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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the Fiscal Year Ended December 31, 2003

For the transition period from          to         

Commission File Number 000-25683

MARIMBA, INC.

(Exact name of registrant as specified in its charter)

440 Clyde Avenue, Mountain View, California 94043

(Address of principal executive offices, including ZIP code)

(650) 930-5282

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, $.0001 par value

(Title of class)

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  x    No  ¨

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

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

The aggregate market value of the registrant’s common stock, $.0001 par value, held by non-affiliates of the registrant on June 30, 2003 was approximately $46 million. As of February 29, 2004, there were 26,381,486 shares of registrant’s common stock, $.0001 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of registrant’s definitive proxy statement (the “Proxy Statement”) to be mailed to stockholders in connection with its 2004 annual meeting of stockholders scheduled to be held on June 10, 2004 are incorporated by reference into Part III of this report. Except as expressly incorporated by reference, the registrant’s Proxy Statement shall not be deemed to be part of this report.

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MARIMBA, INC.

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The information in this report contains forward-looking statements which are subject to safe harbors created under the U.S. federal securities laws. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements, including statements that refer to projections of our future financial performance, anticipated revenue growth, profitability, capital needs, competition and market share growth, the development of new products and technologies and market acceptance of such products or technologies, business and sales strategies, developments in our target markets, matters relating to distribution channels and partnerships, proprietary rights, litigation, and other trends in our businesses. In addition, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. Marimba’s actual results and the timing of certain events may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed below in Item 7 under the heading “Other Factors Affecting Operating Results, Liquidity and Capital Resources”. You should not regard the inclusion of forward-looking information as a representation by us or any other person that the future events, plans or expectations contemplated by us will be achieved. All forward-looking statements in this report are based on information available to Marimba as of the date of this report, and Marimba undertakes no obligation to release publicly any updates or revisions to any such forward-looking statements.

PART I

Marimba, Inc. was incorporated in Delaware in February 1996. We develop, market and support software change and configuration management solutions. Our products automate the distribution and management of software applications and content, helping customers reduce their total cost of information technology (“IT”) ownership and improve the quality of IT service. Specific software solutions we provide include data center automation, security patch management, license compliance and inventory, and others. Our customer base spans multiple industries, and we market our products worldwide through a combination of a direct sales force and resellers.

Marimba operates in one operating segment, the development and marketing of change management software, and has operations in the United States and Europe. For information regarding revenues by geographic region, see Note 1 of the “Notes to the Consolidated Financial Statements.” In addition, for information regarding the seasonality of our business, see “Other Factors Affecting Operating Results, Liquidity and Capital Resources—Our Quarterly Operating Results May be Volatile, which Could Adversely Affect Our Stock Price.

Marimba Products

Marimba’s products allow companies to perform policy-based distributions, updates, and repairs of software on desktops, laptops, servers and handheld devices. Additional functionality includes the ability to collect and track system, hardware and software configuration data. Our products help IT organizations provide their end-user community with higher service levels while reducing the cost of managing their IT assets. Our bandwidth management, scalability, personalization and built-in security functionality allow corporations to reduce the complexity and cost of distributing, managing and updating their software and content on endpoints that are both inside and outside a customer’s corporate firewall. For information regarding the percentage of revenue contribution from our major products and services, see “Management Discussion and Analysis of Financial Condition and Results of Operation—Revenue”.

Marimba’s products include the following:

Desktop/Mobile Management Product Family

Marimba’s Desktop/Mobile Management product family is an enterprise-level change and configuration management solution that allows corporations to manage the lifecycle of software on desktops, laptops and handheld devices across the Internet and other networks. This solution gives IT departments the ability to automate the deployment of software applications, operating system patches and security updates through defined policies. Once software is deployed, the ongoing maintenance and repair of that software is automated to promote standardization. Our Desktop/Mobile Management solution also provides an inventory and audit capability, which enables IT departments to automate the collection of hardware and software configuration information from desktops, laptops, and handheld devices. This information can be stored in a central location for use in software license compliance, security patch management, asset management, desktop refresh planning and helpdesk diagnostic purposes.

Included within our Desktop/Mobile Management product family are our Embedded Management products. Marimba’s Embedded Management products allow device manufacturers and independent software vendors to transparently deliver software updates, software patches, new features and new services over the Internet and other networks by embedding Marimba management capabilities into their devices or software applications.

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Server Management Product Family

Marimba’s Server Management product family provides data center administrators with a solution to automate tasks such as provisioning and deployment of applications and operating system patches, replication of code and content, and the ability to perform remote commands. These functions have been optimized for a variety of server environments, from file and print servers in remote locations, to clusters of servers in data centers. Our Server Management solution allows administrators to manage large numbers of servers with heterogeneous Windows, Linux, and other UNIX server platforms from a single console. Our solution also provides an inventory and audit capability tailored to server environments, which enables IT departments to automate the collection of hardware and software application and configuration information from remote servers. This information can be stored in a central location for use in resource planning, server consolidation planning, patch management, and helpdesk diagnostic purposes.

Marimba Six

On December 19, 2003, Marimba released Marimba Six, which includes an extensive update to both our Desktop/Mobile and Server Management product families. Marimba Six includes a redesigned user interface, enhanced reporting capabilities, as well as a number of features which we believe will make the product easier to deploy and use. Furthermore, Marimba Six has been architected, packaged and priced to allow customers to purchase components of our product lines to meet their specific needs. We believe that the Marimba Six architecture will, over time, make our products accessible to more customers. We also believe that our new Marimba Six pricing may, over time, result in a lower average license transaction size, however we cannot determine how much lower at this time. For more information about the risks associated with our transition to the Marimba Six products, see “Other Factors Affecting Operating Results, Liquidity and Capital Resources—We Depend on the Growth of Our Customer Base and Increased Business from Our Current Customers.”

Technology

We believe that our investment in research and development has resulted in technology that provides us with a strategic advantage. Marimba products have been built from the ground up to provide a robust, secure and scalable solution. Marimba provides a lightweight, cross-platform, and easy to deploy solution that helps solve complex software application deployment and management problems.

Marimba products make extensive use of a broad range of technologies, including Java, JSP, TCP/IP, HTTP, LDAP, XML, SSL, and various digital security technologies. Most of our products are implemented using Sun Microsystems’ Java programming language. As a result, we believe that our products are portable, easily reconfigured and efficient. The use of Java has proven to be an advantage in developing portable components without significantly increasing the engineering overhead as additional platform support is required. We believe that our use of and expertise in Java provides us a competitive advantage. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—We Rely on Third-Party Software and Applications.”

Infrastructure

The Marimba infrastructure is designed to distribute software and data efficiently over networks based upon TCP/IP (Transmission Control Protocol/Internet Protocol) and HTTP (Hyper-text Transfer Protocol), the basic communication protocol of the Internet. The three major components of the Marimba infrastructure are Channels, Transmitters and Tuners. In addition to these components, a variety of features are available for reporting, asset tracking, license compliance, software usage, policy-based distribution, staging updates, resource planning, certificate management, and others. Together with the three major infrastructure components, these features provide the necessary functionality to distribute, manage and maintain mission critical software.

Marimba packages applications and/or related data as a channel. For example, a channel could consist of a custom financial application, a file containing recently updated data, or even a shrink-wrapped application. Each channel has an associated list of properties that describes its features, including application type, author, copyright notice, update schedule and entry point. Marimba’s software prepares the channel for distribution, and is designed to accommodate a range of application types, including shrink-wrapped applications, Java applets, Visual Basic, C and C++ applications, and applications packaged using the Windows Installer format (MSI).

After an application is packaged as a channel, it is published to a transmitter, the server-side component of the Marimba infrastructure. The transmitter distributes channels and subsequent updates, communicating using the Marimba protocol. Additional transmitter features include synchronization, replication, personalization, client feedback, bandwidth management, mirroring, and policy administration.

The tuner is the client-side component of the Marimba infrastructure, a software agent that resides on each managed device. The tuner subscribes to channels located on transmitters, and downloads and installs updates of each channel. The tuner is typically configured to run in the background and can manage multiple channels simultaneously without end-user interaction, updating them as necessary to present the user with the most recent version. In addition, the tuner’s user interface can be customized to include the brand, logo and other look and feel elements desired by the customer.

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Tuners can be redirected automatically to additional transmitters, serving as repeaters, in order to reduce the load on the main transmitter, to provide fault tolerance, and to make more efficient use of available bandwidth. By adding repeaters, it is possible to provide faster download times and to service thousands of simultaneous downloads. Repeaters can be added and removed dynamically without disrupting the overall service, allowing for a high level of scalability, improved service quality and enhanced availability. In addition, the use of a caching proxy server, which stores frequently accessed files on a local disk, can improve the efficiency of downloads through corporate network security barriers.

The Marimba Protocol

The Marimba protocol is designed to distribute applications and data to multiple intermittently connected endpoints. The protocol uses compression technology that compresses data and applications, and differential updating which identifies changes in code and updates only the changed portion. All updates are transactional and interruptible, which means that channels on the tuner are always in a functional state even if the most recent update failed or was interrupted. In addition, interrupted downloads can be restarted automatically at the point of interruption.

The protocol is layered on HTTP so that it can be used from within most secure corporate intranets and networks by tunneling through an HTTP proxy server. When the user is online, the tuner initiates update requests either when requested by the user or automatically using a predefined update schedule. When an update request is received, the transmitter quickly determines which files in the channel have changed, and if a change has occurred, Marimba’s technology determines exactly which bytes within those files have changed. The tuner then downloads the resulting changes. The efficiency of the Marimba protocol makes it possible to distribute frequent updates to large software applications and application files with relatively low bandwidth utilization.

Cross-Platform Framework

Our OSD (Open Software Distribution) based software installation technology provides a cross-platform framework for installing, updating and verifying applications in an operating system specific manner. Applications are delivered with an OSD file that defines the platforms on which the software runs, as well as the libraries and resources it requires. In addition, the OSD file contains platform specific extensions that define the exact installation requirements. For example, on the Microsoft Windows platform, the OSD file describes exactly which files need to be installed, which libraries that contain application code need to be updated, which registry entries need to be set and which system scripts need to be updated. Once an application is installed, the OSD file can be used to upgrade, verify and uninstall the application. OSD files are generated automatically using an installation capture technology, which eliminates the use of the original application installer. Information technology managers can customize the OSD script to control the level of user involvement in the resulting installation.

Security Features

We have invested significant resources in developing Marimba’s security implementation. Marimba’s security features currently include end user authentication, digital certificates and signing technology to verify application authenticity, and SSL communications to help protect the integrity and confidentiality of data transmitted via Marimba’s products. Our security implementation represents a combination of software written by us and security code licensed to us by various vendors. To further enhance the breadth of our security offerings, we also licensed a Java-based security implementation. In addition, we have an arrangement with VeriSign for the provision of digital certificates specifically for Marimba products. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—We Rely on Third-Party Software and Applications.”

Customers

Our customer base spans multiple industry segments including financial services, government, insurance, retail, manufacturing and telecommunications. When selling to potential customers, our Desktop/Mobile Management products are usually targeted at the IT organization, while our Server Management products our usually targeted at either the IT organization or the data center operations function. For the years ended December 31, 2003, 2002 and 2001, no single customer represented more than 10% of total revenues.

Sales and Marketing

We market our products worldwide through a direct sales force and indirectly through resellers. Our worldwide direct sales, professional services, and marketing organizations consisted of 74 individuals as of December 31, 2003, 25 of whom were located at our Mountain View, California headquarters, 34 in regional offices located in California, Georgia, Illinois, New York and Texas, 13 in the United Kingdom and 2 in France. We expect to increase the number of employees in our sales organization during 2004.

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Our direct sales force currently targets primarily large and medium sized accounts within North America, the UK and France. Smaller accounts in these regions, and all accounts in other regions of Europe and Asia, are primarily targeted through independent resellers. For the years ended December 31, 2003, 2002, and 2001, sales to customers outside of the United States were approximately 15%, 16%, and 8% of total revenue respectively. For information on risks related to foreign sales, see “Other Factors Affecting Operating Results, Liquidity and Capital Resources—Our Operating Results and Financial Condition May be Materially Harmed if We Are Not Successful At Expanding Internationally.”

Our customers often engage our professional services organizations to assist with the implementation and deployment of our products, and we have built an experienced consulting services organization to facilitate this. We believe that growth in our product sales depends upon our ability to provide our customers with these services and to educate third-party resellers and consultants on how to provide similar services. As a result, over the long term, we believe that increases in product revenues would require us to increase the number of our service personnel to meet these needs.

Our marketing efforts are designed to help customers understand both the business and technical benefits of the products. We conduct a variety of marketing programs to educate our target market, create awareness and generate leads for our products. To achieve these goals, we have engaged in marketing activities including telemarketing, direct mailings, print and online advertising campaigns and trade shows. These programs are targeted at key information technology and finance executives as well as general managers of business units. In addition, we conduct public relations programs that include establishing and maintaining relationships with key trade press, business press and industry analysts.

Alliances and Partnerships

We have a limited number of distribution relationships for our products with systems integrators and other resellers. Our resellers generally purchase our products at discounts from end-user list prices. This indirect sales channel has recently contributed a greater portion of our revenues, and our reliance on these relationships may increase. We believe that the support of these resellers for our products may become increasingly important in influencing new customers’ decisions to license our products, and we plan to increase both the number and the importance of these relationships. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—Failure to Further Develop and Sustain Our Indirect Sales Channel and Third-Party Distribution Relationships Could Limit or Prevent Future Growth.”

We also have several marketing and technology partnerships with leading software providers, including providers of products that are complementary to ours. These partnerships include joint sales and marketing relationships that provide us access to potential sales to large enterprises that we might not otherwise have access to, as well as product integration and other relationships. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—We Rely on Third-Party Marketing and Technology Relationships For Future Sales Growth.”

Customer Support and Training

Our customer support and training organization consisted of 23 employees as of December 31, 2003, augmented by 8 outsourced personnel located in India. Our support and maintenance programs are generally priced as a percentage of software license fees and provide customers with telephone and email support, as well as software updates to the products. We primarily offer the following annual support and maintenance programs for our products:

Bronze Service.    This service provides customers with technical assistance on installation and basic product questions via e-mail and/or telephone, as well as access to our customer support engineers. With this service, customers also receive the latest product updates as they become generally available.

Silver Service.    This program includes all the features of the Bronze Service offering with the addition of coverage 24 hours a day, every day of the week.

Gold Service.    Designed for mission-critical applications, the Gold Service program provides customers with all the features of Silver Service plus proactive support from designated technical account managers and certain other benefits.

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Research and Development

As of December 31, 2003, our engineering organization was comprised of 49 employees, augmented by 18 outsourced personnel located in India. Our product development organization is divided into development groups organized with regards to our product architecture. These development groups are supported by quality assurance, user experience and documentation groups. The quality assurance group works with the development group to identify software defects through the entire development cycle. The user experience group develops the look and feel and functional flow of our products. The documentation group is responsible for end user, administrator and developer documentation for our products.

We believe that our software development team and core technologies represent a significant competitive advantage. A technically skilled, quality-oriented and productive development organization will be a key component to the success of new product offerings. We must continue to attract and retain highly qualified employees to further our research and development efforts. Our business and operating results could be seriously harmed if we are not able to hire and retain a strong development team.

Research and development expenses were $8.3 million in 2003, $7.9 million in 2002, and $10.5 million in 2001. To date, substantially all software development costs have been expensed as incurred. We believe that significant investments in research and development are required to remain competitive. As we expand, we intend to increase the absolute amount of our research and development expenditures. For more information on our research and development expenses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Competition

The market for our products is intensely competitive and rapidly evolving. We expect competition to continue to increase both from existing competitors and new market entrants. We believe that our ability to compete depends on many factors both within and beyond our control, including:

With the recent release of Marimba Six, we believe that we generally have a competitive advantage with respect to performance, features, scalability, reliability and customer service

We encounter competition from a number of different sources, including sellers of enterprise-wide management systems, which include electronic software distribution, including Tivoli, Computer Associates, and others; companies such as Novadigm (recently agreed to be acquired by Hewlett Packard), ON Technology (recently acquired by Symantec) and others, which market products that support the distribution of software applications; and other software management suites, such as LanDesk, Altiris, Microsoft’s SMS and others. We also face competition from our customers’ information technology groups and other internal development efforts.

Many of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies have broader relationships with existing and potential customers and resellers which could be leveraged to more effectively compete against us. These companies may also have more established customer support and professional services organizations than we do. In addition, our competitors may adopt aggressive pricing policies. As a result, we may not be able to maintain a competitive position against current or future competitors. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—Our Markets are Highly Competitive and Experiencing Consolidation”.

As new participants enter the market, we will face increased competition. Potential competitors may bundle their products or incorporate additional components into existing products in a manner that discourages users from purchasing our products. Furthermore, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can.

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Proprietary Rights and Licensing

Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of patent, trademark, trade secret, and copyright law and contractual restrictions to protect the proprietary aspects of our technology. We presently have been granted five U.S. patents and have eight U.S. patent applications pending, which might not result in the issuance of any additional valid patents. We also have several trademark registrations in the United States and some foreign countries.

We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. We license our software under license agreements, which impose restrictions on the licensee’s ability to utilize the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, we sell our products internationally. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States.

Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could seriously harm our business and operating results. There can be no assurance that the outcome of any such litigation would be favorable to us.

Our success and ability to compete are also dependent on our ability to operate without infringing upon the proprietary rights of others, and we have been involved in two such patent infringement suits in the past. We could incur substantial costs to defend any future intellectual property litigation, and in the event of a future successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results could be significantly harmed. See “Other Factors Affecting Operating Results, Liquidity and Capital Resources—We May Be Found to Infringe Proprietary Rights of Others.”

Employees

At December 31, 2003, we had a total of 168 employees, 151 of whom were based in the United States and 17 of whom were based in Europe. Of the total, 49 were in research and development, 74 were engaged in sales and marketing, 23 were engaged in customer support and training, and 22 were in administration and finance. None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good.

Our principal administrative, sales, marketing, and research and development facility occupies approximately 47,500 square feet in Mountain View, California under a lease which expires in June 2007. We also lease regional U.S. offices located in California, Georgia, Illinois, New York, and Texas, as well as European offices in the United Kingdom and France. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms as needed.

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Beginning in April 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern District of New York naming Marimba, Inc., certain of its officers and directors, and certain underwriters of the company’s initial public offering (Morgan Stanley & Co., Inc., Credit Suisse First Boston Corp. and Bear Stearns & Co., Inc.) as defendants. The complaints have since been consolidated into a single action, and a consolidated amended complaint was filed in April 2002. The complaint alleges, among other things, that the underwriters of our initial public offering violated the securities laws by failing to disclose certain alleged compensation and tie-in arrangements (such as undisclosed commissions or stock stabilization practices) in the registration statement filed in connection with the offering. Marimba and certain of its officers and directors were named in the complaint pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The complaint seeks unspecified damages, attorney and expert fees, and other unspecified litigation costs. Similar complaints have been filed against over 300 other issuers that had initial public offerings since 1998 and all such actions have been included in a single coordinated proceeding. In July 2002, the defendants in the consolidated actions filed motions to dismiss all of the cases in the litigation (including the case involving Marimba). On February 19, 2003, the court ruled on the motions and granted Marimba’s motion to dismiss the claims against it under Section 10(b) and Rule 10b-5. The motions to dismiss the claims under Section 11 were denied as to virtually all of the defendants in the consolidated cases, including Marimba. In addition, the Marimba individual defendants in the litigation each signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002. On June 30, 2003, a special committee of our Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of Marimba and Marimba’s individual defendants for the conduct alleged in the action to be wrongful. Marimba would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert and release certain potential claims Marimba may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by Marimba’s insurers. The special committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of Marimba’s insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the court overseeing the litigation. In the event the settlement is not consummated, the defense of the litigation may increase our expenses and divert our management’s attention and resources. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation, and any unfavorable outcome could have a material adverse impact on our business, financial condition and operating results.

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At Marimba’s 2003 Annual Meeting of Stockholders held on December 11, 2003, our stockholders voted on and approved each of the below two proposals by the votes indicated below. A total of 24,352,959 shares were represented and voting in person or by proxy at the meeting.

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PART II

Price Range of Common Stock

Our common stock is traded publicly on The Nasdaq National Market under the symbol “MRBA.” The following table sets forth for the periods indicated the highest and lowest sales prices of the common stock during each quarter of the last two fiscal years:

On February 29, 2004, the closing price of our common stock on The Nasdaq National Market was $6.37 per share. As of February 29, 2004, there were approximately 251 holders of record (not including beneficial holders of our common stock held in street name) of our common stock.

Dividend Policy

We have not declared nor paid any cash dividends on our capital stock since inception and we do not expect to do so in the foreseeable future. Any future determination with respect to the payment of dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our operating results, financial condition and capital requirements, the terms of then-existing indebtedness, general business conditions and such other factors as the Board of Directors deems relevant.

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The following is a summary of our selected consolidated financial data as of and for the five years ended December 31, 2003. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this report. Historical results may not be indicative of future results.

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Supplementary Data

Quarterly Consolidated Financial Information (unaudited)

(In thousands, except per share data)

The following table presents our operating results for each of the eight quarters in the two-year period ended December 31, 2003. The information for each of these quarters is unaudited but has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this report. In the opinion of management, all necessary adjustments (consisting of normal recurring adjustments) have been included to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements of our company and the notes thereto appearing in this report. These operating results may not be indicative of the results for any future periods.

Statement Regarding Use of Non-GAAP Financial Measures

In addition to providing financial results calculated and presented in accordance with generally accepted accounting principles, or GAAP, we sometimes present historical or forward-looking information regarding our financial performance, financial position or cash flows that excludes one or more of the following three items: (i) amortization of deferred compensation, (ii) settlement of disputes or litigation, and (iii) restructuring costs associated with workforce reductions. We believe that presentation of financial information excluding these items is useful to investors, because it facilitates their comparison of our current results of operations with those previously reported under this format, and more generally because we believe that including these charges could distort trends in our results of operations. In addition, in preparing operating plans and forecasts, management relies in part on trends in our historical results of operations exclusive of these items. However, our presentation of non-GAAP results should not be viewed as a substitute for our financial results determined in accordance with GAAP.

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The following discussion and analysis should be read in conjunction with “Selected Financial Data” and our Consolidated Financial Statements and Notes thereto included elsewhere in this report. As referenced in the first paragraph of Part I, this report contains forward-looking statements that involve risks and uncertainties, including but not limited to the statements in the fifth and sixth paragraphs of “Overview” below. Our actual results may differ materially from the results discussed in such forward-looking statements. For a more complete understanding of our financial condition and results of operations, and some of the risks and trends that could affect future results, see “Other Factors Affecting Operating Results, Liquidity and Capital Resources” in this Item 7.

Overview

Marimba, Inc. was incorporated in Delaware in February 1996. We develop, market and support software change and configuration management solutions. Our products automate the distribution and management of software applications and content, helping customers reduce their total cost of information technology (“IT”) ownership and improve the quality of IT service. Specific software solutions we provide include data center automation, security patch management, license compliance and inventory, and others. Our customer base spans multiple industries, and we market our products worldwide through a combination of a direct sales force and resellers.

Revenues to date have been derived primarily from the license of our products and to a lesser extent from support and maintenance, consulting and training services. Customers who license our products generally purchase maintenance contracts, typically covering a 12-month period. Additionally, customers may purchase consulting services, which are customarily billed at a fixed daily rate plus out-of-pocket expenses. We also offer training services that are billed on a per student or per class session basis.

Our two primary product lines consist of our Desktop/Mobile Management and Server Management product lines. On December 19, 2003, Marimba released Marimba Six, which was a major release of both of these product lines. Marimba Six includes a redesigned user interface, enhanced reporting capabilities and a number of other features and functionality which we believe will make these products easier to deploy and use. Furthermore, Marimba Six has been architected, packaged and priced to allow customers to more easily license single solution modules in our product lines to meet their specific needs. We believe that our Marimba Six architecture will, over time, allow us to sell into more opportunities. However, we also believe that our new Marimba Six pricing may, over time, result in a lower average license transaction size, although we cannot determine how much lower at this time.

We consider our business to be in a single industry segment, specifically the license, implementation and support of our software products. We evaluate the performance of our geographic regions based on revenues only. We do not currently assess the performance of our geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income. In addition, our assets are primarily located in our corporate office in the United States and are not allocated to any specific region.

Fiscal 2003 represented the first year in the company’s history in which we generated positive net income on a GAAP basis. Net income was $0.12 per share, compared with a net loss of $(0.44) per share in 2002. The increase was due to an increase in total revenues of 16%, primarily due to a 32% increase in license revenues, combined with increased gross margins as a result of increased license revenues, and a 16% decrease in operating expenses due primarily to cost controls. Although we were profitable during 2003, since inception we have incurred significant losses and had an accumulated deficit of approximately $47.0 million at December 31, 2003. We believe that our future success depends in part on our ability to increase our customer base and on overall growth in our market.

An important challenge for our management team is to identify and then execute on the areas of our business, that have the highest potential for growth. We believe the areas which currently offer substantial potential are patch management and data center automation. Patch management customers use our technology to automate the distribution of updates and patches, often security related, to their computer endpoints. With recent high profile viruses, worms, and other malicious code, the quality, reliability and automation of patch management processes have become in our opinion, a key strategic area of focus for IT departments in large enterprises. Data center automation customers use our Server Management products to automate many of the tasks that they currently perform manually in their data center operations. These are relatively new markets that we believe offer growth potential over the long term. In the short term, we plan to focus much of our incremental investment on both further development and marketing of our products in these areas.

In view of the rapidly changing nature of our business, we believe that period-to-period comparisons of revenues and operating results are not meaningful and should not be relied upon as indications of future performance, growth or financial results. Additionally, historical trends may not be indicative of future growth or financial results.

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Critical Accounting Policies and Estimates

Discussion and analysis of Marimba’s financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We consider the accounting policies described below to be our critical accounting policies. See Note 1 of the financial statements for more information about these critical accounting policies, as well as descriptions of other significant accounting policies. Actual results may differ materially from these estimates under different assumptions or conditions.

Revenue Recognition.    We derive our revenues primarily from two sources: license revenues, which consist of software license fees; and service revenues, which are comprised of fees for maintenance and support, consulting and training. Revenue recognition rules are complex, and require our management to exercise judgment and make a number of estimates. For example, most of our contracts contain multiple element arrangements, which require us to make assumptions and judgments in order to allocate the total price among the various elements we must deliver, to determine whether vendor specific evidence of fair value exists for each element and to determine whether and when each element has been delivered. We also evaluate whether a risk of concession exists with regards to specific contracts or customers, and also whether there is any material risk of customer non-payment or product returns. If we were to change any of these assumptions or judgments, it could cause a material increase or decrease in the amount of revenue that we report in a particular period. Revenue that we cannot recognize in a particular period is reflected on our balance sheet as deferred revenue and recognized over time as the applicable revenue recognition criteria are satisfied. These estimates are made based upon all of the information available to us at the time. Material differences may result in the amount and timing of our revenue for any given period if different judgments are made or different estimates are utilized.

Allowance for Doubtful Accounts.    The allowance for doubtful accounts is established through a charge to our general and administrative expenses. This allowance is for estimated losses resulting from the inability of our customers to make required payments. We regularly evaluate the adequacy of this estimate by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in aggregate, our current average deal size, and current economic conditions that may affect a customer’s ability to pay or suggest that a particular market sector is more prone to liquidity issues. The use of different estimates or assumptions could produce different allowance balances. If the financial condition of our customers were to deteriorate subsequent to the date of our arrangements with them, this could result in an impairment of their ability to make payments and additional allowances would be required.

Returns.    Prior to December 31, 2002, we maintained a returns reserve, established through a reduction of license revenue. The reserve was for estimated losses resulting from the possibility of product returns by customers. At December 31, 2002, we analyzed our past returns history and combined with changed business practices, we determined that a reserve was no longer appropriate. As a result of this analysis, the entire reserve was reversed in the fourth quarter of 2002, resulting in a net increase to license revenue of $620,000 during the fourth quarter and $527,000 during fiscal year 2002. During the year ended December 31, 2003, we experienced no customer returns and accordingly did not maintain a returns reserve. Our agreements generally do not include a right to return. If in the future we experience customer returns, this may materially negatively impact our business.

Compensation Accruals.    Marimba records an accrual of compensation expenses which reflects compensation earned but not paid prior to the end of each period. The primary components of this accrual are commissions related to sales, variable compensation programs for non-executives, and executive bonuses. These compensation programs may contain elements that are based upon both quarterly and annual performance, and we are required to estimate these payouts based upon the knowledge we have at the time we report our results. The use of different judgments and estimates could have the effect of increasing or decreasing reported compensation costs in any given period. In particular, estimates of annual results made when recording charges early in any fiscal year could, if proven incorrect, result in significant adjustments in later parts of the year as events unfold and our estimates are refined.

July 2002 Legal Settlement.    On July 25, 2002, the court approved a settlement between Marimba and Beck Systems, as described in the notes to the financial statements. Under the terms of the agreement for the settlement, Marimba obtained a license to Beck Systems’ patents. The amount of the settlement was allocated between cost of license revenues and acquired technology based on their relative fair values. The amount charged to cost of license revenues during the quarter ended June 30, 2002 presents the proportion of the total amount which related to payment for the alleged past infringement. The remaining amount, which was recorded as acquired technology during the third quarter of 2002 and is being amortized to cost of license revenues over a five year period, represents the proportion of the total settlement relating to the future benefit to Marimba of the ongoing license to Beck Systems’ patents. The amounts allocated to the expense and the asset was based, respectively, on our license revenues since inception versus our projection of the revenue relating to the technology that we expected to generate over the next 5 years. Management’s assumptions about future revenues and the period over which our product will embed the patented technology required significant judgment. Our revenues have fluctuated in the past and are expected to continue to do so. In

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addition, it is not clear how long our products will include the patented technology. If we had made a different estimate of future revenues or the period over which our product will embed the patented technology, the apportionment of the settlement amount between the charge relating to the alleged past infringement and the acquired technology asset would have been different.

Acquired Technology.    We review our acquired technology for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. We do not perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

Contingencies and Litigation.    We are sometimes subject to proceedings, lawsuits and other claims. We assess the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of loss contingency required, if any, for these matters is made after careful analysis of each individual matter. Established loss contingencies may change and new loss contingencies may be established as the facts and circumstances of each matter changes.

Income Taxes.    Prior to 2003, we generated losses each year. As a result, we were not subject to United States federal income taxes, and our income tax provision consisted primarily of taxes owed to foreign jurisdictions. For the year ended December 31, 2003, we were profitable, and as a result we have to estimate our income tax liability for the period. Our tax situation is complex, and the interplay between our net operating loss balances, the alternative minimum tax, state income tax laws and other variables makes the determination of our tax liability difficult at any specific point in time. Each period we review our tax situation with outside tax advisers and estimate our liability. Changes to our assumptions, or significant adjustments as detail compliance work is performed, could result in us recording additional or reduced provisions.

Results of Operation

The following table presents selected financial data for the periods indicated as a percentage of total revenues:

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Revenues

The following table presents selected revenue data for the periods indicated:

Total revenues in 2003 were $40.9 million, compared to revenues of $35.2 million in 2002 and revenues of $44.0 million in 2001. The fluctuations in total annual revenues from 2001 to 2003 were primarily due to changes in license revenues, as service revenues were basically flat. Each component of revenues is discussed below in more detail.

License Revenues.    License revenues increased $5.9 million, or 32%, to $24.1 million in 2003 from $18.2 million in 2002. License revenues decreased $9.6 million, or 34%, to $18.2 million in 2002 from $27.8 million in 2001. The increase in license revenues during 2003 was the result of many factors to varying degrees, including: a generally stronger IT spending environment; higher productivity in our sales force, aided by increased support from our indirect sales partners; and quality and functionality improvements in our products. The decrease in license revenues in 2002 was due primarily to a generally weak IT spending environment that led to lower deal sizes and longer sales cycles.

The following table presents the license revenues derived from each of our product lines as a percentage of total license revenues (note that our Embedded Management products are included within the Desktop/Mobile Management product line:

Our Desktop/Mobile Management product license revenues include our sales of management solutions for desktops, laptops, handheld devices, and embedded applications. Our large, enterprise customers typically already have a desktop management solution from one of our competitors, often purchased as part of a larger systems management bundle. As a result, much of our sales in this market is replacement business, and growth is driven by increases in market share. Our Server Management products include both products to manage smaller servers within the enterprise, such as file and print servers, as well as solutions to automate the management of larger, more complex servers often found within the data center. Large enterprises have only recently begun to realize the opportunities of automation in the data center, and we anticipate that sales of our Server Management products may comprise a larger percentage of license revenues going forward. Additionally, we feel that offering both Desktop/Mobile Management solutions and Server Management solutions within a single product suite will provide us with a competitive advantage.

Service Revenues.    Service revenues include support and maintenance, consulting and training. Service revenues in 2003 decreased by $242 thousand, or 1%, to $16.8 million from $17.0 million in 2002. Service revenues increased by $775,000, or 5%, to $17.0 million in 2002 from $16.2 million in 2001. The following table presents the components of service revenues for the periods indicated:

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Since 2001, support and maintenance revenues have generally increased. Support and maintenance revenues are driven by new license sales and by renewals of existing annual maintenance contracts. The downturn in sales of licenses during 2002 negatively impacted our growth in support and maintenance revenues in the first half of 2003, although strong license sales in the first half of 2003 resulted in full year 2003 growth in support and maintenance revenues over 2002. Both consulting and training revenues have trended down from 2001 to 2003, the result we believe of heightened scrutiny on services spending by our customers, and also of improvements in the ease of use and ease of deployment of our products.

International.    Revenues outside the United States represented approximately 15%, 15%, and 8% of total revenues in 2003, 2002 and 2001, respectively. In 2003, international revenues increased by $0.5 million, or 9%, to approximately $6.0 million from $5.5 million in 2002. International revenues increased by $2.0 million, or 55%, to approximately $5.5 million in 2002 when compared to 2001. The increase in revenues outside the United States was due primarily to our sales and marketing efforts in Europe and more specifically to increased sales efficiency in United Kingdom and commencing sales and marketing efforts in France in mid 2002. The following table presents our revenues by region as a percentage of total revenues for the period indicated:

Costs of Revenues

Cost of License Revenues.    Cost of license revenues consists primarily of the cost of third-party software technology that was either integrated into our products or resold by us. The following table presents our costs of license revenues and our gross margin on license revenues for the periods indicated:

The increase in cost of license revenues in 2002 was due primarily to a $1.9 million charge recorded in the second quarter of 2002 in relation to the legal settlement of a dispute, which involved a patent license, and to a lesser extent an increase in sales of third party products. The decrease in cost of license revenues in 2003 was due primarily to not having the $1.9 million charge related to the legal settlement of a dispute, which involved a patent license, and to a lesser extent a decrease in sales of third party products, offset partially by additional charges to cost of license revenues of approximately $85,000 per quarter in connection with the capitalized license part of the patent settlement. We anticipate further charges of approximately $85,000 per quarter for five years following the settlement, ending in June 2007.

Cost of Service Revenues.    Cost of service revenues includes:

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The following table presents our cost of service revenues and our gross margin on service revenues for the periods indicated:

Cost of service revenues represented 33%, 34%, and 37% of service revenue in 2003, 2002 and 2001, respectively. The decrease in cost of service revenues as a percentage of service revenues is primarily driven by the mix of our service revenues, as maintenance and support costs less to provide, as a percentage of revenues, than does consulting and training.

Gross Margin

Gross margin was 85%, 76% and 85% in 2003, 2002 and 2001, respectively. The primary factor in our gross margin is the mix between high margin license revenues and lower margin service revenues. Additionally, during 2002, our gross margin was negatively impacted by a $1.9 million charge in cost of license revenues related to a legal settlement involving a patent license.

Operating Expenses

Research and Development.    Research and development costs, which are expensed as incurred, consist primarily of:

We believe that our success is dependent in large part on the continued enhancement of our current products and the ability to develop new, technologically advanced products that meet the sophisticated requirements of our customers. Research and development expenses were $8.3 million, $7.9 million, and $10.5 million in 2003, 2002, and 2001, respectively. The increase in absolute dollars during 2003 was the result of additional headcount and an increase in spending on outsourced research and development, primarily in India. The decrease in absolute dollars in 2002 was due primarily to workforce reductions announced in July 2002 and April 2001, as well as our decisions during the second quarter of 2001 to discontinue the development of a hosting service and separately close our Houston development facility. We plan to increase our expenses in research and development activities as we continue to enhance our products.

Sales and Marketing.    Sales and marketing expenses consist primarily of:

Sales and marketing expenses were $19.6 million, $24.1 million, and $32.0 million in 2003, 2002, and 2001 respectively. Sales and marketing expenses decreased in absolute dollars due primarily to fewer promotional activities and to reductions of headcount in both sales and sales management. We expect to increase our investment in sales and marketing in our efforts to grow revenues and expand our brand awareness.

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General and Administrative.    General and administrative expenses consist primarily of:

General and administrative expenses were $4.7 million, $5.7 million, and $7.9 million in 2003, 2002, and 2001, respectively. General and administrative expenses decreased in absolute dollars due primarily to reductions of headcount and general cost cutting measures. We anticipate our general and administrative expenses to increase as the company grows and as we absorb additional costs imposed by increased regulatory requirements, particularly as a result of the Sarbanes-Oxley Act and recent related regulatory changes.

Restructuring.    In April 2001, we eliminated approximately 20% of our workforce, or 60 employees and independent contractors across all company departments. We recorded a charge of $789,000 in the second quarter of 2001 related to the restructuring plan. Of this amount, $666,000 of the restructuring accrual was reduced by cash payments made during the year ended December 31, 2001 and the remaining balance of $123,000 was reversed out in 2002 once we determined that all outstanding obligations had been settled.

In July 2002, we eliminated approximately 12% of our workforce, or 24 employees, across all company departments. We recorded a restructuring charge of $200,000 in connection with this plan, which consisted of charges of $323,000 for severance and benefits related to the workforce reduction, offset by a $123,000 adjustment from the charge for our April 2001 restructuring plan.

Deferred Compensation.    We record deferred compensation representing the difference between the exercise prices of options granted to acquire shares of common stock and the deemed fair value for financial reporting purposes of our common stock on the grant dates. We also record deferred compensation to represent the intrinsic value of certain restricted stock awards. Deferred compensation is amortized over the vesting periods of the options and stock using the graded vesting method.

In 2001, we recorded deferred compensation of approximately $21,000 (net of reduction of $2.4 million due to forfeited stock options and repurchased shares), which represented the intrinsic value of certain stock awards. In 2002, we recorded a reversal in deferred compensation of approximately $204,000 (net of reduction of $513,000 due to forfeited stock options and repurchased shares), which represented the intrinsic value of certain stock awards. In 2003, we recorded a reversal in deferred compensation of approximately $128,000 due to forfeited stock options and repurchased shares. Deferred compensation was being amortized over the vesting periods of the stock options and stock using the graded vesting method. We currently have no deferred compensation balances, as they have all been either fully amortized, forfeited, or repurchased.

We amortized deferred compensation expense, net of gains resulting from the forfeiture of stock options and repurchase of shares due to employee departures, of $111,000, $1.1 million, and $361,000 for fiscal years 2003, 2002, and 2001, respectively. This compensation expense relates to stock options and stock awarded to individuals in all operating expense categories. At December 31, 2003, our deferred compensation balances have been fully amortized.

Interest Income and Other Expenses, Net

The following table presents our average cash and available-for-sale securities and total interest earned for the periods indicated:

Interest income, net, consists primarily of interest earned on our cash, cash equivalents and available-for-sale securities offset by other miscellaneous expenses. Interest income, net was $949,000, $1.5 million, and $2.8 million in 2003, 2002, and 2001, respectively. The decrease in interest income, net, from 2001 to 2002 to 2003 was due primarily to lower invested balances and lower interest rates.

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Additionally, the decrease in interest rates from 2002 to 2003 was partially the result of a decision by the company to shorten the average maturity of its invested balances.

Provision for Income Taxes

Marimba’s provision for income taxes for the year ended December 31, 2003 consists of state income taxes, franchise taxes, federal income taxes, and foreign taxes. Marimba’s provision for income taxes for the years ended December 31, 2002, and 2001 consisted of state income, franchise taxes and foreign taxes. No provision for federal taxes was recorded in 2001 and 2002, as prior to 2003 we had experienced only operating losses since inception.

As of December 31, 2003, we had federal net operating loss carryforwards of approximately $46.0 million. We also had a total research and development tax credit carryforward of approximately $4.1 million, $2.6 million of which was for federal research and development tax credit. The net operating loss and credit carryforwards will expire at various dates beginning in 2011 through 2023 if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations contained in the Internal Revenue Code of 1986 and similar state provisions, and this annual limitation may result in the expiration of the net operating loss and credits before utilization. Given our losses incurred to date and the difficulty in accurately forecasting our future results, we do not believe that the realization of the related deferred income tax asset meets the criteria required by generally accepted accounting principles. Therefore, we have recorded a 100% valuation allowance against the deferred income tax asset.

Liquidity and Capital Resources

As of December 31, 2003, our principal sources of liquidity included approximately $25.9 million of cash and cash equivalents and $27.2 million of available-for-sale securities.

Cash equivalents consisted of financial instruments, which are readily convertible to cash and have maturities of three months or less at the time of acquisition. Cash equivalents consisted primarily of investments in commercial paper, U.S. government and agency securities and money market funds. These investments are recorded at cost, which approximates fair value, and are managed by professional investment managers.

All marketable debt securities classified as available-for-sale are available for working capital purposes, as necessary. Available-for-sale securities are recorded at fair market value. The unrealized gains and losses related to these securities are included in Other Comprehensive Income (Loss). Fair market values are based on quoted market prices. When securities are sold, their cost is determined based on the specific identification method. Available-for-sale securities as of December 31, 2003 consisted of cost of $27.2 million, gross unrealized gain of $30,000, and fair market value of $27.2 million. The following table represents the maturities of our cash and cash equivalents and available-for-sale securities (in thousands):

Total cash, cash equivalents and available for sale securities increased by $2.8 million from 2002 to 2003, primarily due to cash generated from operating profits. Total cash, cash equivalents and available for sale securities decreased by $9.8 million from 2001 to 2002, primarily due to cash used to fund operating losses and to a $2.75 million cash payment in relation to the legal settlement of a patent dispute in 2002.

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On our GAAP consolidated statements of cash flows, net cash provided by operating activities increased by $2.7 million during 2003 from a decrease of $8.2 million in 2002, due primarily to net income for the period, an increase in deferred revenues from 2003 to 2002, compared to the decrease from 2001 to 2002, and to lower direct personnel expenses due to restructuring measures undertaken in 2002. In general, the primary factor in affecting our cash flows provided by operating activities is our net income for the period, and in the long term our ability to continue to generate positive cash from operations is dependent upon our ability to maintain positive net income. In the short term, our accounts receivable balances also play an important role in cash provided by operating activities each quarter. A significant portion of our license transactions occur at or near the end of each quarter, and as a result the cash received for these transactions is usually received in the quarter after the transaction occurs. Consequently, the primary uses of operating cash each quarter are the expenses incurred that quarter, while the primary sources of operating cash each quarter are the revenues from the prior quarter.

Net cash provided by investing activities increased by $10.5 million in 2003 from a decrease of $6.5 million, due primarily to higher maturities of available-for-sale investments. Net cash provided by financing activities increased to $1.0 million in 2003 from $337,000 in 2002, due to higher proceeds from stock option exercises in 2003.

We currently anticipate that our current cash, cash equivalents and available for sale securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Historically, our primary use of cash has been to fund payroll and related expenses, which are the majority of our expenses. Our primary source of cash, subsequent to our initial public offering on 1999, has been payments from customers for products or services.

It is possible that we could experience unexpected cash requirements that would force us to seek financing, or at some point in the future we may otherwise seek financing to support our long term operations. In any such event, we may seek to sell additional equity or debt securities or obtain a credit facility. Any additional financing, if needed, might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our business and operating results. If additional funds are raised through the issuance of equity securities, the percentage of ownership of our stockholders would be reduced.

Contractual Obligation

The following table summarizes our significant contractual obligations at December 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in the future. This table excludes amounts already recorded on our balance sheet as current liabilities at December 31, 2003:

Recent Accounting Pronouncements

In January 2003, Financial Accounting Standards Board (“FASB”) issued FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” and amended the Interpretation in December 2003. Generally, a variable interest entity (“VIE”) is a corporation, partnership, trust or any other legal structure used for business purposes that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires that a VIE be consolidated by a company if that company is subject to a majority of the VIE’s risk of loss or entitled to receive a majority of the VIE’s residual returns or both. A company that consolidates a VIE is referred to as the primary beneficiary of that entity. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. The adoption of this statement did not have any effect on our results of operation or financial position.

In May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have any effect on our results of operation or financial position.

For a description of the other accounting pronouncements that may apply to our financial results, see note 1 to the Notes to Consolidated Financial Statements in Part II, Item 8 of this report.

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Other Factors Affecting Operating Results, Liquidity and Capital Resources

The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph immediately preceding Part I of this report.

Our Revenues in Any Quarter Depend on a Small Number of Relatively Large Orders

Our quarterly revenues are especially subject to fluctuation, because they normally depend on the completion of relatively large license transactions. For example, two transactions accounted for approximately 30% of our total revenues during the fourth quarter of 2003. This dependence on large orders makes our net revenue and operating results more likely to vary from quarter to quarter, and more difficult to predict, because the loss of any particular large order is significant. As a result, our operating results could be adversely impacted if any large orders are delayed or canceled in any future period.

Our Quarterly Operating Results May be Volatile, which Could Adversely Affect Our Stock Price

A substantial portion of our license revenues for most quarters has been recorded in the last month of the quarter and the magnitude of quarterly fluctuations in revenue may not become evident until late in or towards the end of a particular quarter. At the same time, our expense levels are relatively fixed for a particular quarter and are based, in part, on expectations as to future revenues. As a result, if revenue levels fall below our expectations for a particular quarter, our operating results will be adversely affected as only a small portion of our expenses vary with our revenues. A delay in recognizing revenue, even from a single transaction, could seriously harm our operating results.

We generally expect that revenues in the first and third quarters of each year will not substantially exceed, and may be lower than, revenues in the immediate prior quarter due to the annual nature of companies’ purchasing and budgeting cycles. To the extent that seasonality makes it more difficult to predict our revenues, the volatility of our stock price may increase.

Our quarterly operating results have been volatile in the past and will likely vary significantly in the future. As a result, we believe that period-to-period comparisons of our operating results should not be relied upon as indicators of our future performance. Operating results vary depending on a number of factors, many of which are outside our control. Volatility in our operating results could adversely affect our stock price.

Recent Changes to our Product Packaging and Pricing May Cause Revenues to Decline

We recently changed the way we package and price our products, allowing our customers to more easily license single solution modules instead of having to license an entire product suite. The pricing of each solution module is significantly lower than the price of the entire product suite. We believe that, over time, the more modular packaging of our products will allow us to sell into more opportunities, and that in the future we will be able to better upsell existing customers who choose to license single solution modules. In the near term, however, if our customers choose to purchase single modules instead of purchasing full suites, this could adversely affect our revenues. Any such decrease in license revenues would adversely impact our gross profits and ultimately our net income.

Our Markets are Highly Competitive and are Experiencing Consolidation

The markets for our products are highly competitive, and we expect this competition to persist and intensify in the future. We compete against both new entrants into our markets as well as existing companies. Our failure to maintain and enhance our competitive position could seriously harm our business and operating results. We encounter competition from a number of sources, including:

Many of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies have more extensive customer bases and broader customer relationships that they could leverage, including relationships with many of our current and potential customers. Many also have significantly more established customer support and professional service organizations than we do. In addition, these companies may adopt aggressive pricing policies, which we are unable to match. In the past, we have lost potential customers to competitors for various reasons, including lower prices. Furthermore, these

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companies may have greater brand name recognition than we do. To achieve widespread market acceptance, we will need to further establish the Marimba brand and be able to differentiate our product and service offerings from those of our competitors.

Contributing to these challenges, our industry has been subject to consolidation, which subjects us to competition with larger companies offering integrated solutions and a wider breadth of products. Potential competitors may bundle their products or incorporate additional components into existing products in a manner that discourages users from purchasing our products. Alliances among competitors or between competitors and other large software companies present similar competitive challenges. As a result of consolidation or alliances, these competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can.

Furthermore, Microsoft has publicized its intentions to expand its offerings in the systems management software market that may compete with our products. If Microsoft were to grow its market share in the systems management market with competing products, the demand for our products and our ability to increase or sustain our market share may be harmed. In addition, the possible perception among our customers and potential customers that Microsoft is going to be successful in marketing expanded systems management software offerings that may compete with our products may delay their buying decisions and harm our ability to market our products and services to them.

Failure to Further Develop and Sustain Our Indirect Sales Channel and Third-Party Distribution Relationships Could Limit or Prevent Future Growth

We have a limited number of distributor relationships for our products with systems integrators and other resellers, and we may not be able to increase the number of distribution relationships or maintain our existing relationships. We are relying in part on the growth of our indirect sales channel for future revenue growth, and if this does not continue to develop, our ability to generate revenues may be materially harmed.

Our current agreements with our distribution partners typically do not prevent these companies from selling products of other companies (including products that may compete with our products), and they do not generally require these companies to purchase minimum quantities of our products. Some of these relationships are governed by agreements that can be terminated by either party with little or no prior notice. These distributors could give higher priority to the products of other companies or to their own products than they give to our products. In addition, sales through these channels generally result in lower fees to Marimba than direct sales. The loss of, or significant reduction in, sales volume from any of our current or future distribution partners as a result of any of these or other factors could seriously harm our revenues and operating results.

We Depend on the Growth of Our Customer Base and Increased Business from Our Current Customers

Our success is substantially dependent on the continued growth of our customer base. If we fail to increase our customer base, our business and operating results would be seriously harmed. Our ability to attract new customers will depend on a variety of factors, including the reliability, security, scalability and cost-effectiveness of our products and services, as well as our ability to effectively market our products and services.

If we fail to generate repeat and expanded business from our current customers, our business and operating results would be seriously harmed. Many of our customers initially make a limited purchase of our products and services for pilot programs. Also, with the release of Marimba Six, which enables customers to more easily license single solution modules instead of having to license an entire product suite, we may depend on increased repeat business from our customers to sustain and grow revenues. These customers may not choose to purchase additional licenses to expand their use of our products. In addition, as we deploy new versions of our products or introduce new products, our current customers may not require the functionality provided by our new products and may not ultimately license these products.

Our Success Depends on Our Desktop/Mobile Management Product Line

We expect to continue to derive a substantial portion of our revenues from our Desktop/Mobile Management product line and related services. A decline in the price of our Desktop/Mobile Management products or our inability to increase sales of these products could seriously harm our business and operating results. We cannot predict the success of our Desktop/Mobile Management products. We periodically update our Desktop/Mobile Management products to make improvements and provide additional enhancements.

In December 2003, we released Marimba Six, which includes a new version of our Desktop/Mobile Management product line. This new version and other future versions of the Desktop/Mobile Management product line may not provide the functionality and benefits we expect and could fail to meet customers’ requirements or achieve widespread market acceptance.

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We Need to Continue to Enhance and Develop Our Server Management Product Line and Develop New Products and Services

There can be no assurance that the revenues from our Server Management product line will continue to grow in absolute amount or as a percentage of total license revenues. In addition, we cannot assure you that our Server Management products will meet customer expectations or gain widespread market acceptance.

In December 2003, we released Marimba Six, which includes a new version of our Server Management product line. This new version of the Server Management product line, as well as other future versions of the Server Management product line, may not provide the functionality and benefits we expect and could fail to meet customers’ requirements or achieve widespread market acceptance.

To provide comprehensive software change and configuration management solutions, we will need to develop and introduce new products and services, which offer functionalities that we do not currently provide. We may not be able to develop these technologies, and therefore, we may not be able to offer a comprehensive software change management solution. In addition, we have in the past experienced delays in new product releases, and we may experience similar delays in the future. If we fail to release new products on a timely basis, our business and operating results could be seriously harmed.

We Face Risks Associated with Potential Acquisitions

We may make acquisitions in the future. Acquisitions of companies, products or technologies entail numerous risks, including an inability to successfully assimilate acquired operations and products, diversion of management’s attention, loss of key employees of acquired companies and substantial transaction costs. Some of the products acquired may require significant additional development before they can be marketed and may not generate revenue at anticipated levels. Moreover, future acquisitions by us may result in dilutive issuances of equity securities, the use of a substantial portion of our cash and investment balances, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in significant impairment charges or amortization expense. Any of these problems or factors could seriously harm our business, financial condition and operating results.

Our Operating Results and Financial Condition May be Materially Harmed if We Are Not Successful At Expanding Internationally

We plan to increase our international sales force and operations over the long term. Expanding internationally requires significant management attention and financial resources, and we may not generate sufficient revenues to cover these expenses. For any such expansion, we will also need to, among other things, expand our international sales channel management and support organizations and develop relationships with international service providers and additional distributors and system integrators. In addition, as international operations become a larger part of our business, we could encounter, on average, greater difficulty with collecting accounts receivable, longer sales cycles and collection periods, greater seasonal reductions in business activity and increased tax rates. Furthermore, products may need to be localized or customized to meet the needs of local users, before they can be sold in certain foreign countries. Developing localized versions of our products for foreign markets is difficult and could take longer than we anticipate.

In addition, our international business activities are subject to a variety of risks, including the adoption of or changes in laws, currency fluctuations and political and economic conditions that could restrict or eliminate our ability to conduct business in foreign jurisdictions. To date, we have not adopted a hedging program to protect us against risks associated with foreign currency fluctuations.

Export clearances, and in some cases, import clearances must be obtained before our products can be distributed internationally. Current or new government laws and regulations, or the application of existing laws and regulations, could expose us to significant liabilities, significantly slow our growth and seriously harm our business and operating results.

Our Business and Financial Performance Depends on Our Ability to Retain and Attract Key Personnel

Our success depends largely on the skills, experience and performance of the members of our senior management and other key personnel. Several members of our senior management are relatively new to Marimba, and our success will depend in part on the successful assimilation and performance of these individuals.

We may not be successful in attracting qualified senior management personnel or be able to attract, assimilate and retain other key personnel in the future. None of our senior management or other key personnel in the U.S. is bound by an employment agreement. In addition, our future success will depend largely on our ability to continue attracting and retaining highly skilled personnel. Like other companies in the software industry, we face competition for qualified personnel. If we lose senior management or key employees and are unable to replace them with qualified individuals, our business and operating results could be negatively affected.

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If Requirements Relating to Accounting Treatment For Employee Stock Options Are Changed, We May Be Forced to Change Our Business Practices

We currently account for the issuance of stock options under APB Opinion No. 25, “Accounting for Stock Issued to Employees.” If proposals currently under consideration by administrative and governmental authorities are adopted, we may be required to treat the value of the stock options granted to employees as a compensation expense. As a result, we could decide to decrease the number of employee stock options that we would grant. This could affect our ability to retain existing employees and attract qualified candidates, and increase the cash compensation we would have to pay to them. In addition, such a change could have a negative effect on our earnings.

We Have a Long Sales Cycle and Our Products Require a Sophisticated Sales Effort

A customer’s decision to license our products typically involves a significant commitment of resources and is influenced by the customer’s budget cycles and internal approval procedures for IT purchases. In addition, selling our products requires us to educate potential customers on our products’ uses and benefits. As a result, our products have a long sales cycle, which can take over six months. We face difficulty predicting the quarter in which sales to expected customers may occur. The sale of our products is also subject to delays from the lengthy budgeting, approval and competitive evaluation processes of our customers that typically accompany significant capital expenditures. For example, customers frequently begin by evaluating our products on a limited basis and devote time and resources to test our products before they decide whether to purchase a license for deployment. Customers may also defer orders as a result of anticipated releases of new products or enhancements by our competitors or us.

Our products and services require a sophisticated sales effort targeted at senior management of our prospective customers. New hires require extensive training and typically take at least six months to achieve full productivity. There is no assurance that new sales representatives will ultimately become productive. In prior quarters, a large portion of our license revenues has often resulted from contracts closed by just a few sales representatives. If we were to lose qualified and productive sales personnel, our revenues could be adversely impacted.

Implementation of Our Products by Large Customers May Be Complex and Customers Could Become Dissatisfied if Implementation Proves Difficult, Costly or Time Consuming

Our products must integrate with many existing computer systems and software programs used by our customers. Integrating with many other computer systems and software programs can be complex, costly and time consuming, and can cause delays in the deployment of our products for such customers. Customers could become dissatisfied with our products if implementations prove to be difficult, costly or time consuming, and this could negatively impact our ability to sell our products.

Software Defects in Our Products Would Harm Our Business

Complex software products like ours often contain errors or defects, including errors relating to security, particularly when first introduced or when new versions or enhancements are released. Our products extensively utilize digital certificates and other complex technology. Our use of this technology has in the past and may in the future result in product behavior problems, which may not be anticipated by our customers or us. Defects or errors in our current or future products or in products comparable to ours could result in lost or delayed revenues or harm to the reputation of our business, either of which would seriously harm our business and operating results.

We offer performance warranties with the purchase of a license for our software products. Such warranties typically require us to repair or replace a defective or non-conforming product reported to us during the applicable warranty period, or if repairing or replacing the product is commercially impracticable, to return the license fees paid for the defective or non-conforming product. We do not currently reserve for possible product returns. Because of this, any future product returns that require us to return amounts paid to us, especially from large customers or with respect to large transactions, could have a material adverse effect on our business and operating results.

In addition, since many of our customers use our products for business-critical applications, errors, defects or other performance problems could result in financial or other harm to our customers and could significantly impair their operations. Our customers could seek damages for losses related to any of these issues. A product liability claim or warranty claim brought against us, even if not successful, would likely be time consuming and costly to defend and could adversely affect our marketing efforts.

We Rely on Third-Party Software and Applications

We integrate third-party software and digital certificates as a component of our software. There are inherent limitations in the use and capabilities of much of the technology that we license from third parties. As a result, we face a number of challenges in integrating these technologies into our products. We would be seriously impacted if the providers from whom we license software ceased to deliver and support reliable products, enhance their current products or respond to emerging industry standards. In addition, the third-party software may

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not continue to be available to us on commercially reasonable terms or at all. The loss of, or inability to maintain or obtain, this software could result in shipment delays or reductions. Furthermore, we might be forced to limit the features available in our current or future product offerings. Either alternative could seriously harm our business and operating results.

Almost all of our products are written in Java and require a Java virtual machine in order to operate. Vendors offering these Java virtual machines may not continue to make these implementations of the Java virtual machines available at commercially reasonable terms or at all. Furthermore, if Sun Microsystems were to make significant changes to the Java language, if significant changes were to be made to Java virtual machine implementations of Sun Microsystems and other vendors or if they fail to correct defects and limitations in these products, our ability to continue to improve and ship our products could be impaired. In the future, our customers may also require the ability to deploy our products on platforms for which technically acceptable Java implementations either do not exist or are not available on commercially reasonable terms. Our customers may also use particular implementations of the Java virtual machines that may not be technically or commercially acceptable for integration into our products.

Protection of Our Intellectual Property Is Limited

We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use our proprietary information. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. To the extent that we have sufficient resources to pursue such litigation, it could result in substantial costs and diversion of resources and could significantly harm our business and operating results. In addition, we sell our products internationally, and the laws of many countries do not protect our proprietary rights as well as the laws of the United States.

We May Be Found to Infringe Proprietary Rights of Others

Other companies, including our competitors, may obtain patents or other proprietary rights that could prevent, limit or interfere with our ability to make, use or license our products. As a result, we may be found to infringe the proprietary rights of others. Furthermore, companies in the software market are increasingly bringing suits alleging infringement of their proprietary rights, particularly patent rights. We have been involved in two such patent infringement suits in the past.

We could incur substantial costs to defend any intellectual property litigation, and any such litigation could result in one or more of the following:

In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business and operating results would be significantly harmed. Regardless of the merits, these claims could be time-consuming and divert our management’s attention from the operation of our business.

We May Have Difficulty Collecting Amounts Owed to Us

Certain of our existing and proposed customers have experienced credit-related issues. Because a small number of customers account for a large portion of our revenue and cash flow in any given quarter, the credit-worthiness of our largest customers is critical to our business. At December 31, 2003, two customers represented 20% and 16% of net accounts receivable. We wrote off $1.0 million in uncollectible accounts during fiscal 2002, which had been previously reserved in 2001. We perform ongoing credit evaluations of customers, but do not generally require collateral. We grant credit terms to most customers ranging from 30 to 90 days, however in some instances we provide longer payment terms. Should we have more customers than we anticipate with liquidity issues, or if payment is not received on a timely basis, our business, operating results and general financial condition could be seriously harmed.

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Our Ability to Grow and Sustain Service Revenues Depends on New License Customers and Support Contract Renewals

The total amount of maintenance and support fees we receive in any period depends in large part on the size and number of license orders that we have previously sold. Any downturn in our software license revenues could negatively impact our future service revenues. Our support and maintenance programs are sold on an annual basis. Renewal of annual support and maintenance is generally at the customer’s election. If customers elect not to renew their support and maintenance agreements, our service revenues could be significantly adversely impacted. If support and maintenance revenues were to decline, or not grow as rapidly as expected, we would need to generate additional license revenues and other service revenues in order to compensate for the decline in support and maintenance revenues.

We Rely on Third-Party Marketing and Technology Relationships For Future Sales Growth

We currently have several marketing and technology relationships. These relationships include joint sales and marketing relationships that provide us access to potential sales to large enterprises that we might not otherwise have access to, as well as product integration and other relationships. In addition, the success of key initiatives going forward depends in part on our ability to form and sustain strategic technology and product relationships. If we cannot maintain successful marketing and technology relationships or if we fail to enter into additional marketing and technology relationships, we could experience difficulty expanding the sales of our products and our growth might be limited. Our marketing and technology relationships are generally not documented in writing, or are governed by agreements that can be terminated by either party with little or no prior notice. In addition, companies with which we have marketing or technology relationships may promote products and services of several different companies, including those of our competitors. If these companies choose not to promote our products or if they develop, market or recommend products or services that compete with our products, our business would be harmed.

We Must Respond to Rapid Technological Change and Evolving Industry Standards

The markets for our software change and configuration management solutions are characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. New solutions based on new technologies or new industry standards can quickly render existing solutions obsolete and unmarketable. Any delays in our ability to develop and release enhanced or new solutions could seriously harm our business and operating results. Our technology is complex, and new products, enhancements and services can require long development and testing periods. Our failure to conform to prevailing standards could have a negative effect on our business and operating results.

We Are Subject to the Effects of General Economic and Geopolitical Conditions

Our business is subject to the effects of general economic conditions and, in particular, market conditions in the industries that we serve. Recent political turmoil in many parts of the world, including terrorist and military actions, may put pressure on global economic conditions. Our customers’ decisions to purchase our products are discretionary and subject to their internal budget and purchasing processes, which may be impacted by the above factors. If economic conditions deteriorate, our business and operating results are likely to be adversely impacted.

Our Stock Price Is Likely to Continue to be Volatile

The market price of our common stock has been and is likely to continue to be volatile. The market price of our common stock may be significantly affected by factors such as actual or anticipated fluctuations in our operating results, announcements of technological innovations, new products or new contracts by us or our competitors, developments with respect to patents or proprietary rights and related litigation, other material litigation involving Marimba, changes in our management or other key employees, adoption of new accounting standards affecting the software industry, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market price for the common stock of technology companies. Furthermore, our common stock is relatively thinly traded, which contributes significantly to the volatility of our stock price. Due to the low trading volume of our stock, stockholders may not be able to purchase or sell shares, particularly large blocks of shares, as quickly and as inexpensively as if the trading volume were higher. Volatility in the price of our common stock may adversely affect its market price.

We Are Involved in a Securities Class Action Litigation and Are At Risk of Additional Similar Litigation

We are a party to the securities class action litigation described in Part II, Item 1—“Legal Matters” of this report. We have agreed to a settlement with the plaintiffs in this action. However, the settlement is subject to several conditions, including a hearing on fairness and approval by the court overseeing the litigation, and we cannot assure you that the settlement will be consummated. In the event the settlement is not consummated, the defense of this litigation may increase our expenses and divert our management’s attention and resources, and any unfavorable outcome could have a material adverse effect on our business and results of operations. In addition, we may in the future be the target of other securities class actions or similar litigation.

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Provisions in Our Charter Documents and in Delaware Law May Discourage or Delay Potential Acquisition Bids for Marimba and Prevent Changes in Our Management

Our charter documents authorize us to issue shares of preferred stock with rights, preferences and privileges designated by our Board of Directors, without further stockholder approval. While this provides desirable flexibility in connection with possible acquisitions and other corporate purposes, any issued preferred stock could have the effect of delaying, deferring or preventing a change in control of our company. As a result, the market price of our common stock and the voting and other rights of the holders of our common stock may be adversely affected. The issuance of preferred stock may result in the loss of voting control to others.

In addition, provisions in our charter documents eliminate the right of stockholders to act by written consent without a meeting and limit the right of stockholders to call, and present items of business at, a special meeting of stockholders. These provisions are intended to increase the likelihood of continuity and stability in the composition of our Board of Directors and in the policies set by the Board. These provisions also discourage certain types of transactions that may involve an actual or threatened change of control transaction, and are designed to reduce our vulnerability to an unsolicited acquisition proposal. As a result, these provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. These provisions are also intended to discourage certain tactics that may be used in proxy fights. However, they could have the effect of discouraging others from making tender offers for outstanding shares of our stock, and may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts. These provisions may also have the effect of preventing changes in the management of our company.

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Interest Rate Sensitivity

Our interest income is sensitive to changes in the general level of U.S. interest rates. Most of our investments are in marketable securities with maturities less than two years. Our investment policy requires us to invest funds in excess of current operating requirements in:

The following table presents the amount of cash equivalents and investments that are subject to market risk and the weighted average interest rates, by year of expected maturity, for our investment portfolio as of December 31, 2003 and 2002. This table does not include money market funds, because those funds are not subject to market risk:

Exchange Rate Sensitivity

We develop products primarily in the United States, and sell our products and services primarily in North America, Europe and Asia. As a result, our financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. A portion of our sales and expenses are currently transacted in British Pounds and Euros, which potentially affects our financial position, results of operations and cash flows due to fluctuations in exchange rates. Near-term changes in exchange rates may have a material impact on our future revenues, earnings, fair values or cash flows. We have not engaged in foreign currency hedging transactions during the twelve months ended December 31, 2003. There can be no assurance that a sudden and significant change in the value of the British Pound or Euro would not seriously harm our financial condition, results of operations, and cash flows.

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MARIMBA, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Marimba, Inc.

We have audited the accompanying consolidated balance sheets of Marimba, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Marimba, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

/s/    ERNST & YOUNG LLP

San Francisco, California

January 23, 2004

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MARIMBA, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value data)