 2004. Capital expenditures for the first nine months of 2004 were $2.4 million compared with $1.5 million for the first nine months of 2003. The increase in capital expenditures primarily relates to approximately $0.8 million in capital expenditures related to our planned expansion of our R&D operations in India.

     Cash flows (used in) provided by financing activities were $(0.2) million in the first nine months of 2004 compared with $0.7 million in the first nine months of 2003. During the first nine months of 2004, we generated proceeds of approximately $2.1 million from the issuance of common stock through our Employee Stock Purchase Plan and employee stock option exercises. We also used $2.3 million in cash to repurchase 0.8 million shares of our common stock at an average price of $2.98 per share. The $0.7 million in cash provided by financing activities during the first nine months of 2003 was primarily from issuances of common stock under our Employee Stock Purchase Plan.

12

     We conduct operations in leased facilities under operating leases expiring at various dates through 2011. The contractual obligations under these lease commitments were comprised of the following as of September 30, 2004:

     Our expected principal uses of cash for the remainder of 2004 are: (i) capital expenditures between $0.2 million and $0.4 million, primarily for computer and software equipment, (ii) working capital requirements, (iii) net payments on operating leases of approximately $1.1 million, and (iv) $1.1 million for payments related to the production of our video-based training materials. We believe there is sufficient cash on hand to meet these cash requirements, as well as our cash requirements for the foreseeable future.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     There have been no material changes since December 31, 2003. See the Company’s Annual Report on Form 10-K/A, Amendment No. 1.

ITEM 4. CONTROLS AND PROCEDURES

     The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of September 30, 2004 (the “Evaluation Date”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective in ensuring that all material information relating to the Company, including its consolidated subsidiaries, required to be filed in this quarterly report have been made known to them in a timely manner. However, as more fully described below in “Revenue Recognition Issues in BindView’s Latin American Operations”, management later determined that the Company’s disclosure controls and procedures were not effective as of September 30, 2004, because the Company had a material weakness in revenue reporting for its Latin American operations.

     There have been no significant changes made during the fiscal quarter ended September 30, 2004 in the Company’s internal controls over financial reporting or in other factors that could significantly affect internal controls over financial reporting. As discussed below, however, we have implemented additional measures to improve our internal controls over financial reporting. These measures took effect after the period covered by this report.

Revenue Recognition Issues in BindView’s Latin American Operations

     In October 2004, as a result of information obtained by the Company in its efforts to collect certain receivables from Latin American resellers, the Company’s Audit Committee commenced an investigation of the Company’s Latin American operations. The Audit Committee retained independent legal counsel and consultants to assist with the investigation. On December 6, 2004, with the investigation substantially complete, the Audit Committee concluded that due to errors with the transactions described below, the Company would restate its financial statements for the year ended December 31, 2003 and the first two quarters of 2004, and also concluded that previously issued financial statements for those periods should no longer be relied upon. These conclusions were set forth in the Form 8-K dated December 6, 2004, and were also discussed with the Company’s independent registered public accounting firm. The Audit Committee investigation was completed on December 8, 2004.

13

     The Company’s previously issued financial statements for the periods referenced above have been restated to correct for an overstatement of approximately $1.0 million in revenues, involving six transactions in Latin America. As a result, the Company’s reported revenues were overstated by $173,000 in the fourth quarter of 2003; $131,000 in the first quarter of 2004; and $698,000 in the second quarter of 2004.

     Revenues for the fourth quarter of 2003 were overstated by $173,000 related to a product return, which certain Company personnel in Latin America knew to have occurred within the contractually allowable return period, but which they did not report to the Company’s accounting department. If this return had been reported in a timely manner to the Company’s accounting department, revenues from this transaction would not have been recognized in the fourth quarter of 2003. Certain personnel in Latin America who knew of the product return also made inaccurate representations as to status of the receivable in response to the on-going collection efforts of the Company’s accounting department.

     Revenues for the first quarter of 2004 were overstated by $131,000. This was comprised of (i) two separate transactions with a single reseller and an end-user customer for which professional services revenues were overstated by $122,000; and (ii) maintenance revenue of $9,000 on the fourth quarter 2003 transaction referred to above. The overstatement of professional services revenues resulted from the recording of revenues based on invalid contracts and statements of work that had been submitted to the Company’s accounting department by certain personnel in Latin America. These documents, certain of which the Company believes were falsified prior to being submitted to its accounting department, purported to show that the Company had entered into an arrangement with a subsidiary of the reseller to provide services to the end-user customer on behalf of the Company.

     Revenues for the second quarter of 2004 were overstated by $698,000, resulting from the recording of three transactions based on invalid documents that had been submitted to the Company’s accounting department by certain personnel in its Latin American operations. These documents, which the Company believes were falsified prior to being submitted to its accounting department, included contracts and professional services statements of work and time sheets that purported to show that valid arrangements supporting the underlying transactions had been entered into with third parties. Certain personnel in Latin America also made inaccurate representations as to status of these receivables in response to the on-going collection efforts of the Company’s accounting department.

     Individuals who the Company believes were culpably involved in these transactions are no longer employed by the Company. The Company has terminated relationships with resellers that it believes may have been culpably involved in these transactions.

     As a result of the investigation into the above matters, the Company has determined that it has a “material weakness” with respect to the reporting of revenues from its Latin American operations. In addition to the actions taken with respect to personnel and resellers, as mentioned above, the Company has also designed and implemented new procedures to improve controls to better ensure revenues are recognized only on transactions that are based on valid arrangements, which meet the Company’s revenue recognition criteria. The significant enhancements to our procedures and controls that have been implemented include:

•

We will obtain signed written representations from each sales and professional services representative, manager, director and vice president prior to finalizing results for a quarterly or annual period and prior to payment of sales commissions or any incentive-based compensation for that period. Generally speaking, these representations state that to the best of the individual's knowledge, (i) he or she has complied with the Company’s Code of Conduct, (ii) the documentation supporting the sales transactions with which he or she was involved is valid, appropriately authorized and complete and (iii) no conditions to any sales transaction have been agreed to with the customer that have not been explicitly stated in the documentation supporting that sales transaction.

•

In geographies where the Company has a limited operating history (e.g. Latin America or any other new geography the Company may enter), payment of commissions will be deferred until collection of accounts receivable has occurred.

14

•

We are assigning non-sales personnel to communicate directly with foreign resellers and end-user customers regarding past due accounts receivable.

•

We have made changes to our reporting structure to provide for more direct communication. These changes include sales operations now reports to our chief operating officer and the head of professional services now reports directly to non-sales management.

•

We have implemented more extensive background and reference checks to be performed on all prospective employees.

•

We have expanded the Company’s disclosure committee to include representations from a broader cross section of departments.

•

We are implementing enhanced pre-close analytical review procedures to identify emerging changes in our business.

     By implementing its planned internal control improvements, the Company expects to remediate this “material weakness”. However, if the Company is unable to (i) demonstrate that its internal controls over financial reporting are designed appropriately and operating effectively for a sufficient period of time, (ii) assert that its internal controls over financial reporting are effective as of December 31, 2004, and (iii) complete its evaluation on a timely enough basis for its independent registered public accounting firm to complete their assessment of the Company’s internal controls over financial reporting by the due date for the Company’s 2004 Annual Report on Form 10-K, the Company will have to report the material weakness in such Form 10-K.

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

15

ITEM 5. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Report, including without limitation, statements regarding the Company’s future financial position, revenue and expense projections, business strategy, planned products, products under development, markets, budgets and plans and objectives of management for future operations, are forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that those expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company’s expectations are disclosed in statements set forth under “Cautionary Statements” in our Annual Report on Form 10-K/A, Amendment No. 1.

ITEM 6. EXHIBITS

(a) Exhibits: The following exhibits are filed with this Quarterly Report of Form 10-Q.

     Exhibits designated by the symbol * are filed with this Quarterly Report on Form 10-Q.

16

SIGNATURE

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

	BINDVIEW DEVELOPMENT CORPORATION
December 20, 2004	By:	/s/ Kevin P. Cohn
		Kevin P. Cohn
		Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)

17

EXHIBIT INDEX

Exhibits designated by the symbol * are filed with this Quarterly Report on Form 10-Q

18