UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from                     to                    .

Commission File Number 000-26934

Hyperion Solutions Corporation

1344 Crossman Avenue, Sunnyvale, California 94089
(Address of principal executive offices, including zip code)

(408) 744-9500
(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 ü No o

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

As of April 30, 2004, there were 39,002,879 shares of the Registrant’s common stock, $0.001 par value, outstanding.

Hyperion Solutions Corporation

Form 10-Q

“Hyperion,” the Hyperion “H” logo and Hyperion’s product names are trademarks of Hyperion. References to other companies and their products use trademarks owned by the respective companies and are for reference purposes only.

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

See accompanying notes to condensed consolidated financial statements.

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HYPERION SOLUTIONS CORPORATION

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to these rules and regulations. However, management believes that the disclosures are adequate to ensure the information presented is not misleading. The balance sheet at June 30, 2003 has been derived from the audited financial statements, but it does not include all disclosures required by generally accepted accounting principles. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the fiscal year ended June 30, 2003.

In the opinion of management, all adjustments, consisting only of normal recurring items, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year ending June 30, 2004.

2. Significant Accounting Policies

Revenue Recognition

Hyperion derives revenues from licensing its software products and providing maintenance, consulting and training services. Hyperion’s standard software license agreement is a perpetual license to use its products on an end user, concurrent user or central processing unit basis.

Hyperion records revenue from licensing its software products to end users provided there is persuasive evidence of an arrangement, the fee is fixed or determinable, collection is reasonably assured and delivery of the product has occurred, as prescribed by Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition.” For arrangements with multiple elements, and for which vendor specific objective evidence (“VSOE”) of fair value exists for the undelivered elements, revenue is recognized for the delivered elements based upon the residual method in accordance with SOP 98-9, “Modifications of SOP 97-2 with Respect to Certain Transactions.” Amounts billed or payments received in advance of revenue recognition are recorded as deferred revenue.

Maintenance agreements are generally twelve-month prepaid contracts that are recognized ratably over the service period. VSOE of fair value for maintenance is measured by the stated renewal rates included in the agreements.

Customers may also enter into arrangements that are typically on a time and materials basis for consulting and training services. VSOE of fair value for consulting and training services is based upon the standard hourly rate Hyperion charges for such services when sold separately. Training services are generally prepaid prior to rendering the service. Consulting and training revenues are typically recognized as earned. Consulting revenues are generated primarily from implementation services related to the installation of Hyperion’s products. These arrangements are generally accounted for separately from the license revenue because the arrangements qualify as “service transactions” as defined in SOP 97-2. Hyperion’s services are generally not essential to the functionality of the software. Hyperion’s products are fully functional upon delivery of the product and implementation does not require significant modification or alteration. Factors considered in determining whether the revenue should be accounted for separately include, but are not limited to: degree of risk, availability of services from other vendors, timing of payments and impact of milestones or acceptance criteria on the realizability of the software license fee. Payments related to the software product to which the services relate are typically billed independently from the services and, therefore, are not coincident with performance of such services. License agreements generally do not include acceptance provisions. In the infrequent circumstance where an arrangement does not qualify for separate accounting of the license and service elements, license revenue is generally recognized together with the consulting services using the percentage-of-completion method of contract accounting in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Product-Type Contracts” and Accounting Research Bulletin No. 45, “Long-Term Construction-Type Contracts.”

If the fair value of any undelivered element included in a multiple-element arrangement cannot be objectively determined, revenue is deferred until all elements are delivered, services have been performed or until fair value can be objectively determined. License revenue from resellers or distributors is recognized upon sell-through to the end customer. If Hyperion determines that collection of a license fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.

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Accounts Receivable Allowances

Hyperion makes judgments as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices. For those invoices not specifically reviewed, provisions are made at differing rates, based upon the age of the receivable. In determining these provisions, Hyperion analyzes several factors, including: its historical collection experience, customer concentrations, customer credit-worthiness and current economic trends. If the historical data used to calculate the accounts receivable allowances does not reflect Hyperion’s future ability to collect outstanding receivables, Hyperion may record additional provisions for accounts receivable allowances. Hyperion records the provision for accounts receivable allowances in general and administrative expense and as a reduction of revenue in order to match the underlying cause of the provision to the appropriate classification in Hyperion’s statement of operations.

Hyperion’s accounts receivable allowance was $9.3 million at March 31, 2004 and $8.2 million at June 30, 2003. The total provision for accounts receivable allowances was $3.4 million for the three months ended March 31, 2004. Of this amount, $0.4 million was recorded in general and administrative expense and $3.0 million was recorded as a reduction of revenue for the three months ended March 31, 2004. The total provision for accounts receivable allowances was $7.6 million and $5.4 million for the nine months ended March 31, 2004 and 2003, respectively. Of these provisions, $1.3 million and $1.1 million were recorded in general and administrative expense for the nine months ended March 31, 2004 and 2003, respectively, and $6.3 million and $4.3 million were recorded as a reduction of revenue for the nine months ended March 31, 2004 and 2003, respectively.

Net Income Per Share

Net income per share, which is also referred to as earnings per share (“EPS”), is computed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding and potentially dilutive securities outstanding during the period. Potentially dilutive securities include stock options, unvested restricted shares and shares issuable upon conversion of Hyperion’s convertible subordinated notes. Potentially dilutive securities are excluded from the computations of diluted net income per share if their effect would be antidilutive.

The following table sets forth the computations of basic and diluted net income per share (in thousands, except per share data):

For the three and nine months ended March 31, 2004, stock option rights totaling 0.7 million shares and 0.9 million shares of common stock have been excluded from the diluted EPS calculations because their effect would have been antidilutive. For the three and nine months ended March 31, 2003, stock option rights totaling 2.3 million shares and 2.6 million shares, respectively, have been excluded from the diluted EPS calculations because their effect would have been antidilutive.

For the nine months ended March 31, 2004, 0.5 million shares of common stock issuable upon conversion of the convertible subordinated notes have been excluded from the diluted EPS calculations because their effect would have been antidilutive. For the three and nine months ended March 31, 2003, 0.9 million shares and 1.2 million shares of common stock, respectively, issuable upon conversion of the convertible subordinated notes have been excluded from the diluted EPS calculations because their effect would have been antidilutive.

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Stock-Based Compensation

Hyperion accounts for employee stock-based compensation in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS 123, “Accounting for Stock-Based Compensation,” and SFAS 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.” Had Hyperion accounted for employee stock-based compensation based on the estimated grant date fair values, as defined by SFAS 123, Hyperion’s net income and net income per share would have been adjusted to the following pro forma amounts (in thousands, except per share data):

These pro forma amounts may not be representative of the effects for future periods as options vest over several years and additional awards are generally granted each year.

Comprehensive Income

Comprehensive income includes net income, foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. To date, unrealized gains and losses on available-for-sale securities have not been material. The components of accumulated other comprehensive loss are as follows (in thousands):

Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” In general, a variable interest entity (“VIE”) is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE’s activities or is entitled to receive a majority of the VIE’s residual returns or both. The consolidation requirements of FIN 46 are effective immediately for VIEs created after January 31, 2003. The consolidation requirements for older VIEs are effective for financial statements of interim or annual periods beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date of FIN 46 for older VIEs to the end of the first interim or annual period ending after December 15, 2003. Certain of the disclosure requirements are effective for all financial statements issued after January 31, 2003, regardless of when the VIE was established. Hyperion adopted FIN 46 on February 1, 2003 for new entities and on December 31, 2003 for entities created or acquired prior to February 1, 2003. The adoption did not have a material impact on its financial position or results of operations.

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In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 (“EITF 03-06”), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. Hyperion is currently assessing the impact of adopting EITF 03-06 but does not expect it will have a material impact on its financial position or results of operations.

3. Commitments and Contingencies

Guarantees and Indemnifications

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee or indemnification. FIN 45 also requires additional disclosure by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and indemnifications. The initial recognition and measurement provisions of FIN 45 are applicable for guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. Hyperion adopted the recognition and measurement provisions of FIN 45 prospectively to guarantees issued or modified after December 31, 2002, and the adoption did not have a material impact on its financial position or results of operations. The following is a summary of the agreements that Hyperion has determined are within the scope of FIN 45:

As permitted under Delaware law, Hyperion has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at Hyperion’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments Hyperion could be required to make under these indemnification agreements is unlimited; however, Hyperion has a director and officer insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of the insurance policy coverage, Hyperion believes the estimated fair value of these indemnification agreements is minimal. Hyperion has no liabilities recorded for these agreements as of March 31, 2004.

Hyperion includes standard intellectual property indemnification clauses in its software license agreements. Pursuant to these clauses, Hyperion holds harmless and agrees to defend the indemnified party, generally Hyperion’s business partners and customers, in connection with certain patent, copyright or trade secret infringement claims by third parties with respect to Hyperion’s products. The term of the indemnification clauses is generally perpetual any time after execution of the software license agreement. In the event an infringement claim against Hyperion or an indemnified party is successful, Hyperion, at its sole option, agrees to do one of the following: (i) procure for the indemnified party the right to continue use of the software; (ii) provide a modification to the software so that its use becomes non-infringing; (iii) replace the software with software which is substantially similar in functionality and performance; or (iv) refund the residual value of the software license fees paid by the indemnified party for the infringing software. Hyperion believes the estimated fair value of these agreements is minimal. Hyperion has no liabilities recorded for these agreements as of March 31, 2004.

Hyperion generally warrants that its software products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the licensed products to the customer for a period of ninety days following delivery. If necessary, Hyperion would provide for the estimated cost of product warranties based on specific warranty claims and claim history. Hyperion has not incurred significant expense under its product warranties to date and, as a result, Hyperion believes the estimated fair value of these warranties is minimal. Hyperion has no liabilities recorded for these warranties as of March 31, 2004.

Contingencies

On July 11, 1997, Gentia Software filed a request for reexamination of Hyperion’s U.S. Patent No. 5,359,724 (“‘724 patent”) with the United States Patent and Trademark Office (“PTO”) arguing that the ‘724 patent was anticipated and obvious in light of certain prior art references. On September 11, 1997, the PTO granted the request for reexamination. On February 27, 1998, Gentia Software filed with the PTO a request for a second reexamination of the ‘724 patent based on additional prior art references. On May 22, 1998, the PTO granted that request for reexamination, which was later consolidated with the first reexamination. On March 31, 1999, the PTO issued a non-final office action rejecting the claims of the ‘724 patent. Hyperion filed its response to the office action on May 31, 1999. No final office action has been issued by the PTO. Hyperion believes that the outcome of such action will not have a material adverse effect on its financial position, results of operations or cash flows.

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From time to time, in the normal course of business, various claims are made against Hyperion. At this time, in the opinion of management, there are no pending claims the outcome of which is expected to result in a material adverse effect on the financial position, results of operations or cash flows of Hyperion.

4. Business Combination

On October 16, 2003, Hyperion completed its acquisition of Brio Software, Inc., a business intelligence software provider based in Santa Clara, California. Under the terms of the acquisition, Brio stockholders received a combination of 0.109 of a share of Hyperion common stock and $0.363 in cash in exchange for each share of Brio common stock, which resulted in the issuance of 4.2 million shares of Hyperion common stock and $14.0 million in cash to the Brio stockholders. Additionally, Hyperion reserved 1.1 million shares of its common stock for issuance in connection with the Brio stock options assumed in the transaction. Brio’s results of operations have been included in Hyperion’s results since the date of acquisition.

Brio provides business intelligence software with advanced query, reporting and analysis capabilities. Brio’s business intelligence tools supplement the Hyperion platform and complement our Business Performance Management offering. Hyperion expects the acquisition will result in greater integration of business intelligence into the Business Performance Management process.

The aggregate purchase price was approximately $150.1 million, which consisted of approximately $14.0 million in cash, $133.0 million in Hyperion common stock and options, and $3.1 million in acquisition costs, which primarily consist of fees paid for financial advisory, legal, and accounting services. The value of the stock issued to Brio stockholders was based upon the average of the closing prices of one share of Hyperion’s common stock during the five trading days ending July 25, 2003, which was $27.68. The fair value of Hyperion’s stock-based awards issued to employees was estimated using a Black-Scholes option pricing model. The fair value of the stock-based awards was estimated assuming no expected dividends and the following weighted-average assumptions:

The intrinsic value allocated to unvested stock-based awards issued to employees was approximately $7.1 million and has been recorded as deferred stock-based compensation. Deferred stock-based compensation is being amortized over the remaining vesting periods of the awards.

In accordance with SFAS 141, “Business Combinations,” Hyperion allocated the purchase price to tangible assets, intangible assets, in-process research and development, deferred compensation, and liabilities based on their estimated fair values. The excess purchase price over the fair values was recorded as goodwill. The fair value assigned to intangible assets acquired was based on estimates and assumptions determined by management. In accordance with SFAS 142, “Goodwill and Other Intangible Assets,” goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Purchased intangibles with finite lives are amortized on a straight-line basis over their respective useful lives. The total purchase price has initially been allocated as follows (in thousands):

The purchase price allocation is preliminary and a final determination of required purchase accounting adjustments will be made upon the completion of a final analysis of fair values of the assets acquired and liabilities assumed.

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In performing this preliminary purchase price allocation, Hyperion considered, among other factors, its intention for future use of the acquired assets, analyses of historical financial performance and estimates of future performance of Brio’s products. The fair values of intangible assets were estimated using the income approach for capitalized software and maintenance agreements, the royalty savings approach for patents and core technology, and the cost approach for customer contracts and related relationships and value added reseller relationships. The rates utilized to discount the net cash flows to their present values were based upon Hyperion’s weighted average cost of capital and range from 14% to 16%. These discount rates were determined after consideration of Hyperion’s rate of return on debt capital and equity, the weighted average return on invested capital and the risk associated with achieving forecasted sales related to the technology and assets acquired from Brio. Identifiable intangible assets purchased in the Brio acquisition consist of the following (in thousands, except for useful life):

In-process research and development (“IPR&D”) of $2.3 million was expensed in the accompanying condensed consolidated statements of operations because the purchased research and development had no alternative uses and had not reached technological feasibility. The IPR&D relates to the Brio 8 product line. The value assigned to IPR&D was determined utilizing the income approach. The stage of completion for the project was estimated to determine the discount rate to be applied to the valuation of the in-process technology. Based upon the level of completion and the risk associated with the in-process technology, a discount rate of 20% was deemed appropriate for valuing IPR&D.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the combined results of operations of Hyperion and Brio, on a pro forma basis, as though the companies had been combined as of the beginning of each period presented. The impact of the acquisition-related IPR&D charge and restructuring charges recorded in the second quarter of fiscal 2004 have been excluded. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition taken place at the beginning of each period presented. The unaudited pro forma combined statement of operations data for the three months ended March 31, 2004 represent the results of Hyperion for the three months ended March 31, 2004, which include the post-acquisition results of Brio for the full quarter. The unaudited pro forma combined statement of operations data for the nine months ended March 31, 2004 combines (i) the results of Hyperion for the nine months ended March 31, 2004, which include the post-acquisition results of Brio for the period of October 16, 2003 to March 31, 2004 and (ii) the pre-acquisition results of Brio for the period of July 1, 2003 to October 15, 2003. The unaudited pro forma combined statement of operations data for the three and nine months ended March 31, 2003 combine (i) the results of Hyperion for the three and nine months ended March 31, 2003 and (ii) the results of Brio for the three and nine months ended March 31, 2003. The pro forma amounts are as follows (in thousands, except per share amounts):

5. Restructuring Accruals

In connection with the acquisition of Brio in October 2003, management approved and initiated plans to restructure the operations of Hyperion to eliminate certain duplicative activities and reduce the company’s cost structure. Consequently, Hyperion recorded restructuring charges totaling $3.2 million in the three months ended December 31, 2003, of which $3.1 million related to employee severance costs and $0.1 million related to facility closure costs, and recorded an additional $0.2 million of restructuring charges in the three months ended March 31, 2004, substantially all of which related to employee severance costs. These costs were accounted for under SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities” and have been included as a charge to Hyperion’s results of operations. During the three months ended December 31, 2003, Hyperion also recorded a restructuring charge of $0.3 million related to the restructuring activities initiated in June 2001.

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As a result of the acquisition of Brio, Hyperion recorded $33.5 million of restructuring costs in connection with exiting certain pre-acquisition activities of Brio including employee severance costs, facility closure costs, and other costs. Accordingly, these costs have been recognized as a liability assumed in the purchase business combination in accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.”

In June 2001, Hyperion announced a corporate restructuring plan designed to bring costs more in line with revenues and strengthen the financial performance of the business, which resulted in a reduction of the workforce by approximately 300, or 12% of worldwide headcount. Employee groups impacted by the restructuring include personnel involved in corporate services, product business units, sales and customer support. In addition, Hyperion consolidated some of its facilities and exited other facilities. The total restructuring charges recorded in June 2001 were $42.8 million and were accounted for under EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” which was subsequently superseded by SFAS 146.

The following table sets forth the activity in Hyperion’s restructuring accruals, accounted for under SFAS 146 and EITF 94-3, for the nine months ended March 31, 2004, which are included in “Other current liabilities” and “Other liabilities” in the accompanying condensed consolidated balance sheet (in thousands):

The following table sets forth the activity in Hyperion’s restructuring accruals, accounted for under EITF 95-3, for the nine months ended March 31, 2004, which are included in “Accounts payable and accrued expenses,” “Accrued employee compensation and benefits,” and “Other liabilities” in the accompanying condensed consolidated balance sheet (in thousands):

The restructuring costs recorded during the nine months ended March 31, 2004 are based on Hyperion’s restructuring plans that have been committed to by management and are subject to refinement. Any changes to the estimates of executing the currently approved plans of restructuring the pre-acquisition Brio operations will be recorded as an adjustment to goodwill and any changes to the estimated costs of restructuring the pre-acquisition Hyperion operations will be reflected in Hyperion’s results of operations.

6. Debt Redemption

In October 2003, Hyperion’s board of directors authorized the redemption of its outstanding convertible subordinated notes of $50.0 million. The redemption occurred in November 2003 and resulted in the recognition of a loss of $0.9 million, which comprised the 1.286% redemption premium paid as well as the write-off of associated deferred issuance costs.

7. Stock Repurchases

In July 2003, Hyperion’s board of directors authorized the repurchase of up to $125.0 million of its outstanding common stock. Hyperion determined the timing and amount of shares repurchased based upon market conditions and other factors, and used its existing cash, cash equivalents and short-term investments to finance the transactions. During the three months ended March 31, 2004, Hyperion repurchased and retired 1.0 million shares of its common stock for a total cost of $33.0 million. Of this amount, $11.3 million was recorded as a reduction of additional paid-in capital and the remaining $21.7 million was recorded as a reduction of retained earnings. During the nine months ended March 31, 2004, Hyperion repurchased and retired 3.8 million shares of its common stock for a total cost of $124.9 million. Of this amount, $42.2 million was recorded as a reduction of additional paid-in capital and the remaining $82.7 million was recorded as a reduction of retained earnings. This stock repurchase plan was completed during the three months ended March 31, 2004.

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8. Segment and Geographic Information

SFAS 131, “Disclosures about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in a company’s financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Hyperion has identified one industry segment: the development and marketing of business performance management software and related services. This segment operates in three geographic regions: the Americas (United States, Canada and Latin America), EMEA (Europe, Middle East and Africa) and APAC (Asia Pacific). Hyperion’s products are marketed internationally through Hyperion’s direct sales force, independent distributors and application resellers.

Enterprise-wide information is provided in accordance with SFAS 131. Geographic revenue information is primarily based on the ordering location of the customer, and long-lived asset information is based on the physical location of the assets. The following table presents revenues and long-lived assets by geographic region (in thousands):

The following table presents revenues for groups of similar products and services (in thousands):

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

FORWARD-LOOKING STATEMENTS

Certain information contained in this report on Form 10-Q is forward-looking in nature. All statements included in this report on Form 10-Q or made by management of Hyperion Solutions Corporation and its subsidiaries, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Hyperion’s future financial results, operating results, business strategies, projected costs, products, competitive positions and plans and objectives of management for future operations. In some cases, forward-looking statements can be identified by terminology such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “project,” “continue,” or the negative of these terms or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in the section entitled “Factors That May Affect Future Results.” These and many other factors could affect Hyperion’s future financial and operating results, and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Hyperion or on its behalf. Hyperion does not undertake an obligation to update its forward-looking statements to reflect future events or circumstances.

OVERVIEW

Hyperion provides business performance management software that enables companies to translate strategies into plans, monitor execution and provide insight to improve financial and operational performance. We combine a complete set of interoperable applications with a business intelligence platform to support and create business performance management solutions. In addition, we offer support and services from offices in 20 countries and are represented by distributors in an additional 25 countries. We work with over 600 partners to provide specialized solutions to more than 9,000 customer organizations worldwide. Hyperion is headquartered in Sunnyvale, California and employs approximately 2,500 people globally.

RESULTS OF OPERATIONS

We completed our acquisition of Brio Software, Inc. on October 16, 2003. Brio’s results of operations have been included in Hyperion’s results beginning on the date of acquisition. In addition to the incremental revenue streams associated with Brio products and services, our headcount increased by approximately 15% in the second quarter of fiscal 2004 as a result of the acquisition.

REVENUES

Total revenues increased 31% in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 and increased 20% in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003.

The change in foreign currency exchange rates favorably affected total revenues in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 by approximately $6.2 million and favorably affected total revenues in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003 by approximately $16.1 million, in both cases primarily due to the strength of the Euro against the U.S. dollar. Excluding the impact of foreign currency exchange rate changes, total revenues would have increased 26% in the third quarter of fiscal 2004 and would have increased 15% in the first nine months of fiscal 2004, compared to the same periods in fiscal 2003.

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Software Licenses. Software license revenues increased 29% to $65.1 million in the third quarter of fiscal 2004 from $50.4 million in the third quarter of fiscal 2003. While this license revenue growth was predominantly attributable to sales of Hyperion Performance Suite, the former Brio products, we also experienced balanced growth across our broader product portfolio, consisting of our financial applications and core Essbase platform.

Software license revenues increased 15% to $167.9 million in the first nine months of fiscal 2004 from $146.2 million in the first nine months of fiscal 2003. This growth was substantially attributable to sales of Hyperion Performance Suite.

We market our products through our direct sales force and through channel partners. To date, we have generated the majority of our license revenue through our direct sales force, but we continue to focus on complementing our direct sales force with channel partners, which include original equipment manufacturers, value added resellers, system integrators and independent distributors. License revenue from channel partners comprised 29% of total license revenue in the third quarter of fiscal 2004 compared to 30% in the third quarter of fiscal 2003 and comprised 25% of total license revenue in the first nine months of fiscal 2004 compared to 28% for the first nine months of fiscal 2003. The percentage of license revenue derived from our channel partners can fluctuate between periods, as it is sensitive to individual large transactions that are neither predictable nor consistent in size or timing. No single channel partner represented more than 10% of total revenue during the periods presented.

Maintenance and services. Maintenance and services revenue increased 33% in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003, which was comprised of a 33% increase in maintenance revenue and a 31% increase in consulting and training services revenue. Maintenance and services revenue increased 23% in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003, which was comprised of a 24% increase in maintenance revenue and a 21% increase in consulting and training services revenue.

The increases in maintenance revenue in the third quarter and first nine months of fiscal 2004 were primarily attributable to our acquisition of Brio in October 2003 and, to a lesser extent, to year-over-year growth of our installed customer base and improvements in our invoicing and collecting procedures for maintenance renewals, offset slightly by cancelled maintenance contracts. The increases in consulting and training services revenue in the third quarter and first nine months of fiscal 2004 were principally due to our acquisition of Brio in October 2003 and, to a lesser extent, to increased utilization rates in our consulting organization.

COST OF REVENUES

Cost of software license revenue. Cost of software license revenue consists primarily of royalty expenses, amortization of capitalized software development costs, amortization of acquired technologies, and the cost of product packaging and documentation materials. Cost of software license revenues decreased 18% in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 primarily due to a $0.7 million decrease in royalty expense. Cost of software license revenues decreased 8% in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003 also primarily due to a $0.7 million decrease in royalty expense. The decreases in royalty expense in the third quarter and the first nine months of fiscal 2004 compared to the same periods in fiscal 2003 are attributable to different mixes of product sales as well as the termination of our OEM relationship with Crystal Decisions. Partially offsetting the decreases in royalty expenses were slight increases in amortization expense primarily resulting from our acquisitions of Brio in October 2003 and The Alcar Group in April 2003.

Gross margin on software license revenue was 95% for the third quarter of fiscal 2004 compared to 92% for the third quarter of fiscal 2003. Gross margin on software license revenue was 94% for the first nine months of fiscal 2004 compared to 93% for the same period in fiscal 2003.

In the first nine months of fiscal 2004 and 2003, we capitalized $1.2 million and $1.4 million of software product development costs, respectively, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed.” The amounts capitalized relate to localization costs for our software products. Capitalized software product development costs are amortized over the estimated economic life of the products, which is generally three years. The amortization of capitalized product development costs begins upon the general release of the software to customers.

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Cost of maintenance and services revenue. Cost of maintenance and services revenue consists largely of compensation and benefits for support, consulting and training personnel. Cost of maintenance and services revenue increased 16% in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 and increased 9% in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003. The increase in cost of maintenance and services revenue in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 was principally due to a $2.1 million increase in employee expenses and a $2.4 million increase in subcontractor and other external personnel costs, both of which primarily resulted from our acquisition of Brio in October 2003. The increase in cost of maintenance and services revenue in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003 was principally due to a $4.3 million increase in employee expenses and a $4.9 million increase in subcontractor and other external personnel costs, both of which primarily resulted from our acquisition of Brio in October 2003. Maintenance and services headcount grew to 773 employees at March 31, 2004 from 733 employees at March 31, 2003, primarily due to the addition of incremental Brio employees.

Gross margins on maintenance and services revenue were 61% for the third quarter of fiscal 2004 compared to 55% for the third quarter of fiscal 2003. Gross margins on maintenance and services revenue were 61% for the first nine months of fiscal 2004 compared to 56% for the first nine months of fiscal 2003. The increase in gross margins on maintenance and services revenue is primarily due to increased consulting utilization rates combined with increases in maintenance and services revenues.

OPERATING EXPENSES

Sales and marketing. Sales and marketing expense increased 29% to $60.6 million in the third quarter of fiscal 2004 from $46.9 million in the third quarter of fiscal 2003. This increase was mainly due to an $11.1 million increase in employee expenses that resulted primarily from our acquisition of Brio in October 2003 and a higher effective commission rate in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003. Sales and marketing headcount grew to 831 employees at March 31, 2004 from 681 employees at March 31, 2003, primarily due to the addition of incremental Brio employees.

Sales and marketing expense increased 18% to $161.3 million in the first nine months of fiscal 2004 from $136.7 million in the first nine months of fiscal 2003. This increase was mainly due to a $20.0 million increase in employee expenses that resulted primarily from our acquisition of Brio in October 2003 and a higher effective commission rate in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003.

Research and development. Research and development expense increased 42% to $26.3 million in the third quarter of fiscal 2004 from $18.6 million in the third quarter of fiscal 2003. This increase was mainly attributable to a $5.4 million increase in employee expenses that resulted primarily from our acquisition of Brio in October 2003. Research and development headcount grew to 528 employees at March 31, 2004 from 417 employees at March 31, 2003, primarily due to the addition of incremental Brio employees.

Research and development expense increased by 28% to $69.7 million in the first nine months of fiscal 2004 from $54.6 million in the first nine months of fiscal 2003. This increase was primarily attributable to an $11.7 million increase in employee expenses that resulted primarily from our acquisition of Brio in October 2003.

General and administrative. General and administrative expense increased 61% to $16.8 million in the third quarter of fiscal 2004 from $10.4 million in the third quarter of fiscal 2003. This increase was principally due to a $4.2 million increase in employee expenses that resulted from our acquisition of Brio in October 2003. General and administrative headcount grew to 395 employees at March 31, 2004 from 336 employees at March 31, 2003, primarily due to the addition of incremental Brio employees.

General and administrative expense increased 33% to $45.6 million in the first nine months of fiscal 2004 from $34.2 million in the first nine months of fiscal 2003. This increase was principally due to a $7.2 million increase in employee expenses that resulted primarily from our acquisition of Brio in October 2003.

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RESTRUCTURING CHARGES

In connection with our acquisition of Brio in October 2003, management approved and initiated plans to restructure the operations of Hyperion to eliminate certain duplicative activities and reduce the company’s cost structure. Consequently, we recorded restructuring charges totaling $3.2 million in the second quarter of fiscal 2004, of which $3.1 million related to employee severance costs and $0.1 million related to facility closure costs, and recorded an additional $0.2 million of restructuring charges in the third quarter of fiscal 2004, substantially all of which related to employee severance costs. During the second quarter of fiscal 2004, we also recorded a restructuring charge of $0.3 million related to the restructuring activities initiated in June 2001.

During the second quarter of fiscal 2003, we recorded a restructuring charge of $0.6 million related to the restructuring activities initiated in June 2001.

IN-PROCESS RESEARCH AND DEVELOPMENT

During the second quarter of fiscal 2004, in connection with our acquisition of Brio, we recorded a charge of $2.3 million related to the write-off of in-process research and development costs.

INTEREST AND OTHER INCOME

Interest and other income consists primarily of interest earned on cash, cash equivalent and short-term investment balances. Interest and other income decreased 39% in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 and decreased 30% in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003 due to declines in short-term interest rates as well as lower average cash and investment balances. Average cash and investment balances decreased in the third quarter and first nine months of fiscal 2004 compared to the same periods in fiscal 2003 due to the $124.9 million used to repurchase our common shares and the $50.7 million used to redeem our convertible subordinated notes during the first nine months of fiscal 2004.

INTEREST AND OTHER EXPENSE

Interest and other expense consists primarily of interest paid and amortization of deferred issuance costs related to our convertible subordinated notes. Interest and other expense decreased 97% in the third quarter of fiscal 2004 compared to the third quarter of fiscal 2003 and decreased 53% in the first nine months of fiscal 2004 compared to the first nine months of fiscal 2003. During the first and second quarters of fiscal 2003, we repurchased and retired convertible subordinated notes with face values totaling $28.7 million, and, during the second quarter of fiscal 2004, we redeemed the remaining convertible subordinated notes with face values totaling $50.0 million. These repurchases and redemptions significantly contributed to the decrease in interest and other expense in the third quarter and first nine months of fiscal 2004 compared to the third quarter and first nine months of fiscal 2003.

GAIN (LOSS) ON REDEMPTION OF DEBT

During the second quarter of fiscal 2004, we redeemed all of our outstanding convertible subordinated notes, which had face values totaling $50.0 million. This redemption resulted in the recognition of a loss of $0.9 million in the second quarter of fiscal 2004, which comprised the 1.286% redemption premium paid as well as the write-off of associated deferred issuance costs.

During the first and second quarters of fiscal 2003, we repurchased convertible subordinated notes with a face value of $28.7 million for a total cost of approximately $27.9 million, which resulted in the recognition of a gain, net of the write-off of associated deferred issuance costs, of approximately $0.5 million.

INCOME TAX PROVISION

Our effective income tax rate was 37% for the third quarters of fiscal 2004 and 2003. Our effective income tax rate was 39% for the first nine months of fiscal 2004 compared to 37% for the first nine months of fiscal 2003. Excluding the impact of the charge for in-process research and development of $2.3 million, which is not deductible for tax purposes, our effective income tax rate would have been 37% for the first nine months of fiscal 2004.

NET INCOME

We generated net income of $12.7 million, or $0.32 per diluted share, in the third quarter of fiscal 2004 compared to net income of $8.3 million, or $0.23 per diluted share, in the third quarter of fiscal 2003. For the first nine months of fiscal 2004, our net income was $29.0 million, or $0.74 per diluted share, compared to net income of $24.9 million, or $0.71 per diluted share, for the first nine months of fiscal 2003.

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We project total revenues in the fourth quarter of fiscal 2004 to be in the range of $167.0 million to $171.0 million. We expect net income for the fourth quarter of fiscal 2004 to be in the range of $11.9 million to $14.0 million, or $0.29 to $0.34 per diluted share, assuming an effective tax rate of 37% and projected diluted shares outstanding of approximately 41.2 million.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2004, we had $329.1 million in cash and cash equivalents and $9.5 million in short-term investments, consisting primarily of balances in interest-bearing demand deposit accounts, state and municipal bonds, U.S. government and agency obligations and other highly-liquid securities. At March 31, 2004, our working capital was $242.7 million.

In the first nine months of fiscal 2004 and 2003, we generated positive cash flow from operations of $58.7 million and $72.8 million, respectively. In the first nine months of fiscal 2004, our operating cash flow was primarily due to the net income generated during the period and the impact of the non-cash charges reflected in the net income amount such as depreciation and amortization expense, partially offset by decreases in accounts payable, accrued expenses and accrued employee compensation and benefits. In the first nine months of fiscal 2003, our positive operating cash flow was primarily due to the net income generated during the period and the impact of the non-cash charges reflected in the net income amount such as depreciation and amortization expense, as well as a substantial decrease in accounts receivable due to our focus on invoicing and collection process improvements in fiscal 2003. These cash inflows were partially offset by decreases in accounts payable, accrued expenses and accrued employee compensation and benefits.

Net cash provided by investing activities amounted to $0.8 million in the first nine months of fiscal 2004 compared to net cash used in investing activities of $5.6 million in the first nine months of fiscal 2003. The cash provided by investing activities in the first nine months of fiscal 2004 resulted primarily from proceeds from maturities of investments, net of purchases, of $22.9 million, partially offset by purchases of property and equipment of $14.3 million and payments for acquisitions, net of cash acquired, of $6.5 million. In connection with our acquisition of Brio in October 2003, we paid a total of $17.1 million, comprising $14.0 million paid to the Brio stockholders and $3.1 million in acquisition costs paid to various third parties, and acquired Brio’s existing cash balance of $10.6 million. The cash used in investing activities in the first nine months of fiscal 2003 was primarily due to purchases of property and equipment of $13.6 million, partially offset by proceeds from maturities of investments, net of purchases, of $9.2 million.

Net cash used in financing activities was $132.5 million in the first nine months of fiscal 2004 compared to $1.2 million in the first nine months of fiscal 2003. The cash used in financing activities in the first nine months of fiscal 2004 resulted from $50.7 million paid to redeem our remaining outstanding convertible subordinated notes, which was authorized by our board of directors in October 2003, and $124.9 million of repurchases of our common stock, which was authorized by our board in July 2003. These cash outflows were partially offset by $43.1 million of proceeds from the issuance of common stock under our employee stock option and stock purchase plans. The net cash used in financing activities in the first nine months of fiscal 2003 was due to the repurchase of our convertible subordinated notes with face values totaling $28.7 million for a total cost of approximately $27.9 million and the $2.3 million principal payment on our mortgage loan, partially offset by $29.1 million of proceeds from the issuance of common stock under our employee stock option and stock purchase plans.

We intend to fund our capital requirements, as well as our liquidity needs, with existing cash, cash equivalent and short-term investment balances as well as cash generated from future operations, if any. However, capital requirements will depend on many factors, including our rate of revenue growth, market acceptance of our products, the timing and extent of development projects and increases in operating expenses, all of which are subject to uncertainty. We believe that our existing cash, cash equivalent and short-term investment balances, and cash generated from our future operations, if any, will be sufficient to finance our business through at least March 31, 2005. To the extent that existing cash, cash equivalent and short-term investment balances and cash generated by operations are insufficient to fund future activities, we may need to raise additional funds through public or private debt or equity financing. Additional funds may not be available on terms favorable to us or at all. In addition, our ability to generate positive cash flows from operations will be impacted by changes in customer demand and acceptance of our products as well as our ability to manage operating expenses and achieve further operational efficiencies.

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The following table summarizes our contractual obligations as of March 31, 2004 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.

[1]

For the year ended June 30, 2004, the table above includes only those obligations to be settled between April 1, 2004 and June 30, 2004.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” In general, a variable interest entity (“VIE”) is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE’s activities or is entitled to receive a majority of the VIE’s residual returns or both. The consolidation requirements of FIN 46 are effective immediately for VIEs created after January 31, 2003. The consolidation requirements for older VIEs are effective for financial statements of interim or annual periods beginning after June 15, 2003. However, in October 2003, the FASB deferred the effective date of FIN 46 for older VIEs to the end of the first interim or annual period ending after December 15, 2003. Certain of the disclosure requirements are effective for all financial statements issued after January 31, 2003, regardless of when the VIE was established. We adopted FIN 46 on February 1, 2003 for new entities and on December 31, 2003 for entities created or acquired prior to February 1, 2003. The adoption did not have a material impact on our financial position or results of operations.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 (“EITF 03-06”), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. We are currently assessing the impact of adopting EITF 03-06 but do not expect it will have a material impact on our financial position or results of operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

We operate in a very competitive and rapidly changing environment that involves numerous risks, some of which are beyond our control. The following discussion highlights some of these risks.

Product enhancement and new product introductions involve inherent risks.

Hyperion competes in a market characterized by rapid technological advances in hardware and software development, evolving standards in computer hardware and software technology and frequent new product introductions and enhancements. Hyperion continually seeks to expand and refresh its product offerings to include newer features or products, and enter into agreements allowing integration of third-party technology into Hyperion’s products. The introduction of new products or updated versions of continuing products has inherent risks, including, but not limited to:

•

product quality, including the possibility of software defects;

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the fit of the new products and features with the customer’s needs;

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the successful adaptation of third-party technology into Hyperion’s products;

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educating Hyperion’s sales, marketing and consulting personnel to work with the new products and features;

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competition from earlier and more established entrants;

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market acceptance of initial product releases;

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marketing effectiveness; and

•

the accuracy of assumptions about the nature of customer demand.

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Hyperion’s failure to successfully introduce, market and sell new products and technologies, enhance and improve existing products in a timely manner, and properly position and/or price Hyperion’s products, and undetected errors or delays in new products or new versions of a product and/or the failure of anticipated market growth could have a material adverse effect on Hyperion’s business, results of operations or financial position. These risks tend to be greater when newer products, such as Hyperion Performance Suite 8, make up a larger portion of the overall product mix. As more and more of these newer products are deployed, Hyperion’s service and maintenance organizations, along with its partners, will have to rapidly increase their ability to install and service these products, and Hyperion must rapidly improve their ease-of-implementation and ease-of-use. The failure to successfully increase these capacities and make these improvements could result in significantly lower customer satisfaction, which could lead to lower revenues and profits.

Hyperion operates in a very competitive environment.

The markets in which Hyperion competes are intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. Hyperion has experienced, and expects it will continue to experience, vigorous competition from current competitors and new competitors, some of whom may have significantly greater financial, technical, marketing and other resources than Hyperion does. Cognos competes with Hyperion across a wide range of products, offering what they refer to as Corporate Performance Management solutions, as do, generally, the major ERP vendors, including SAP, Microsoft and Oracle. Many other companies compete in specific areas of Hyperion’s business. SAS and PeopleSoft have OLAP products and analytic applications, Business Objects and Cognos have query and reporting products, and numerous smaller vendors offer specific applications that compete with a single Hyperion product. Hyperion expects additional competition as other established and emerging companies, including Microsoft and PeopleSoft, move further into both the application and platform parts of the business performance management software market. This competition could result in price reductions, fewer customer orders, reduced gross margins and loss of market share, any of which would materially adversely affect Hyperion’s business, operating results and financial condition.

If Hyperion is unable to develop new and enhanced products that achieve widespread market acceptance, Hyperion may be unable to recoup product development costs, and Hyperion’s earnings and revenue may decline.

Hyperion’s future success depends on its ability to address the rapidly changing needs of its customers by developing and introducing new products, product updates and services on a timely basis. Hyperion must also extend the operation of its products to new platforms and keep pace with technological developments and emerging industry standards. Hyperion commits substantial resources to developing new software products and services. If the markets for these new products do not develop as anticipated, or demand for Hyperion’s products and services in these markets does not materialize or occurs more slowly than Hyperion expects, Hyperion will have expended substantial resources and capital without realizing sufficient revenue, and Hyperion’s business and operating results could be adversely affected.

Hyperion may face challenges in integrating Brio’s business and, as a result, may not realize the expected benefits of the acquisition and the price of Hyperion common stock may be adversely affected.

Hyperion may not be successful in integrating Brio’s business. Achieving the benefits of the acquisition will depend on many factors, including:

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the successful and timely integration of the products, technology and sales operations of the two companies;

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managing software development activities to define a combined product roadmap, ensure timely development of new products, ensure timely release of new products to market, and the development of efficient integration and migration processes and tools;

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combining product offerings, platforms and technologies quickly and effectively;

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demonstrating to our existing and potential customers that the acquisition will not result in adverse changes in customer service standards or business focus;

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retaining key alliances on attractive terms with partners and suppliers;

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coordinating and integrating sales and marketing efforts to effectively communicate the capabilities of the combined company, cross selling related products to each other’s customers, and managing the combined sales force and distribution channels to avoid channel conflict;

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maintaining employee morale, assimilating key employees and managing an increased number of employees over large geographic distances;

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creating and effectively implementing uniform standards, controls, procedures, policies and information systems; and

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retaining or recruiting key personnel.

The successful execution of these tasks will involve considerable effort and time, especially considering the highly technical and complex nature of each company’s products. Failure to achieve a successful and timely integration of the respective businesses could impair relationships with employees, customers and business partners as a result of the integration of management and other key personnel and the potential disruption of the combined company’s ongoing business and distraction of its management.

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The combined company may not succeed in addressing integration issues or other problems encountered in connection with the acquisition, which could have a material adverse effect on the business, financial condition and results of operations of Hyperion, and on the price of shares of Hyperion common stock. The diversion of the attention of management and any difficulties encountered in the process of combining the companies could cause the disruption of, or a loss of momentum in, the activities of the combined company’s business.

Failure to upgrade older products will adversely affect revenue.

As newer products are introduced by Hyperion, or by its competition, the market’s demand for Hyperion’s older products declines. Declining demand reduces revenue from additional licenses, and reduces maintenance revenue from past purchasers of Hyperion’s software. We must continually upgrade Hyperion’s older products in order for Hyperion’s customers to continue to see value in Hyperion’s maintenance services. If Hyperion is unable to provide continued improvements in functionality, or, alternatively, move customers from Hyperion’s older products to Hyperion’s newer products, declining maintenance and new license revenue from older products could have a material adverse effect on Hyperion’s business.

Hyperion typically has back-ended quarters.

Quarterly revenues and operating results are highly dependent on the volume and timing of the signing of licensing agreements and product deliveries during the quarter, which are difficult to forecast. Significant portions of Hyperion’s quarterly software licensing agreements are concluded in the last month of the fiscal quarter, generally with a concentration of such revenues in the final week of that month. Due to the relatively fixed nature of certain costs, including personnel and facilities expenses, a decline or shortfall in quarterly and/or annual revenues typically results in lower profitability or may result in losses. Prior to the very end of any quarter, Hyperion must rely on Hyperion’s forecasts of revenue for planning, modeling and other purposes. However, forecasts are only estimates and may not correlate to revenues in a particular quarter or over a longer period of time. Consequently, a significant discrepancy between actual results and sales forecasts could cause Hyperion to improperly plan or budget and thereby adversely affect Hyperion’s business or results of operations. Any publicly stated revenue or earnings projections by Hyperion are especially subject to this risk.

A change in pricing or marketing could adversely affect Hyperion’s business.

In an effort to simplify and clarify Hyperion’s product positioning and marketing, Hyperion periodically makes changes to Hyperion’s product pricing or product descriptions. Broadly based changes to pricing or marketing messages could cause customers to change or delay their purchasing decisions in response to such revisions. Additional risks of such changes include delays in transactions as Hyperion’s sales force learns how to deploy the new pricing or convey Hyperion’s new marketing messages and delay or loss of revenues as the competition reacts to the pricing and marketing changes, any of which could have a material adverse effect on Hyperion’s business, results of operations or financial position.

Hyperion may not be able to continue its operational improvements.

As part of Hyperion’s focus on improving its operating margins, Hyperion is driving toward increased efficiencies in Hyperion’s sales force, as well as Hyperion’s services, product development, product marketing, finance, and other administrative processes. The ability to continue to realize current efficiencies and find ways to improve on past performance is crucial to the improvement of operating margins. Any increase in the relative cost of these functions, or failure to continue to realize current efficiencies, could have a material adverse effect on Hyperion’s profits.

Reorganizations may adversely affect productivity.

Hyperion has continued to make adjustments to Hyperion’s operations and organization. These changes have historically resulted in productivity declines in the short term. The revised operations and/or organization must keep improving over past performance in order to provide better operating margins and efficiencies. Failure to maintain or improve momentum and productivity could materially adversely impact Hyperion’s revenue and profits.

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Hyperion’s international operations are subject to significant risks.

Hyperion derives a substantial portion of its revenue from customers located outside of the United States. Hyperion’s international operations are subject to risks, including:

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potential loss of proprietary information due to piracy, misappropriation or weaker laws regarding intellectual property protection;

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imposition of foreign laws and other governmental controls, including trade and employment restrictions;

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fluctuations in currency exchange rates and economic instability such as higher interest rates and inflation, which could reduce Hyperion’s customers’ ability to obtain financing for software products or which could make Hyperion’s products more expensive in those countries;

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difficulties in hedging foreign currency transaction exposures;

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longer payment cycles for sales in foreign countries and difficulties in collecting accounts receivable;

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difficulties in staffing and managing its international operations, including difficulties related to administering Hyperion’s stock option plan in some foreign countries;

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difficulties in coordinating the activities of Hyperion’s geographically dispersed and culturally diverse operations;

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competition from local suppliers;

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costs and delays associated with developing software in multiple languages; and

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political unrest, war or terrorism, particularly in areas in which Hyperion has facilities.

Hyperion may not be able to successfully address each of these challenges.

Exchange rate fluctuations may adversely affect results.

Hyperion conducts a significant portion of its business in currencies other than the United States dollar. Hyperion’s operating results are, therefore, subject to fluctuations in foreign currency exchange rates. Hyperion’s revenues and operating results are adversely affected when the United States dollar strengthens relative to other currencies and are positively affected when the United States dollar weakens. Changes in the value of major foreign currencies, particularly the Euro, relative to the value of the United States dollar positively affected revenues and operating results in the quarter. If the United States dollar strengthens relative to other currencies in the future, our revenues and operating results will be adversely affected.

There are significant risks related to any business combination.

Hyperion has made, and may in the future make, acquisitions of, mergers with, or significant investments in, businesses that offer complementary products, services and technologies. There are risks involved in these activities, including but not limited to:

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the possibility that Hyperion pays more than the value it derives from the acquisition;

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the difficulty of integrating the operations and personnel of the acquired businesses;

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the possibility that all aspects of the integration are not completed or that all of the anticipated synergies of the acquisition are not realized;

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the potential product liability associated with selling the acquired company’s products;

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the potential disruption of Hyperion’s ongoing business and the distraction of management from Hyperion’s business; and

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the potential write-down of impaired goodwill and intangible and other assets.

These factors could have a material adverse effect on Hyperion’s business, results of operations or financial position, especially in the case of a large acquisition.

Hyperion is subject to the possibility of infringement claims.

Hyperion expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in Hyperion’s industry segment grows and the functionality of products in different industry segments overlaps. Hyperion has in the past been subjected to patent infringement claims. Any such claims, with or without merit, could be time consuming and costly to defend, divert management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all, and may require the payment of substantial amounts of money. In the event of a successful product infringement claim against Hyperion, and Hyperion’s failure or inability to license the infringed or similar technology, Hyperion’s business, operating results and financial condition could be materially adversely affected.

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Enforcement of Hyperion’s intellectual property rights may be difficult.

Hyperion relies primarily on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect Hyperion’s proprietary rights. Hyperion’s means of protecting its proprietary rights in the United States or abroad may not be adequate and could be subject to challenge, such as the reexamination of one of our patents by the United States Patent and Trademark Office.

Hyperion’s stock price may be volatile.

The market price of Hyperion’s common stock is subject to significant fluctuations. The market price of Hyperion’s common stock may be significantly affected by such factors as the announcement of new products, product enhancements or technological innovation by Hyperion or Hyperion’s competitors, announcements of acquisitions by Hyperion, changes in Hyperion’s or Hyperion’s competitors’ results of operations, changes in revenue, revenue growth rates and revenue mix, changes in earnings estimates by market analysts and general market conditions or market conditions specific to particular industries. Technology stocks have experienced wide fluctuations in prices, which sometimes have been unrelated to their operating performance. The market price of Hyperion’s common stock could be adversely affected by such fluctuations.

Hyperion is dependent upon indirect channel partners.

In addition to its direct sales force, Hyperion relies on indirect channel partners such as OEMs, VARs and distributors for licensing and support of its products in the United States and internationally. License revenue from channel partners comprised 29% of Hyperion’s total license revenue for the third quarter of fiscal 2004. Indirect channel sales involve a number of special risks, including:

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Hyperion’s lack of control over the delivery of its products to end-users;

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Hyperion’s resellers and distributors may terminate their relationship with Hyperion on short notice; and

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Hyperion’s resellers and distributors may market and distribute competing products.

Hyperion’s current indirect channel partners may not elect, or be able, to market or support Hyperion’s products effectively or be able to release their products embedded with Hyperion products in a timely manner. Hyperion may not be able to effectively manage conflicts between its various indirect channel and direct customers, and economic conditions or industry demand may adversely affect indirect channel partners or indirect channel partners may devote greater resources to marketing and supporting the products of other companies. Revenues derived from indirect channel partners may fluctuate significantly in subsequent periods.

Hyperion is exposed to product liability claims.

Hyperion’s license agreements with its customers typically contain provisions designed to limit Hyperion’s exposure to potential product liability claims, and Hyperion carries insurance to protect against such claims. It is possible, however, that the limitation of liability provisions contained in Hyperion’s license agreements may not be effective as a result of U.S. or foreign laws or ordinances or because of judicial decisions, and that liability insurance may not be available, or that coverage for specific claims may be denied. Although Hyperion has not experienced any material product liability claims to date, the sale and support of business performance management products by Hyperion entails the risk of such claims. A successful product liability claim brought against Hyperion could have a material adverse effect upon Hyperion’s business, operating results and financial condition.

Defects in Hyperion’s products could increase its costs, adversely affect its reputation, diminish demand for its products and hurt its operating results.

As a result of their complexity, Hyperion’s software products may contain undetected errors or viruses. Errors in new products or product enhancements might not be detected until after initiating commercial shipments, which could result in additional costs, delays, possible damage to Hyperion’s reputation and could cause diminished demand for Hyperion’s products. This could lead to customer dissatisfaction and reduce the opportunity to renew maintenance or sell new licenses.

Employee turnover could adversely impact revenue, costs and productivity.

As employees leave Hyperion, it suffers loss of productivity while new employees are hired, or promoted into vacant positions. There are also costs of recruiting and re-locating new employees. New employees must learn the Hyperion organization, products and procedures. Promoted employees must learn new skills. All of this takes time, reduces productivity and increases cost. The potential adverse impact of employee turnover is greater for situations involving senior positions in the company. Turnover rates tend to increase as economic conditions improve. If turnover increases, the adverse impacts of turnover could materially affect Hyperion’s costs, productivity or ability to respond quickly to the competitive environment.

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Some provisions in Hyperion’s charter documents and its stockholder rights plan may prevent or deter an acquisition of Hyperion.

Some of the provisions in Hyperion’s charter documents may deter or prevent certain corporate actions, such as a merger, tender offer or proxy contest, which could affect the market value of Hyperion’s securities. These provisions include:

•

Hyperion’s board of directors is authorized to issue preferred stock with any rights it may determine. Consequently, Hyperion’s board of directors may issue preferred stock, without shareholder approval, that has rights superior to the outstanding Hyperion common stock;

•

Hyperion’s board of directors is classified into three groups, with each group of directors holding office for three years. The effect of this classified board is that two annual meetings, not one, are required to replace a majority of the board of directors;

•

Hyperion stockholders are not entitled to cumulate votes for directors; and

•

special meetings of Hyperion stockholders may be called only by Hyperion’s president or by the president or secretary upon written request by a majority of the board of directors and may not be called by Hyperion’s stockholders.

Hyperion has in place a stockholder rights plan that is designed to discourage coercive takeover offers. In general, Hyperion’s stockholder rights plan makes it uneconomic for any person to acquire more than a 15% interest in Hyperion without the consent of the Hyperion Board of Directors.

Hyperion’s board of directors could utilize the provisions of its charter documents and stockholder rights plan to resist an offer from a third party to acquire Hyperion, including an offer to acquire Hyperion common stock at a premium to its trading price or an offer that is otherwise considered favorable by Hyperion stockholders.

If requirements relating to the accounting treatment for employee stock options are changed, Hyperion’s earnings may be adversely affected and we may be forced to change our employee compensation and benefits practices.

We currently account for the issuance of stock options under APB Opinion No. 25, “Accounting for Stock Issued to Employees,” under which we generally do not record compensation expense related to employee stock options. On March 31, 2004, the Financial Accounting Standards Board issued an Exposure Draft of a proposed accounting standard that would require public companies to report compensation expense related to stock options and other forms of stock-based compensation based on the estimated fair value of the awards on the grant dates. The final standard is expected to be issued in the fourth calendar quarter of 2004 and could be effective beginning in our fiscal year 2006. If the proposed standard is adopted in its current form, our earnings will be negatively impacted. Also, we may consider changing our employee compensation and benefits practices in a manner that could adversely impact our ability to retain existing employees and attract qualified candidates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK. The primary objective of our investment activities is to preserve principal while maximizing yields, without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of high-quality, liquid securities. At March 31, 2004, our short-term investments consisted of investment-grade debt securities with a fair value of $9.5 million. The portfolio is invested in securities with relatively short maturities to minimize interest rate risk and for liquidity purposes in the event of immediate cash needs. Due to the short duration of our investment portfolio, an immediate 10% change in market interest rates would not have a material impact on the value of our investment portfolio.

FOREIGN CURRENCY EXCHANGE RATE RISK. We transact business in various foreign currencies. Our exposure to foreign currency exchange rate fluctuations arises in part from non-functional currency denominated trade accounts receivable and intercompany accounts receivable. Intercompany accounts receivable arise when software royalty fees and certain other costs incurred in the United States are charged to our foreign sales subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary, which is generally their local currency. From time to time, we utilize foreign currency forward exchange contracts to offset the risk associated with the effects of these trade receivables and the effects of certain intercompany receivables for which we anticipate settlement in the foreseeable future. As a result, increases or decreases in these accounts due to foreign exchange rate changes are offset by gains and losses on the forward contracts, so as to minimize foreign currency transaction gains and losses. Our forward contracts generally have terms of 60 days or less. We do not use forward contracts for trading purposes. All foreign currency balances and all outstanding forward contracts are marked-to-market at the end of the period with unrealized gains and losses included in our consolidated statements of operations. Our ultimate realized gain or loss with respect to currency fluctuations will depend on the currency exchange rates and other factors in effect as the contracts mature.

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Net foreign exchange transaction gains and losses were not material for the third quarter and first nine months of fiscal 2004. As of March 31, 2004, we had net forward contracts to sell U.S. dollar equivalent of $39.7 million in foreign currency. An immediate 10% change in currency exchange rates affecting these contracts would not have a material impact on our results of operations.

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There were no significant changes in our internal control over financial reporting identified in connection with our evaluation that occurred during our third fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On July 11, 1997, Gentia Software filed a request for reexamination of our U.S. Patent No. 5,359,724 (“‘724 patent”) with the United States Patent and Trademark Office (“PTO”) arguing that the ‘724 patent was anticipated and obvious in light of certain prior art references. On September 11, 1997, the PTO granted the request for reexamination. On February 27, 1998, Gentia Software filed with the PTO a request for a third reexamination of the ‘724 patent based on additional prior art references. On May 22, 1998, the PTO granted that request for reexamination, which was later consolidated with the first reexamination. On March 31, 1999, the PTO issued a non-final office action rejecting the claims of the ‘724 patent. We filed our response to the office action on May 31, 1999. No final office action has been issued by the PTO. We believe that the outcome of such action will not have a material adverse effect on our financial position, results of operations or cash flows.

From time to time, in the normal course of business, various claims are made against us. At this time, in the opinion of management, there are no pending claims the outcome of which is expected to result in a material adverse effect on our financial position, results of operations or cash flows.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

[1] On July 23, 2003, we announced that our board of directors had authorized a plan to repurchase up to $125.0 million of our common stock. This plan was completed during the third quarter of fiscal 2004.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(b) Reports on Form 8-K

On April 21, 2004, we filed a current report on Form 8-K in connection with the issuance of a press release dated April 21, 2004 announcing Hyperion’s financial results for the third fiscal quarter ended March 31, 2004.

On January 22, 2004, we filed a current report on Form 8-K in connection with the issuance of a press release dated January 22, 2004 announcing Hyperion’s financial results for the second fiscal quarter ended December 31, 2003.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Date: May 10, 2004	Hyperion Solutions Corporation (Registrant)
	By:	/s/ DAVID W. ODELL
		David W. Odell
		Chief Financial Officer

	By:	/s/ WILLIAM B. DEWES
		William B. Dewes
		Global Controller (Principal Accounting Officer)

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EXHIBIT INDEX

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