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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended April 30, 2004

OR

Commission File Number: 0-22369

BEA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

2315 North First Street

San Jose, California 95131

(Address of principal executive offices)

(408) 570-8000

(Registrant’s telephone number, including area code)

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

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

As of May 31, 2004, there were approximately 407,190,421 shares of the Registrant’s common stock outstanding.

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BEA SYSTEMS, INC.

INDEX

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PART I. FINANCIAL INFORMATION

BEA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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BEA SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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BEA SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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BEA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the BEA Systems, Inc. (“BEA” or the “Company”) Annual Report on Form 10-K for the fiscal year ended January 31, 2004. The results of operations for the three months ended April 30, 2004 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending January 31, 2005 (“fiscal 2005”).

The condensed consolidated balance sheet at January 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Principles of consolidation

The condensed consolidated financial statements include the accounts of the Company and all subsidiaries. The Company also consolidated as of August 2003 a variable interest entity of which the Company is the primary beneficiary pursuant to Financial Accounting Standards Board (or FASB) Interpretation No. 46R (“FIN 46R”), a revision to Interpretation 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin No. 51. Material intercompany accounts and transactions have been eliminated.

Use of estimates

The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ materially from those estimates.

Revenue recognition

The Company recognizes revenues in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2, Software Revenue Recognition, as amended. Revenue from software license agreements is recognized when the basic elements of software revenue recognition have been established (i.e. persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collection is probable). The Company uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and vendor specific evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

When licenses are sold together with services, license fees are recognized upon delivery, provided that (1) the basic elements of software revenue recognition have been met, (2) payment of the license fees is not dependent upon the performance of the services, and (3) the services do not provide significant customization of the software products and are not essential to the functionality of the software that was delivered. The majority of license fees are recognized in this manner.

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BEA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

If the fee due from the customer is not fixed or determinable, including in certain circumstances where terms are extended, revenue is recognized as payment is made, assuming all other revenue recognition criteria have been met. In certain regions or countries where collection risk is considered to be high, such as Latin America and certain Asian and Eastern European countries, revenue is generally recognized only when full cash payment is received from the customer. Revenue arrangements with resellers are recognized when the Company receives persuasive evidence that the reseller has sold the products to an end user customer. Revenue from sales to independent software vendors (“ISVs”) who embed BEA’s products into their software products is recognized either upon shipment to the ISV or when the Company receives persuasive evidence that the ISV has sold the products to an end user customer, depending upon the facts and circumstances and BEA’s past experience with the particular ISV. License revenue on a majority of ISV arrangements is recognized upon shipment to the ISV. None of the Company’s resellers or ISV have rights of return.

Services revenue includes consulting services, customer support and education. Consulting revenue and the related cost of services are recognized on a time and materials basis; however, revenues from certain fixed-price contracts are recognized on the percentage of completion basis, which involves the use of estimates. The amount of consulting contracts recognized on a percentage of completion basis has not been significant to date. Customer support agreements provide technical support and the right to unspecified future upgrades on an if-and-when available basis. Customer support revenue is recognized ratably over the term of the support period (generally one year) and education revenues are recognized as the related training services are delivered. The unrecognized portion of amounts billed in advance of delivery for services is recorded as deferred revenues.

The Company rarely purchases software products from vendors who are also customers of BEA. For contemporaneous exchanges of software products, the transaction is generally recorded on a net basis (i.e. revenue or expense is recognized equal to the net cash exchanged in the transaction).

Accounts receivable

Accounts receivable are stated net of allowances for doubtful accounts. The Company makes judgments as to its ability to collect outstanding receivables and records allowances when collection becomes doubtful. Allowances are made based upon a review of significant outstanding invoices. For those invoices not reviewed, allowances are provided based upon a percentage of expected uncollectible accounts. In determining these percentages, the Company analyzes its historical collection experience and current economic trends including such factors as geography and industry of the customer.

Stock-based compensation

The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair market value of the stock on the date of grant. As permitted under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“FAS 123”), as amended by SFAS No. 148 “Accounting for Stock-Based Compensation” – Transition and Disclosure” (collectively referred to as “SFAS 123”, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in the Company’s financial statements in connection with employee stock awards where the exercise price of the award is equal to or greater than the fair market value of the stock on the date of grant. When stock options are granted with an exercise price that is lower than the fair market value of the stock on the date of grant, the difference is recorded as deferred compensation and amortized to expense on a straight-line basis over the vesting term of the stock options.

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BEA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Pro forma information regarding net income (loss) and net income (loss) per share is required by FAS 123. This information is required to be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called “stock-based awards”), under the fair value method of FAS 123. Stock-based awards have been valued using the Black-Scholes option pricing model. Among other things, the Black-Scholes model considers the expected volatility of the Company’s stock price, determined in accordance with FAS 123, in arriving at an option valuation.

The fair value of the Company’s stock-based awards to employees was estimated assuming no expected dividends and the following weighted-average assumptions:

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because the Company’s stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable measure of the fair value of the Company’s stock-based awards.

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BEA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For purposes of pro forma disclosures, the estimated fair value of the stock-based awards is amortized to expense over the awards’ vesting period. The pro forma stock-based employee compensation expense has no impact on the Company’s cash flows. In the future, the Company may elect, or be required, to use a different valuation model, which could result in a significantly different impact on pro forma net income (loss). For purposes of this reconciliation, the Company adds back to previously reported net income all stock-based employee compensation expense that relates to acquisitions or to awards made below fair market value, then deducts the pro forma stock-based employee compensation expense determined under the fair value method for all awards. The Company’s pro forma information is as follows (in thousands, except per share amounts):

Consistent with FAS 109 and the Company’s recognition of its deferred tax assets, the reconciliation above does not include any tax impact on the stock-based employee compensation expense as the resulting deferred tax asset would be offset by an additional valuation allowance.

Projects funded by third parties

The Company occasionally enters into product development agreements with third parties that provide funding to BEA, which is intended by BEA and the third party to offset certain operating costs incurred by BEA. Such amounts are recorded as a reduction in BEA’s operating expenses. During the first quarter of fiscal 2005 and 2004, approximately $2.7 million and $3.2 million, respectively, of third party funding was recorded as a reduction in operating expenses.

Loans to executives and officers

We have secured notes receivable from two executives totaling approximately $1.4 million as of April 30, 2004 and as of January 31, 2004. These notes originated prior to June 30, 2002 and are secured by deeds of trust on real property. They bear interest of 4.75 percent and 7 percent per annum and are due and payable on April 3, 2006 and May 10, 2007, respectively, or upon the termination of employment with us. The notes maybe repaid at anytime prior to the due date.

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BEA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In September 1999, the Company issued an unsecured line of credit to Alfred Chuang, our Chief Executive Officer of the Company, in the amount of $5.0 million. No borrowings were outstanding under this line of credit at April 30, 2004 or January 31, 2004.

Common Board Members or Executive Officers

We occasionally sell software products or services to companies that have board members or executive officers that are also on our Board of Directors. The total revenues recognized by us from such customers in the first quarters of fiscal 2005 and 2004 were insignificant.

Basic net income per share is computed based on the weighted average number of shares of the Company’s common stock less the weighted average number of shares subject to repurchase and held in escrow. Diluted net income per share is computed based on the weighted average number of shares of the Company’s common stock and common equivalent shares (using the treasury stock method for stock options and using the if-converted method for convertible notes), if dilutive.

The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations (in thousands, except per share data):

The computation of diluted net income per share for the three months ended April 30, 2004 and 2003 excludes the impact of options to purchase 16.0 million and 35.3 million shares of common stock, respectively, and the conversion of the $550 million 4% Convertible Subordinated Notes due December 15, 2006 (the “2006 Notes”) which are convertible into 15.9 million shares of common stock at both April 30, 2004 and 2003, as such impact would be anti-dilutive for these periods.

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BEA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property and equipment consist of the following (in thousands):

The following tables provide a summary of the carrying amounts of acquired intangible assets that will continue to be amortized and exclude amounts originally allocated to assembled workforce (in thousands):

The total expected future amortization related to acquired intangible assets as of April 30, 2004 is provided in the table below (in thousands):

During the first fiscal quarter of 2005, the Company approved a plan to consolidate certain facilities in regions including the United States and Canada. A facilities consolidation charge of $7.7 million was recorded using management’s best estimates and was based upon the present value of the remaining future lease

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BEA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

commitments for vacant facilities, net of the present value of the estimated future sublease income. The facilities consolidation charge also included the write-off of approximately $0.8 million of unamortized leasehold improvements. During the fiscal year ended January 31, 2002 (“Fiscal 2002”), the Company approved a plan to consolidate certain facilities in the United States, Canada, and Germany. The Company recorded a facilities consolidation charge of $20.0 million based on the remaining future lease commitments for vacant facilities, net of estimated future sublease income. The estimated costs of abandoning these leased facilities, including estimated costs to sublease, were based on market information and trend analyses, including information obtained from third party real estate industry sources.

As a result of these consolidation activities, at April 30, 2004, $15.2 million of lease termination costs remained accrued, net of anticipated sublease income. These accrued costs are expected to be fully expended by fiscal 2012. If actual circumstances prove to be materially different than the amounts management has estimated, the Company’s total charges for these vacant facilities could be significantly higher. Adjustments to the facilities consolidation charge will be made in future periods, if necessary, based upon then current actual events and circumstances. The following table summarizes the charge in fiscal 2002 and fiscal 2005, and the activity related to the facilities consolidation liability during the fiscal year ended January 31, 2003 (“Fiscal 2003”), the fiscal year ended January 31, 2004 (“Fiscal 2004”), and the three months ended April 30, 2004 (in thousands):

The components of accumulated other comprehensive income are as follows (in thousands):

During the three months ended April 30, 2004, the Company issued 2.2 million shares of common stock and received $12.0 million in proceeds resulting from the exercise of employee stock options.

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BEA SYSTEMS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company recorded a tax benefit from stock options of $6.3 million and $9.8 million in the three months ended April 30, 2004 and 2003, respectively.

In September 2001 and March 2003, the Board of Directors approved an aggregate repurchase of up to $200.0 million of our common stock under the Share Repurchase Program. In fiscal 2003, 6.9 million shares were repurchased at a total cost of approximately $42.1 million. In fiscal 2004, an additional 8.0 million shares were purchased at a total cost of approximately $81.2 million, leaving approximately $76.7 million of the approval limit available for share repurchases under the Share Repurchase Program. No repurchases were done in the first quarter of fiscal 2005 under the Share Repurchase Program. Subsequent to the quarter ended April 30, 2004, the Board of Directors approved an additional repurchase of up to $200.0 million of our common stock under the Share Repurchase Program.

Litigation and other claims

The Company is subject to legal proceedings and other claims that arise, such as those arising from domestic and foreign tax authorities and employee-related matters, in the ordinary course of its business. While management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect the Company’s financial position, results of operations, or liquidity, the ultimate outcome of any litigation or claim is uncertain, and the impact of an unfavorable outcome could be material to the Company.

Warranties and indemnification

The Company generally provides a warranty for its software products and services to its customers and accounts for its warranties under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“FAS 5”). The Company’s products are generally warranted to perform substantially as described in the associated product documentation for a period of 90 days. The Company’s services are generally warranted to be performed consistent with industry standards for a period of 90 days from delivery. In the event there is a failure under such warranties, the Company generally is obligated to correct the product or service to conform to the warranty provision or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company has not provided for a warranty accrual as of April 30, 2004 or January 31, 2004. To date, the Company’s warranty expense has not been significant.

The Company generally agrees to indemnify its customers against legal claims that the Company’s software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations under FAS 5. In the event of such a claim, the Company is generally obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably possible, to refund the cost of the software, as pro-rated over a three-year period. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers. As such, the Company has not recorded a liability for infringement costs as of April 30, 2004 or January 31, 2004.

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The following discussion of the financial condition and results of operations of BEA Systems, Inc. (“BEA” or the “Company”) should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004, and subsequent SEC filings. This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “goals,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements regarding: future company performance; financial and product performance; market growth; revenue mix; future opportunities; performance of geographic and business sectors; foreign exchange rates; new product features and benefits; assumptions about market growth; financial models; financial assumptions; the use of a different valuation model to value stock options; the utilization of lease termination costs; the amount of ultimate liability of any litigation; critical accounting policies; the fluctuation of revenues of regions as a percentage of total revenues; adjustments to facilities consolidation charges; the development of further integration technologies and features; the continuation of certain products accounting for a majority of revenue; the significant advantages of a standards-based approach; use of the application server for essential services, and a tightly integrated platform product; the construction of additional corporate offices and research and development facilities; the continuation of growth through acquisitions; seasonality of orders and sales; the investment in programs and strategies to attract developers using non-Java platforms; sufficiency of existing cash; future amortization expenses associated with intangible assets; the commitment of substantial resources to product development and engineering; fluctuation of revenues and operating results; continued investment in WebLogic Platform 8.1; the expansion of relationships with distributors and ISVs; the update of our management information systems to integrate financial and other reporting; the development and roll out of information technology initiatives; an increase in staff and improvement in financial reporting and controls; the estimate and fluctuation of interest payments; estimates of future cash flows; the evaluation of the realizability of deferred tax assets; the trend toward increased high dollar transactions; the dependence on continued expansion of international operations; the dependence on our ability to attract and retain highly skilled personnel; our acquisition strategy; the slowdown of service revenue; completion of structural changes in the Americas sales organization; the goal to sell more broadly inside customer organization; and the focus on developing products to address the integration market. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described under the headings “Effect of New Accounting Pronouncements” and “Risk Factors that May Impact Future Operating Results,” as well as risks described immediately prior to or following some forward-looking statements. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statement or risk factors.

Overview

BEA^® is the world’s leading application infrastructure software provider. Our WebLogic Enterprise Platform^™ delivers a highly reliable, scalable software infrastructure for customers to bring new services to market quickly, to lower operational costs by automating processes, and to automate relationships with suppliers and distributors. The BEA WebLogic^™ Enterprise Platform consists of BEA WebLogic Server^™, the world’s leading Java 2 Enterprise Edition (“J2EE”) application server, which includes security, management, development and deployment features, as well as support for Web services protocols; BEA WebLogic Integration^™, a standards-based solution for application integration, business process management, business-to-business integration and Web services; BEA WebLogic Portal^™, an infrastructure for building and deploying robust personalized enterprise portals; BEA Liquid Data for WebLogic^™, a solution for providing information

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integration and data aggregation from various sources in distributed computer systems; BEA WebLogic Workshop^™, a unified, services-oriented development environment for Java and Web applications, Web services, data and application integration, business processes, and portals; BEA Weblogic JRockit^™ JVM, a server centric Java Virtual Machine (“JVM”); WebLogic Enterprise Security^™, an application security infrastructure solution; and BEA Tuxedo^®, a proven transaction processing platform for mission-critical, large-scale and high-volume distributed enterprise applications. Our products are marketed and sold worldwide primarily through our direct sales force, and also through systems integrators (“SIs”), independent software vendors (“ISVs”) and hardware vendors that are our partners and distributors. Our products have been adopted in a wide variety of industries, including telecommunications, commercial and investment banking, securities trading, government, manufacturing, retail, airlines, package delivery, pharmaceuticals and insurance. The BEA WebLogic Enterprise Platform provides application infrastructure for building and deploying distributed, integrated information technology (“IT”) environments, allowing customers to integrate private client/server networks, the Internet, intranets, extranets, virtual private networks, and mainframe and legacy systems as system components. Our products serve as a platform, integration tool or portal framework for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading and settlement, online banking, Internet sales, inventory management, supply chain management, enterprise resource planning, scheduling and logistics, and hotel, airline and rental car reservations. Licenses for our products are typically priced on a per-central processing unit basis, but we also offer licenses priced on other metrics.

Seasonality.    Our first quarter sales are typically lower than sales in the immediately preceding fourth quarter because most of our customers begin a new fiscal year on January 1 and it is common for capital expenditures to be lower in an organization’s first quarter than in its fourth quarter. Our commission structure and other sales incentives also tend to result in fewer sales in the first quarter than in the fourth quarter. We anticipate that the negative impact of seasonality on our first quarter will continue.

Investment in Distribution.    In the first quarter of fiscal 2005, we implemented changes in our Americas distribution organization. These changes included signing relationships with a value-added distributor and several value-added resellers (“VARs”), creating a new general accounts region within our Americas sales organization primarily to coordinate our efforts with the VARs, reassigning personnel to staff this newly created general accounts region, transitioning customer relationships for these reassigned personnel, transitioning customer accounts to be focused on by the general accounts region and the VARs, moving the location of our telesales organization, and hiring a significant number of new employees in the Americas sales organization. We believe these changes disrupted the sales process in our first quarter of our fiscal 2005 more than we anticipated, and contributed significantly to reducing our revenue in North America in this quarter. Although we currently believe the structural changes have been substantially completed, the adverse impact of these changes will continue into our second quarter of our fiscal 2005 and for some time thereafter. For example, it will take time to transition customer relationships, to train the new personnel and to train the VARs. In addition, after the close of our first quarter of our fiscal 2005, the Vice President in charge of our Americas sales organization resigned from the company. In the interim, our Executive Vice President of worldwide sales is directly managing the Americas sales organization. Based in part on adverse the impact on our revenue resulting from the disruptions we experienced in our first quarter of our fiscal 2005, we believe that there is a significant risk that the ongoing adverse impact of these changes to our Americas sales and distribution organizations, together with the absence of a dedicated executive leading our Americas sales organization, could negatively impact our revenue in the Americas in our second quarter of our fiscal 2005 and beyond.

Investment in Platform Product.    In the Fall of 2001, we announced a new focus on a platform approach. Primarily known as an application server provider, our platform strategy converged application server, integration, portal, security, development and deployment tools, and operations, administration and management into a single product offering. Our approach was to unify these technologies into a single code base, with a single installation, single development and deployment tools and single management console. Delivering a platform product required significant research and development investment in areas that were relatively new to us, such as security, integration and tools, and also required significant investment in research and development in order to

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unify various technologies into a single code base. Selling and marketing a platform product also requires significant investment in marketing to educate customers and prospects, and significant investment to educate our sales force. One goal of the platform approach is to sell more broadly inside customer organizations, and also to sell at higher levels in the customer organizations. This approach may have the effect of lengthening sales cycles and increasing deal sizes, both of which make it harder to predict the timing and size of large deals. We recently released our WebLogic Platform^™ 8.1 product in July 2003, and are actively working on the transitions inside the sales force, product market and customer base.

Investment in Integration Technologies.    In the spring of 2001, we announced a new focus on developing products to address the integration market. To address this market, we introduced BEA WebLogic Integration in July 2001, and a series of BEA branded, sold and supported adapters in August 2002. We also partner with complementary technology providers to supplement our integration solutions. In addition, we continue to develop further integration technologies and features, both inside the WebLogic^® Integration product and in the other elements of the WebLogic Enterprise Platform. Our strategy for the integration market is characterized by three approaches that we believe are different than how the market was previously being addressed: (i) a standards based approach, built on the J2EE messaging and connectivity standards, in contrast to other vendors’ proprietary approaches; (ii) using the application server to provide essential capabilities and underlying services, such as scalability and transaction processing, in contrast to the messaging approaches offered by most other integration vendors; and (iii) providing Web services support, business process management, business-to-business integration, application integration, information integration, development tools and a run-time framework all in a single tightly integrated platform product, rather than providing them as separate products with separate tools and separate deployment frameworks. Some of our competitors in the integration market have recently announced a variety of initiatives similar to one or more of these approaches.

Investment in Developer Programs.    Our products are a platform for Java application development and deployment, both packaged applications built and sold by ISVs and custom applications built by our customers and SI partners. Success in a platform market requires that a large number of developers are trained on and actively using our platform. As a result, we have made a substantial investment in building programs to attract and retain Java developers. In addition, BEA WebLogic Workshop is designed to allow developers who are not trained in Java, such as developers who primarily use Visual Basic, Power Builder or COBOL, to quickly and easily become productive in Java and on the BEA WebLogic Platform. As a result, we are investing in programs to go beyond the current community of Java developers and attract developers currently using non-Java platforms. There can be no assurance that our investment in these programs will be successful.

Acquisitions.    Throughout our history, we have acquired product lines, development teams, distributors and companies to expand our business. Our strategy is to continue to grow our business through acquisitions. Our acquisition strategy is focused primarily on using cash or stock to purchase development teams or technologies to add features or products that complement or expand our products.

Critical Accounting Policies

We believe there have been no significant changes in our critical accounting policies during the quarter ended April 30, 2004 as compared to our previous disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.

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Results of Operations

The following table sets forth certain line items in BEA’s consolidated statements of operations as a percentage of total revenues for the fiscal quarters ended April 30, 2004 and 2003.

Revenues (in thousands):

Our revenues are derived from fees for software licenses, and services, which include customer support, education and consulting. The revenue growth of 10.7 percent for the quarter ended April 30, 2004 (the “first quarter of fiscal 2005”) from the same quarter in the prior fiscal year (the “first quarter of fiscal 2004”) reflects growth in our customer support, consulting and education revenues, offset partially by a decrease in license revenues. Services revenue increased by 23.9 percent which was primarily due to the $20.0 million increase (22.8 percent increase) in support revenues compared to the same quarter in the prior year. Geographically, the increase in total revenues was due in large part to the 25.8 percent increase in international revenues offset by a 2.2 percent decline in Americas revenues year over year. In the quarter ended April 30, 2004, total revenues when translated at a constant exchange rate from the same quarter in the prior year would have been approximately $245.5 million. Many factors that impact our revenue levels are beyond our control and there can be no assurance that our revenues will grow in the future.

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License Fees (in thousands):

Management believes the decrease in license revenues for the first quarter of fiscal 2005 from the same quarter in the prior fiscal year was due in part to organizational changes in the Americas sales force, greater than anticipated seasonality, the timing of large transactions, and the rate of market acceptance of the WebLogic Platform 8.1. License fees for the period ended April 30, 2004 included 17 product transactions of high dollar value (transactions with a product value greater than $1.0 million) compared to 12 transactions in the same quarter of the prior year. Management believes that the trend toward an increase in the number of license fee transactions greater than $1.0 million increases the risk that reported results may differ from expected results.

Service Revenues

The following table provides a summary of service revenues (in thousands):

Consulting and education revenues consist of professional services related to the deployment and use of our software products, and are typically recognized on a time and materials basis. Customer support revenues consist of fees for annual maintenance contracts, which are recognized ratably over the term of the agreement (generally one year). Customer support is typically priced as a percentage of license fees. The significant increase in customer support revenues in the first quarter of fiscal 2005 compared to the same quarter in the prior fiscal year was driven by maintenance renewals on our existing installed base of software licenses as well as maintenance contracts sold together with new sales of software licenses. Consulting and education revenues increased in the first quarter of fiscal 2005 compared to the same quarter in the prior fiscal year due, in part, to an increase in demand for consulting and education services related to our new WebLogic Platform products, which were released in July 2003.

Revenues by Geographic Region

The following tables provide a summary of revenues by geographic region (in thousands):

For each of the twelve fiscal quarters ended April 30, 2004, EMEA and APAC revenues as a percentage of total revenues have ranged between 28 percent to 38 percent for EMEA and 13 percent to 17 percent for APAC.

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These ranges may fluctuate in the future depending upon regional economic conditions, including but not limited to, foreign currency exchange rates, and if a large sale is made in a particular region. Management believes the decline in the Americas revenues quarter over quarter was due to a combination of factors which include organizational changes in the Americas sales force, greater than anticipated seasonality, and the timing of large deals. Americas revenues translated at a constant exchange rate would have been $124.1 million. The increase in EMEA revenues was due to strong performance across the entire region including a significant increase in million dollar transactions compared to a year ago. EMEA revenues translated at constant exchange rate would have been approximately $85.9 million. APAC revenues declined slightly from the same quarter in the prior year. APAC revenues would have been approximately $35.5 million when translated at a constant exchange rate year over year.

Cost of Revenues

The following table provides a summary of cost of revenues (in thousands):

Cost of License Fees.    Cost of license fees, as referenced in the table above, includes fees paid to third- party contractors in connection with our customer license compliance program, royalties and license fees paid to third parties, costs associated with transferring our software to electronic media, the printing of user manuals, packaging and distribution costs, and localization costs. Cost of license fees was 5.4 percent and 4.8 percent of license revenues for the first quarter of fiscal 2005 and 2004, respectively. The increase in cost of license fees in absolute dollars and as a percentage of license revenues from the first quarter of fiscal 2004 to the first quarter of fiscal 2005 is primarily due to increases in royalties paid to third parties

Cost of Services.    Cost of services, consists primarily of salaries and benefits for consulting, education and product support personnel; cost of third party delivered education and consulting revenues; and infrastructure costs in information technology and real estate facilities for the operation of the services organization. The increase in cost of services in the first fiscal quarter of 2005 compared to the same quarter in fiscal 2004 is primarily related to costs associated with the increase in consulting and education revenues and an exchange rate impact of approximately 6 percent. These increases in costs of services were offset by the classification of $1.2 million of rent expense as Other Income, Net in the first quarter of fiscal 2005 in connection with the adoption of Financial Accounting Standards Board Interpretation No. 46 (“FIN 46R”) in August 2003. Cost of services represented 34.4 percent, and 40.7 percent of total services revenues in the first quarter of fiscal 2005 and 2004, respectively. Cost of services as a percentage of service revenues decreased over this period due to a higher mix of higher-margin customer support revenues versus lower-margin consulting and education revenues.

Amortization of Acquired Intangible Assets included in Cost of Revenues.    The amortization of acquired intangible assets consists of amortization of purchased technology, non-compete agreements, customer base, patents and trademarks and distribution rights. The decrease in amortization from the first quarter of fiscal 2004 to the first quarter of fiscal 2005 was primarily due to a portion of our acquired intangible assets becoming fully amortized in the early part of the first quarter of fiscal 2005. In the future, amortization expense associated with intangible assets recorded prior to April 30, 2004 is currently expected to total approximately $9.2 million and $3.5 million for the remainder of fiscal 2005 and for fiscal 2006, respectively. We periodically review the

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estimated remaining useful lives of our intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.

Operating Expenses

Sales and Marketing (in thousands):

Sales and marketing expenses include salaries, benefits, sales commissions, travel, information technology and facility costs for our sales and marketing personnel. These expenses also include programs aimed at increasing revenues, such as advertising, public relations, trade shows and user conferences. The increase in sales and marketing in the first fiscal quarter of 2005 compared to the same quarter in fiscal 2004 is primarily related to the investment in additional personnel in the sales organization coupled with a negative foreign exchange impact of approximately 5 percent and offset by the classification of rent expense of $0.5 million as Interest and Other, Net in the first quarter of fiscal 2005 in connection with the adoption of FIN 46R in August 2003.

Research and Development (in thousands):

Research and development expenses consist primarily of salaries and benefits for software engineers, contract development fees, costs of computer equipment used in software development, information technology and facilities expenses. Research and development expenses remained flat in absolute dollars from the first quarter of fiscal 2004 to the first quarter in fiscal 2005 and included the $0.6 million classification of rent expense as Interest and Other, Net in the first quarter of fiscal 2005 in connection with the adoption of FIN 46R in August 2003. We believe that a significant level of research and development is required to remain competitive and we expect to continue to commit substantial resources to product development and engineering in future periods.

General and Administrative (in thousands):

General and administrative expenses include costs for our human resources, finance, legal, information technology, facilities and general management functions, as well as bad debt expense. The increase in expenses over the same quarter in fiscal 2004 was due primarily accounting expenses related to the compliance with the regulations of the Sarbanes-Oxley Act, legal expenses on intellectual property matters offset by the $1.2 million reduction in the allowance for doubtful accounts in fiscal 2004, and the classification of rent expense in the first quarter of fiscal 2005 of $0.3 million as Interest and Other, Net in connection with the adoption of FIN 46R in August 2003.

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Other Charges

Facilities Consolidation.

During the first fiscal quarter of 2005, we approved a plan to consolidate certain facilities in regions including the United States and Canada. A facilities consolidation charge of $7.7 million was recorded using management’s best estimates and was based upon the remaining future lease commitments for vacant facilities, net of estimated future sublease income. The facilities consolidation also included the write-off of approximately $0.8 million of unamortized leasehold improvements. The estimated costs of abandoning these leased facilities, including estimated costs to sublease were based on market information and trend analyses, including information obtained from third party real estate industry sources.

Interest and Other, Net

The following table provides a summary of the items included in interest and other, net (in thousands):

On August 1, 2003 and in accordance with the adoption of FIN 46R, we recorded the carrying value of leased San Jose land and the related debt that had previously been accounted for as an operating lease. Prior to August 1, 2003, the carrying costs associated with the San Jose land of approximately $2.6 million for the quarter ended April 30, 2004 were accounted for as rent expense, which was recorded as operating expenses and cost of services. Subsequent to August 1, 2003, these carrying costs have been recorded as interest expense. This change is the primary reason for the increase in interest expense

Our exposure to foreign exchange rate fluctuations arises in part from intercompany accounts between our parent company in the United States and our foreign subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars for consolidation purposes. As exchange rates vary, these results, when translated, may vary from expectations and may adversely impact overall financial results.

We have a program to reduce the effect of foreign exchange gains and losses from recorded foreign currency-denominated monetary assets and liabilities. This program involves the use of forward foreign exchange contracts in certain European, Asian and Latin and North American currencies. A forward foreign exchange contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. Under this program, foreign currency gains and losses due to exchange rate fluctuations are partially offset by gains and losses on the forward contracts. We do not use foreign currency contracts for speculative or trading purposes. All outstanding forward contracts are marked-to-market on a monthly basis with gains and losses included in Interest income and other, net. Net gains/(losses) resulting from foreign currency transactions and hedging foreign currency transactions were approximately ($322,000) and $683,000 for the first quarter of fiscal 2005 and 2004, respectively.

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Interest Income and other, net declined quarter over quarter due to the decline in short term interest rates combined with the reduction in cash due to repayment of the long-term debt related to the land lease in October 2003.

Provision for Income Taxes

We have provided for income tax expense of $10.9 million and $10.5 million for the first quarters of fiscal 2005 and 2004, respectively. Our effective income tax rate was 30 percent for both the first quarter of fiscal 2005 and for the first quarter of fiscal 2004. Our effective tax rate for the first quarter of fiscal 2005 and for the first quarter of fiscal 2004 differed from the U.S. federal statutory rate of 35 percent primarily due to the benefit of low taxed foreign earnings.

Under Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes (“FAS 109”), deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the available evidence, which includes our historical levels of U.S. taxable income and stock option deductions, we have provided a valuation allowance against our net deferred tax assets to the extent that they are dependent upon future taxable income for realization. We evaluate the realizability of the deferred tax assets on a quarterly basis.

Liquidity and Capital Resources

As of April 30, 2004, cash, cash equivalents (excluding all restricted cash) and short-term investments totaled $1,559.2 million versus $1,467.0 million at January 31, 2004.

Cash flow from operations increased by $41.6 million from $40.5 million in the first quarter of fiscal 2004 to $82.1 million in the first quarter of fiscal 2005. The increase is primarily due to net changes in certain operating assets and liabilities, which generated cash of approximately $41.9 million in the first quarter of fiscal 2005 compared to consuming cash of $4.1 million in the first quarter of fiscal 2004, a net increase of $46.0 million.

Cash used in investing activities increased by $72.8 million from $3.2 million in the first quarter of fiscal 2004 to $76.0 million in the first quarter of fiscal 2005. This increase was primarily due to an increase of $77.6 million in net purchases of available-for-sale short-term investments.

Cash provided by financing activities in the first quarter of fiscal 2005 of $19.4 million was primarily related to the proceeds from the issuance of common stock under employee stock compensation plans. Cash used in financing activities in the first quarter of fiscal 2004 of $63.4 million was primarily related to the repurchases of our common stock totaling $52.0 million and the increase of $21.2 million in restricted cash for collateral provided in connection with a new European banking arrangement, offset by proceeds of $9.8 million from the issuance of common stock under employee stock compensation plans.

At April 30, 2004, our outstanding short and long-term debt obligations consisted of $550.0 million of convertible notes, long-term debt related to our San Jose land lease of $211.3 million (of which $19.7 million is recorded as accrued liabilities related to the land lease and $191.6 million is recorded as long-term debt related to the land lease on our balance sheet), and $4.1 million of other obligations. The long-term debt related to the San Jose land lease was recorded on our balance sheet when we adopted the provision of the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”) on August 1, 2003. The adoption of FIN 46 on August 1, 2003 had no impact on our liquidity because the change in the accounting method for the synthetic lease arrangement did not change the underlying cash flows.

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The $550.0 million 4% Convertible Subordinated Notes due December 15, 2006 may be settled in cash or stock, depending upon future prices of our common stock as outlined below:

The total debt related to the San Jose land lease of $211.3 million matures in February 2006. Interest on this debt is calculated based on the London Interbank Offering Rate (“LIBOR”) and the effective interest rate will fluctuate based on changes in LIBOR as well as changes in our financial position as specified in the San Jose land lease agreement. The effective annual interest rate was approximately 2.89 percent as of April 30, 2004. Interest payments are made in cash at intervals ranging from thirty days to six months, as elected by us.

In connection with the long-term debt related to the San Jose land lease, we must maintain certain covenants, including liquidity, leverage and profitability ratios. As of April 30, 2004, we are in compliance with all such financial covenants.

When we begin to develop the land subject to the land lease, the development will require significant cash and/or financing resources.

The following table of minimum contractual obligations owed has been prepared assuming that the convertible notes will be repaid in cash upon maturity (in thousands):