TIBCO SOFTWARE INC - 10-Q Quarterly Report

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

The number of shares outstanding of the registrant’s Common Stock, $0.001 par value, as of June 25, 2004 was 209,882,607.

The accompanying unaudited condensed consolidated financial statements have been prepared by TIBCO Software Inc. (the “Company” or “TIBCO”) in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted in accordance with such rules and regulations. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position of the Company, and its results of operations and cash flows. These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto as of and for the year ended November 30, 2003 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on January 20, 2004.

For purposes of presentation, we have indicated the second quarter of fiscal 2004 and 2003 as ending on May 31, 2004 and May 31, 2003, respectively; whereas in fact, our second fiscal quarters ended on the Sunday and Friday nearest to the end of May, respectively. In fiscal 2004, we changed our quarterly periods to end on the Sunday nearest the end of the month.

The results of operations for the three months and six months ended May 31, 2004 are not necessarily indicative of the results that may be expected for the year ending November 30, 2004 or any other future interim period, and we make no representations related thereto.

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Certain reclassifications have been made to prior year balances in order to conform to the current period presentation. These reclassifications had no impact on previously reported net income or cash flows.

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

In connection with the purchase of our corporate headquarters (Note 3), we extended the remaining useful life of the carrying value of the building improvements from the length of the original lease term of 12 years to an estimated useful life of 25 years, effective July 1, 2003. This change reduced depreciation expense by $0.3 million and $0.7 million for the three-month and six-month periods ended May 31, 2003, respectively, and increased net income by $0.2 million and $0.4 million for the three-month and six-month periods ended May 31, 2004, respectively. This change had no impact on earnings per share for the three-month and six-month periods ended May 31, 2004.

We consider all highly liquid investment securities with remaining maturities, at the date of purchase, of three months or less to be cash equivalents. Management determines the appropriate classification of marketable securities at the time of purchase and evaluates such designation as of each balance sheet date. To date, all marketable securities have been classified as available-for-sale and are carried at fair value with unrealized gains and losses, if any, included as a component of accumulated other comprehensive income in stockholders’ equity. These investments are presented as current assets as management expects to use them within one year in current operations even though some have scheduled maturities of greater than one year. Interest, dividends and realized gains and losses are included in interest and other income. Realized gains and losses are recognized based on the specific identification method.

We announced a cash and share offer (the “Offer”) for all of the share capital of Staffware plc (“Staffware”), in April 2004. In order to cover the cash component of the Offer, we placed $150.0 million into a restricted cash account during the second quarter of fiscal 2004 which is included in Cash Restricted for Acquisition on the Condensed Consolidated Balance Sheets. See Subsequent Event (Note 16).

In February 2004, we entered into a $0.7 million bank guarantee in connection with Value Added Tax refunds for one of our European subsidiaries. The cash restricted in connection with this guarantee is included in Other Assets on the Condensed Consolidated Balance Sheets.

We adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” on December 1, 2002. In accordance with SFAS No. 142, goodwill and intangible assets with indefinite useful lives are no longer amortized, but are instead tested for impairment annually or sooner if circumstances indicate they may no longer be recoverable. Goodwill impairment testing is a two-step process. The first step, screens for impairment, while the second step, measures the impairment, if any. In addition, SFAS No. 142 includes provisions for the reclassification of certain existing recognized intangibles as goodwill and the reassessment of the useful lives of existing recognized intangibles. In accordance with this statement, assembled workforce has been reclassified to goodwill.

License revenue consists principally of revenue earned under software license agreements. License revenue is generally recognized when a signed contract or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable, and collection of the resulting receivable is probable. When contracts contain multiple elements wherein vendor specific objective evidence exists for all undelivered elements, we account for the delivered elements in accordance with the “Residual Method” prescribed by AICPA Statement of Position (“SOP”) 98-9. Revenue from subscription license agreements, which include software, rights to future products and maintenance, is recognized ratably over the term of the subscription period. Revenue on shipments to resellers, which is generally subject to certain rights of return and price protection, is recognized when the products are sold by the resellers to the end-user customer.

Service revenue consists primarily of revenue received for performing implementation of system solutions, on-site support, consulting and training. Service revenue is generally recognized as the services are performed.

Maintenance revenue consists of fees for providing software updates on a when and if available basis and technical support for software products (post-contract support or “PCS”). Maintenance revenue is recognized ratably over the term of the agreement.

Payments received in advance of services performed are deferred. Allowances for estimated future returns and discounts are provided for upon recognition of revenue.

Basic net income (loss) per share is computed by dividing the net income available to common stockholders for the period by the weighted average number of common shares outstanding during the period less common shares subject to repurchase. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and potential common shares outstanding during the period if their effect is dilutive. Certain potential common shares were not included in computing net income (loss) per share because they were anti-dilutive.

We account for employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25 and have adopted the disclosure only provisions of SFAS No. 123 and SFAS No. 148. We account for stock compensation expense related to stock options granted to consultants based on the fair value estimated using the Black-Scholes option pricing model on the date of grant and remeasured at each reporting date in compliance with Emerging Issues Task Force (“EITF”) Issue No. 96-18. As a result, stock based compensation expense fluctuates as the fair market value of our common stock fluctuates. Compensation expense is amortized using the multiple option approach in compliance with FASB Interpretation No. 28 (“FIN 28”). Pursuant to FIN 44, options assumed in a purchase business combination are valued at the date of acquisition at their fair value calculated using the Black-Scholes option pricing model. The fair value of assumed options is included as a component of the

purchase price. The intrinsic value attributable to unvested options is recorded as unearned stock based compensation and amortized over the remaining vesting period of the options. The disclosure in the following table illustrates the effect on net income (loss) and net income (loss) per share if we had applied a fair value method as prescribed by SFAS No. 123 for the periods indicated (in thousands, except per share data):

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

Our restructuring charges are comprised primarily of costs related to properties abandoned in connection with facilities consolidation, related write-down of leasehold improvements and severance and associated employee termination costs related to headcount reductions. For restructuring actions initiated prior to December 31, 2002, we complied with the guidance provided by the EITF 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” We recorded the liability related to these termination costs when the plan was approved; the termination benefits were determined and communicated to the employees; the number of employees to be terminated, their locations and jobs were specifically identified; and the period of time to implement the plan was set. For restructuring actions initiated after January 1, 2003, we adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” which requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The adoption of SFAS No. 146 did not have a material impact on our operating results or financial position.

In March 2004, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. We will apply the recognition and measurement guidance of EITF 03-01 in future periods and expect that the adoption will not have a material impact on our results of operations or financial condition.

In May 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In November 2003, FASB issued FASB Staff Position No. 150-3 (FSS 150-3), which deferred the effective dates for applying certain provisions of SFAS 150 related to mandatorily redeemable financial instruments of certain non-public entities and certain mandatorily redeemable non-controlling interests for public and non-public companies. For public entities, SFAS 150 is effective for mandatorily redeemable financial instruments entered into or modified after May 31, 2003 and is effective for all other financial instruments as of the first interim period beginning after June 15, 2003. The measurement provisions of SFAS 150 are deferred indefinitely for other mandatorily redeemable non-controlling interests that were issued before November 5, 2003. For those instruments, the measurement guidance for redeemable shares and non-controlling interests in other literature shall apply during the deferral period. We adopted SFAS No. 150 on June 1, 2003. The adoption did not have a material impact on our results of operations or financial condition.

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ( “FIN46”), which was revised in December 2003 and subsequently referred to as FIN 46R. FIN 46R has been subsequently interpreted by three FASB Staff Positions. FIN 46 and FIN 46R applied immediately to variable interest entities (“VIEs”) created after January 31, 2003 and no later than the end of the first interim or annual reporting period ending after March 15, 2004. The adoption of FIN 46 and FIN 46R (and related interpretations) had no impact as we have no investments in VIEs.

In June 2003, we purchased the four buildings comprising our corporate headquarters in Palo Alto, California for $80.0 million. In connection with the purchase we entered into a 51-year lease of the land upon which the buildings are located. The lease was paid in advance in the amount of $28.0 million (Note 6). The total consideration paid for the land lease and the buildings of $108.0 million was comprised of $54.0 million in cash and a $54.0 million mortgage note payable (Note 5).

The capitalized cost of the buildings was reduced by the existing deferred rent in the amount of $3.1 million related to the previous operating lease on the buildings. In addition, we capitalized $1.1 million of acquisition costs incurred in connection with the purchase. The net purchase price of the buildings of $78.0 million is stated at cost, net of accumulated depreciation, and is included as a component of Property and Equipment on the Condensed Consolidated Balance Sheets. Depreciation is computed using the straight-line method over the estimated useful life of 25 years.

In connection with the adoption of SFAS No. 142 on December 1, 2002, $103.2 million in goodwill, which includes $1.2 million in assembled workforce, net of accumulated amortization and deferred taxes that were reclassified to goodwill, is no longer amortized, but is instead tested for impairment annually or sooner if circumstances indicate that it may no longer be recoverable.

SFAS No. 142 prescribes a two-step process for transitional impairment testing of goodwill. The first step, screens for impairment, while the second step, measures the impairment, if any. We performed our transitional goodwill impairment test during the first quarter of fiscal 2003 and our annual goodwill impairment test during the forth quarter of fiscal 2003. SFAS No. 142 requires impairment testing based on reporting units, however, we operate in one segment which we considers our sole reporting unit. Therefore, goodwill was tested for impairment at the entity level. The fair value of the entity, which was determined based on current market capitalization, exceeded its carrying value, and goodwill was determined not to be impaired.

The changes in the carrying amount of goodwill for the six months ended May 31, 2004 are as follows:

We had no intangible assets that are not subject to amortization as of either of the periods presented. The following is a summary of amortized acquired intangible assets for the periods indicated (in thousands):

The following is a summary of the aggregate acquired intangible assets amortization expense for the periods indicated (in thousands):

The estimated future amortization expense of acquired intangible assets as of May 31, 2004 is as follows (in thousands):

In connection with the corporate headquarters purchase in June 2003, we recorded a $54.0 million mortgage note payable to a financial institution collateralized by the commercial real property acquired. The mortgage note payable carries a fixed annual interest rate of 5.09% and a 20-year amortization. The principal balance remaining at the end of the ten-year term of $33.9 million is due as a final lump sum payment on July 1, 2013. We are prohibited from acquiring another company without prior consent from the lender unless we maintain between $100.0 million and $300.0 million of cash and cash equivalents, depending on various other non-financial terms as defined in the agreements. In addition, we are subject to certain non-financial covenants as defined in the agreements. We were in compliance with all covenants at May 31, 2004.

We capitalized $0.7 million in financing fees in connection with the mortgage note payable. These fees are included in Other Assets on the Condensed Consolidated Balance Sheets and are amortized to interest expense over the term of the loan of ten-years.

In connection with the mortgage note payable, we have a $20.0 million revolving line of credit with Silicon Valley Bank that matures on June 23, 2005. As of May 31, 2004, no amounts were drawn on this line of credit. Interest is charged on any outstanding amounts at the greater of the lender’s Prime Rate plus 4.25% or, if elected by us, a rate of 2.75% per annum in excess of the LIBOR Rate. We are required to maintain a minimum unrestricted cash, cash equivalent, and short-term investment balance of $150.0 million as well as comply with other non-financial covenants defined in the agreement. We were in compliance with all covenants at May 31, 2004.

In connection with the mortgage note payable (Note 5), we entered into an irrevocable letter of credit with Silicon Valley Bank in the amount of $13.0 million. The letter of credit is collateralized by the Line of Credit and automatically renews for successive one-year periods until the mortgage note payable has been satisfied in full. See Line of Credit (Note 5).

In June 2003, we entered into a 51-year lease of the land upon which our corporate headquarters is located. The lease was paid in advance for a total of $28.0 million, but is subject to adjustments every ten years based upon changes in fair market value. Should it become necessary, we have the option to prepay any rent increases due as a result of a change in fair market value. This prepaid land lease is being amortized using the straight-line method over the life of the lease; the portion to be amortized over the next twelve months is included in Other Current Assets and the remainder is included in Other Assets on our Condensed Consolidated Balance Sheets.

We lease office space and equipment under non-cancelable operating leases with various expiration dates through March 2014. Rental expense was approximately $1.5 million and $5.6 million for the second quarter of fiscal 2004 and 2003, respectively, and $3.0 million and $11.2 million for the six months ended May 31, 2004 and 2003, respectively.

As of May 31, 2004, contractual commitments associated with indebtedness and lease obligations is as follows (in thousands):

As of May 31, 2004, future minimum lease payments under restructured non-cancelable operating leases, include $35.2 million provided for as accrued restructuring costs and $3.3 million provided for as acquisition integration liabilities. These amounts are included in Accrued Excess Facilities Costs on our Condensed Consolidated Balance Sheets.

We conduct business in North America, South America, Europe, Asia and the Middle East. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. A majority of our sales are currently made in U.S. dollars. We enter into foreign currency forward exchange contracts (“forward contracts”) to manage exposure related to accounts receivables denominated in foreign currencies. We do not enter into derivative financial instruments for trading purposes. Gains and losses on the contracts are included in other income (expense) in our Condensed Consolidated Statements of Operations. Our forward contracts relating to accounts receivable generally have original maturities corresponding to the due dates of the receivables. We had outstanding forward contracts with notional amounts totaling approximately $6.9 million at May 31, 2004, which expire at various dates through December 2004. The fair value of these contracts at May 31, 2004 was approximately $7.0 million.

Our software license agreements typically provide for indemnification of customers for intellectual property infringement claims. To date, no such claims have been filed against us. We also warrant to customers that software products operate substantially in accordance with the software product’s specifications. Historically, minimal costs have been incurred related to product warranties, and, as such, no accruals for warranty costs have been made. In addition, we indemnify our officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to our certificate of incorporation, bylaws, and applicable Delaware law. To date, we have not incurred any costs related to these indemnifications.

We, certain of our directors and officers and certain investment bank underwriters have been named in a putative class action for violation of the federal securities laws in the U.S. District Court for the Southern District of New York, captioned “In re TIBCO Software Inc. Initial Public Offering Securities Litigation.” This is one of a number of cases challenging underwriting practices in the initial public offerings (IPOs) of more than 300 companies, which have been coordinated for pretrial proceedings as “In re Initial Public Offering Securities Litigation.” Plaintiffs generally allege that the underwriters engaged in undisclosed and improper underwriting activities, namely the receipt of excessive brokerage commissions and customer agreements regarding post-offering purchases of stock in exchange for allocations of IPO shares. Plaintiffs also allege that various investment bank securities analysts issued false and misleading analyst reports. The complaint against us claims that the purported improper underwriting activities were not disclosed in the registration statements for our IPO and secondary public offering and seeks unspecified damages on behalf of a purported class of persons who purchased our securities or sold put options during the time period from July 13, 1999 to December 6, 2000.

A lawsuit with similar allegations of undisclosed improper underwriting practices, and part of the same coordinated proceedings, is pending against Talarian Corporation (“Talarian”), which we acquired in 2002. That action is captioned “In re Talarian Corp. Initial Public Offering Securities Litigation.” The complaint against Talarian, certain of its underwriters, and certain of its former directors and officers claims that the purported improper underwriting activities were not disclosed in the registration statement for Talarian’s IPO and seeks unspecified damages on behalf of a purported class of persons who purchased Talarian securities during the time period from July 20, 2000 to December 6, 2000.

A proposal to settle the claims against all of the issuers and individual defendants in the coordinated litigation was conditionally accepted by us and Talarian on June 20, 2003. The completion of the settlement is subject to a number of conditions, including Court approval. Under the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in the action, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay an amount equal to $1.0 billion less any amounts ultimately collected by the plaintiffs from the underwriter defendants in all the cases. The disposition of this matter is limited to our $0.5 million corporate insurance deductible. We completed payment of the insurance deductible in the third quarter of fiscal 2003. Unlike most of the defendant issuers’ insurance policies, including ours, Talarian’s policy contains a specific self-insured retention in the amount of $0.5 million for IPO “laddering” claims, including those alleged in this matter. Thus, under the proposed settlement, if any payment is required under the insurers’ guaranty, Talarian would be responsible for paying its pro rata share of the shortfall, up to $0.5 million of the self-insured retention remaining under its policy. The self insured retention of $0.5 million was accrued at the time of the acquisition.

A summary of comprehensive income (loss) on an after-tax basis where applicable, is as follows (in thousands):

Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, is as follows (in thousands):

Our current estimate of our annual effective tax rate on anticipated operating income for the 2004 tax year is 41%. The estimated annual effective tax rate of 41% has been used to record the provision for income taxes for the six-month period ended May 30, 2004 compared with an effective tax rate of 40% used to record the provision for income taxes for the comparable period in 2003. The estimated annual effective tax rate differs from the U.S. statutory rate primarily due to state taxes, foreign tax rate differences, and research and development tax credits. We maintained a full valuation allowance on the deferred tax assets because we expect that it is more likely than not that all deferred tax assets will not be realized in the foreseeable future.

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share data):

The following table sets forth potential weighted average common shares that are not included in the diluted net income (loss) per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):

In February 2004, Reuters sold 69 million shares of our outstanding common stock at a price of $6.85 per share in a registered public offering. Pursuant to the terms of the Registration and Repurchase Agreement with Reuters, we repurchased and retired approximately 16.8 million shares of our common stock at the same price of $6.85 per share, totaling $115.0 million from the public market. This completed our obligation under the agreement to repurchase shares from Reuters.

We have entered into commercial transactions with Reuters Group PLC, including its wholly owned and partially owned subsidiaries (collectively, “Reuters”), one of our stockholders. As of May 31, 2004, Reuters’ ownership of the issued and outstanding shares of our capital stock was less than 10%.

Reuters is a distributor of our products to customers in the financial services segment. Through the third quarter of fiscal 2003, we had a license, distribution and maintenance agreement with Reuters pursuant to which Reuters agreed to pay a minimum guaranteed distribution fee, which consists of a portion of Reuters’ revenue from its sales of our products and related services and maintenance, to us in the amount of $20.0 million per year through December 2003. Reuters had guaranteed minimum distribution fees of $20.0 million for each of the years ended December 31, 2003, 2002, and 2001. These fees were recognized ratably over the corresponding period as related party revenue. If actual distribution fees due from Reuters exceeded the cumulative minimum year-to-date guarantee, incremental fees were due. Such incremental fees were recognized in the period when the year-to-date fees exceeded the cumulative minimum guarantee. Royalty payments to Reuters for resale of Reuters’ products and services and fees associated with sales to the financial services segment were classified as related party cost of sales. In addition, the agreement required us to provide Reuters with internal maintenance and support until December 31, 2011 for a fee of $2.0 million per year plus an annual CPI-based increase, subject to Reuters’ annual renewal option. This amount was recognized ratably over the corresponding period as related party maintenance revenue.

In October 2003, we entered into a new commercial agreement with Reuters relating to the licensing, distribution and maintenance of our products that replaced our original agreement with Reuters. Pursuant to this new agreement, Reuters will continue to act as a non-exclusive reseller of our products to certain specified customers in the financial services market until March 2005 and will pay us a distribution license fee equal to 60% of license revenue it receives from sales to such customers. Reuters may also continue to use our products internally and embed them into its solutions. Reuters has agreed to continue to pay us minimum guaranteed fees in the amount of $5 million per quarter through March 2005. The quarterly minimum guaranteed fees will be reduced by an amount equal to 10% of the license and maintenance revenue from our sales to financial services companies (or, in the case of customers transitioned to us by Reuters, 40% of our maintenance revenues from such customers for up to one year after effectiveness of the agreement). Furthermore, Reuters began transitioning maintenance and support of our products for its customers, as well as

associated revenues, upon entering into the new agreement. As a result, we began providing maintenance and support services directly to customers transitioned from Reuters in the fourth quarter of fiscal 2003. In addition to acting as a reseller of our products in the financial services market, Reuters is eligible to receive a fee of between 5% and 20% of revenue from sales to approved customers referred to us by Reuters, depending upon the level of assistance Reuters provides in supporting the sale.

We recognized $7.0 million and $6.1 million in revenue from Reuters in the second fiscal quarter of 2004 and 2003, respectively, and $14.5 million and $17.3 million for the six month periods ended May 31, 2004 and 2003, respectively. Revenue from Reuters consists primarily of product and maintenance fees on its sales of TIBCO products under the terms of the license, maintenance and distribution agreement with Reuters. In addition, during the first quarter of fiscal 2003, we recognized $1.7 million in distribution fees for arrangements outside the terms of the license agreement with Reuters. No distribution fees for arrangements outside the terms of the license agreement with Reuters were recognized in the second quarter of fiscal 2003 nor for the first or second quarters of fiscal 2004. Revenue from Reuters accounted for approximately 8.6% and 10.0% of total revenue for the second fiscal quarter of 2004 and 2003, respectively, and 9.3% and 13.8% for the six month periods ended May 31, 2004 and 2003, respectively. We incurred a negligible amount of royalty and commission expense to Reuters in the second quarter of fiscal 2004 and $0.2 million in royalty and commission expense to Reuters in the second quarter of fiscal 2003. We incurred a negligible amount of royalty and commission expense to Reuters for the six month periods ended May 31, 2004 and $0.6 million for the six month period ended May 31, 2003.

Revenue from Cisco Systems, Inc., an authorized reseller, consists primarily of product and maintenance fees on its sales of TIBCO products. We recognized $0.4 million and $0.5 million in revenue from Cisco Systems in the second quarter of fiscal 2004 and 2003, respectively, and $0.7 million and $2.7 million for the six month periods ended May 31, 2004 and 2003, respectively. As of May 31, 2004, Cisco Systems owned less than 5% of our issued and outstanding capital stock.

For options granted to employees and in connection with acquisitions we recorded a total of $58.4 million in unearned compensation through May 31, 2004, representing the difference between the fair value of our common stock at the date of grant and the exercise price of such options. In addition, as of May 31, 2004, we expect to record a negligible amount of additional acquisition related compensation expense in connection with additional cash consideration contingent on the vesting and exercise of stock options and restricted stock, which were unvested at the acquisition date.

Stock-based compensation expense related to stock options granted to consultants is recognized as earned using the multiple option method, and is shown by expense category. At each reporting date, we re-value the stock options using the Black-Scholes option-pricing model. As a result, stock-based compensation expense will fluctuate as the fair market value of our common stock fluctuates. In connection with the grant of stock options to consultants, we recognized a negligible amount of stock-based compensation expense for the second quarters of fiscal 2004 and 2003, and a negligible amount of stock based compensation expense and $0.1 million stock-based compensation income for the six month periods ended May 31, 2004 and 2003, respectively, for the reversal of stock based compensation expense caused by a decline in the fair value of our common stock.

Payroll taxes due as a result of employee exercises of nonqualified stock options were negligible for the second quarter of fiscal 2004 and 2003, and for the six month periods ended May 31, 2004 and 2003.

We operate primarily in one industry segment: the development, marketing and support of our suite of software enterprise products that enables businesses to link internal operations, business partners and customer channels through the real-time distribution of information. Revenue by geographic area is as follows (in thousands):

Revenue from Reuters, a related party for the period ended May 31, 2003, is primarily included in the European geographic area and accounted for 8.6% and 10.0% of total revenue for the second quarter of fiscal 2004 and 2003, respectively, and 9.3% and 13.8% of total revenue for the six month period ended May 31, 2004 and 2003, respectively. One customer accounted for 15.3% of total revenue during the second quarter of fiscal 2004 and no single customer accounted for greater than 10% of revenues during the six month period ended May 31, 2004. No single customer accounted for greater than 10% of revenues in the second quarter of fiscal 2003 and with the exception of Reuters, no single customer represented greater than 10% of total revenue during the six month period ended May 31, 2003. Long-lived assets outside the United States at May 31, 2004 and 2003 were not material.

Two customers accounted for 21.0% and 12.1% of our net accounts receivables at May 31, 2004 and one customer accounted for 18.1% of our net accounts receivables at May 31, 2003.

During fiscal 2003, 2002 and 2001, we recorded restructuring charges totaling $71.6 million, consisting of $5.6 million for headcount reductions, $54.3 million for consolidation of facilities, $11.1 million for related write-down of leasehold improvements and $0.6 million of other related restructuring charges. These restructuring charges were recorded to align our cost structure with changing market conditions. We are currently working with corporate real estate brokers to sublease unoccupied facilities.

In connection with the acquisition of Talarian in the second quarter of fiscal 2002, we recorded an accrual for acquisition integration liabilities which includes the incremental costs to exit and consolidate activities at Talarian locations, termination of certain Talarian employees, and for other costs to integrate operating locations and other activities of Talarian. The accrual was recorded using the guidance provided by EITF 95-3 “Recognition of Liabilities in a Purchase Business Combination” which requires that these acquisition integration expenses, which are not associated with the generation of future revenues and have no future economic benefit, be reflected as assumed liabilities in the allocation of the purchase price to the net assets acquired. We abandoned the Talarian facilities and recorded an accrual of $7.4 million for the estimated losses to be incurred to sublet such facilities. In addition, we recorded an accrual of $1.0 million for severance related to the termination of redundant personnel.

The following sets forth our accrued restructuring costs as of May 31, 2004 (in thousands). Accrued excess facilities costs represent the estimated loss on abandoned facilities, net of sublease income, that is expected to be paid over the next six years.

In February 2004, our Board of Directors adopted a stockholder rights plan designed to guard against partial tender offers and other coercive tactics to gain control of the company without offering a fair and adequate price and terms to all of our stockholders.

In connection with the plan, the Board declared a dividend of one right (a “Right”) to purchase one one-thousandth share of our Series A Participating Preferred Stock (“Series A Preferred”) for each share of our common stock outstanding on March 5, 2004 (the “Record Date”). Of the 75.0 million shares of preferred stock authorized under our Certificate of Incorporation, as amended, 25.0 million have been designated as Series A Preferred. The Board further directed the issuance of one such right with respect to each share of our common stock that is issued after the Record Date, except in certain circumstances. The rights will expire on March 5, 2014.

The rights are initially attached to our common stock and will not trade separately. If a person or a group (an “Acquiring Person”) acquires 15% or more of our common stock, or announces an intention to make a tender offer for 15% or more of our common stock, the rights will be distributed and will thereafter trade separately from the common stock. Each right will be exercisable for 1/1000th of a share of Series A Preferred at an exercise price of $70 (the “Purchase Price”). The preferred stock has been structured so that the value of 1/1000th of a share of such preferred stock will approximate the value of one share of common stock. Upon a person becoming an Acquiring Person, holders of the rights (other than the Acquiring Person) will have the right to receive, upon exercise, shares of our common stock having a value equal to two times the Purchase Price.

If a person becomes an Acquiring Person and we are acquired in a merger or other business combination, or 50% or more of our assets are sold to an Acquiring Person, the holder of rights (other than the Acquiring Person) will have the right to receive shares of common stock of the acquiring corporation having a value equal to two times the Purchase Price. After a person has become an Acquiring Person, our Board of Directors may, at its option, require the exchange of outstanding rights (other than those held by the Acquiring Person) for common stock at an exchange ratio of one share of our common stock per right.

The Board may redeem outstanding rights at any time prior to a person becoming an Acquiring Person at a price of $0.001 per Right. Prior to such time, the terms of the rights may be amended by the Board.

On April 22, 2004, we made an offer to acquire the share capital of Staffware, a UK-based company, for approximately $240 million, comprised of approximately 60% cash and 40% stock. Staffware is a leading provider of Business Process Management (“BPM”) solutions that enable businesses to automate, refine, and manage their processes. We expect that this BPM solution will be complementary to our real-time business integration platform.

Pursuant to the offer, each Staffware share was valued at approximately $15, which is comprised of $9.26 in cash plus 0.6902 TIBCO shares. Staffware shareholders, however, may request to vary the proportion of cash and stock they receive at the time they tender the shares. The offer was declared wholly unconditional on June 7, 2004, at which point approximately 85% of the outstanding shares were tendered and we assumed control of Staffware. As of June 25, 2004, additional outstanding shares have been tendered, taking our ownership to approximately 97%.

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

The following 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. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors which could cause actual results to differ materially include those set forth in the following discussion, and, in particular, the risks discussed below under the subheading “Factors that May Affect Operating Results” and in other documents we file with the Securities and Exchange Commission. Unless required by law, we undertake no obligation to update publicly any forward-looking statements.

Our suite of business integration software solutions makes us a leading enabler of real-time business. We use the term “real-time business” to refer to those companies that use current information in their businesses to execute their critical business processes. We are the successor to a portion of the business of Teknekron Software Systems, Inc. Teknekron developed software, known as the TIB technology, for the integration and delivery of market data, such as stock quotes, news and other financial information, in trading rooms of large banks and financial services institutions. In 1992, Teknekron expanded its development efforts to include solutions designed to enable complex and disparate manufacturing equipment and software applications—primarily in the semiconductor fabrication market—to communicate within the factory environment. Teknekron was acquired by Reuters Group PLC, the global information company, in 1994. Following the acquisition, continued development of the TIB technology was undertaken to expand its use in the financial services markets.

In January 1997, our company, TIBCO Software Inc., was established as an entity separate from Teknekron. We were formed to create and market software solutions for use in the integration of business information, processes and applications in diverse markets and industries outside the financial services sector. In connection with our establishment as a separate entity, Reuters transferred to us certain assets and liabilities related to our business and granted to us a royalty-free license to the intellectual property from which some of our messaging software products originated. Reuters also assigned to us at that time license and service contracts primarily within the high-tech manufacturing and energy markets, including contracts with NEC, Motorola, Mobil and Chevron.

Our products are currently licensed by approximately 2,100 companies worldwide in diverse industries such as telecommunications, retail, healthcare, manufacturing, energy, transportation, logistics, financial services, government and insurance. We sell our products through a direct sales force and through alliances with leading software vendors and systems integrators.

Our revenue in the second quarter of fiscal 2004 and 2003 consisted primarily of license and maintenance fees from our customers and distributors, including fees from Reuters pursuant to our license agreement, both of which were primarily attributable to sales of our TIBCO ActiveEnterprise product suite. In addition, we receive fees from our customers for providing project integration services. We also receive revenue from our strategic relationships with business partners who embed our products in their hardware and networking systems as well as from systems integrators who resell our products.

First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Maintenance revenue is determined based on vendor-specific objective evidence of fair value and amortized over the term of the maintenance contract, typically 12 months. Consulting and training revenues are recognized as the services are performed and are usually on a time and materials basis. Such services primarily consist of implementation services related to the installation of our products and generally do not include significant customization to or development of the underlying software code.

Our revenue is derived from a diverse customer base. One customer, Pepsico Business Solutions Group (“Pepsico”), accounted for 15.3% of our total revenue during the second quarter of fiscal 2004, and no single customer represented greater than 10.0% of total revenue during the second quarter of fiscal 2003. No single customer accounted for greater than 10% of our total revenue during the six months ended May 31, 2004 and, with the exception of Reuters, no single customer accounted for greater than 10% of our total revenue during the six months ended May 31, 2003. During the second quarter of fiscal 2004 and 2003, Reuters represented 8.6% and 10.0% of our total revenue, respectively. Two customers, Pepsico and Bank of America Securities LLC accounted for 21.0% and 12.1%, respectively, of our net accounts receivable at May 31, 2004 and one customer, FedEx Corporation, accounted for 18.1% of our net accounts receivable at May 31, 2003. We establish allowances for doubtful accounts based on our evaluation of collectibility and an allowance for returns and discounts based on specifically identified credits and historical experience.

Reuters had been the primary distributor of our products to customers in the financial services segment since 1997. As of May 31, 2004, Reuters’ ownership of our outstanding capital stock was diluted to less than 10%. Through the third quarter of fiscal 2003, we had a license, maintenance and distribution agreement with Reuters pursuant to which Reuters was paying us certain minimum guaranteed distribution fees related to sales of our products to financial services customers. Reuters’ obligations with respect to these minimum guaranteed distribution fees were to expire at the end of calendar 2003. For each of the calendar years ended December 31, 2003 and 2002, Reuters’ guaranteed minimum distribution fees were $20.0 million. These fees were recognized ratably in the period earned as related party revenue. In addition, our previous agreement with Reuters required us to provide Reuters with internal maintenance and support for a fee of $2.0 million per year plus an annual CPI-based increase. To date, this amount has been recognized ratably over the corresponding period as related party service and maintenance revenue.

Under our previous agreement with Reuters, we were restricted from selling our products and providing consulting services directly to companies in the financial services market, except in limited circumstances. Accordingly, to date we have relied on Reuters and, to a lesser extent, other third-party resellers and distributors to sell our products to financial services market customers. In the past, when we did sell our products to financial services market customers other than through Reuters or when we resold Reuters’ products and services, we were required to pay certain fees to Reuters, which were recorded as related party cost of revenue.

In October 2003, we entered into a new agreement with Reuters relating to the licensing, distribution and maintenance of our products that replaced our original agreement with Reuters. Pursuant to the terms of this new agreement, Reuters will continue to act as a non-exclusive reseller of our products to certain specified customers in the financial services market until March 2005 and will pay us a distribution license fee equal to 60% of license revenue it receives from sales to such customers. Reuters may also continue to use our products internally and embed them into its solutions. We have agreed to provide certain fee-based support services to Reuters for TIBCO products Reuters uses internally and may provide additional support services if purchased by Reuters. We now have the right to market and sell our products, other than risk management and market data distribution products, directly and through third party resellers (other than four specified resellers) to customers in the financial services market. The limitations on our ability to sell risk management and market data distribution products and to resell through the specified resellers will expire in May 2008. Reuters has agreed to continue to pay us minimum guaranteed fees in the amount of $5.0 million per quarter through March 2005. The quarterly minimum guaranteed fees will be reduced by an amount equal to 10% of the license and maintenance revenues from our sales to financial services companies (or, in the case of customers transitioned to us by Reuters, 40% of our maintenance revenue from such customers for up to one year after effectiveness of the agreement).

Reuters has begun transitioning maintenance and support of our products for its customers, as well as associated revenue, in accordance with the new agreement. As a result, we began providing maintenance and support services directly to customers transitioned from Reuters in the fourth quarter of fiscal 2003. Consequently, service and maintenance revenue and associated costs increased as a result of our assumption of Reuters’ contracts in the fourth quarter of fiscal 2003 and during the six months ended May 31, 2004 and we expect these increases to continue through at least the remainder of fiscal 2004. To the extent, as a result of our increased service and maintenance obligations, our cost of revenue increases faster than our service and maintenance revenue, our gross margins will be adversely affected.

In addition to acting as a reseller of our products in the financial services market, Reuters is eligible to receive a fee of between 5% and 20% of revenue from sales to approved customers referred to us by Reuters, depending upon the level of assistance Reuters provides in supporting the sale.

Staffware is a leading provider of BPM solutions that specializes in technology for businesses to custom build, automate, refine and control their processes. On April 22, 2004, we made an offer to acquire the share capital of Staffware, a UK-based company, for approximately $240 million, comprised of 60% cash and 40% stock. We expect that this BPM solution will be complementary to our real-time business integration platform. The offer was declared wholly unconditional on June 7, 2004, at which point approximately 85% of the outstanding shares were tendered and we assumed control of Staffware. As of June 25, 2004, additional outstanding shares have been tendered, taking our ownership to approximately 97%.

The discussion and analysis of our 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 of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to the annual consolidated financial statements as of and for the year ended November 30, 2003, included in our Form 10-K filed with the Securities and Exchange Commission on January 20, 2004 and Note 2 to condensed consolidated financial statements as of and for the three and six month periods ended May 31, 2004, included herein. We believe our most critical accounting policies include the following:

The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:

Total revenue increased for the three months ended May 31, 2004 compared to the same period of the prior year. The increase in total revenue was due primarily to a strengthening of the global economic environment and an increase in commitment to information technology spending in general. We recognized $7.0 million and $6.1 million in revenue from Reuters in the second quarters of fiscal 2004 and 2003, respectively, accounting for approximately 8.6% and 10.0% of total revenue for the second fiscal quarters of 2004 and 2003, respectively. One customer, Pepsico Business Solutions Group, accounted for 15.3% of total revenue in the second quarter of fiscal 2004. No single customer accounted for more than 10% of total revenue in the second quarter of fiscal 2003.

Total revenue increased for the six-month period ended May 31, 2004 compared to the same period of the prior year. The increase in total revenue was due primarily to a strengthening of the global economic environment and an increase in commitment to information technology spending in general. We recognized $14.5 million and $17.3 million in revenue from Reuters during the six-month periods ended May 31, 2004 and 2003, respectively. Reuters accounted for approximately 9.3% and 13.8% of total revenue for the six-month periods ending May 31, 2004 and 2003, respectively. No single customer accounted for more than 10% of total revenue for the six-month period ended May 31, 2004 or, with the exception of Reuters, the six-month period ended May 31, 2003.

License revenue increased for the three and six months ended May 31, 2004 as compared to the same periods of the prior year. This increase was due primarily to a strengthening of the global economic environment and an increase in average deal size in the second quarter of fiscal 2004 as compared to the same period of the prior year. One customer, Pepsico, accounted for 26.5% of total license revenue in the second quarter of fiscal 2004. There were no customers that accounted for greater than 10% of total license revenue in the same quarter of the prior year.

The increase in service and maintenance revenue in absolute dollars for the second fiscal quarter of 2004 as compared to the same quarter of 2003 was primarily due to installed software base. In addition, we continued to focus on renewals of maintenance contracts with our existing customer base. Maintenance revenue increased from $21.0 million in the second quarter of fiscal 2003 to $23.9 million in the same quarter of 2004. Service revenue increased from $9.6 million to $12.0 million during the same period primarily due to increased consulting revenue.

The increase in service and maintenance revenue in absolute dollars for the six months ended May 31, 2004 as compared to the same period of 2003 was primarily due to installed software base. In addition, we continued to focus on renewals of maintenance contracts with our existing customer base. Maintenance revenue increased from $41.5 million in the six months ended May 31, 2003 to $47.9 million in the same period of 2004. Service revenue increased from $17.9 million to $21.7 million during the same period primarily due to increased consulting revenue.

Cost of revenue consists primarily of salaries, third party contractors and associated expenses related to providing project integration services, the cost of providing maintenance and customer support services, royalties and product fees as well as the amortization of technologies acquired through corporate acquisitions. The majority of our cost of revenue is directly related to our service revenue.

The increase in cost of revenue in absolute dollars for the second quarter of fiscal 2004 as compared to the same quarter of 2003 resulted primarily from increased use of third party contractors, compensation costs and travel costs that were partially offset by a decrease in facilities costs. Service revenue increased 25% in the second quarter of fiscal 2004 as compared to the same quarter of 2003, and, as a result of this increase in consulting activities, third party consulting costs increased $2.0 million, compensation costs increased $1.8 million and travel costs increased $1.2 million. These costs were partially reduced by a $0.6 million cost savings from the purchase of our corporate facilities. In addition, we realized $0.3 million in cost savings from travel expenses reimbursed by our customers.

The increase in cost of revenue in absolute dollars for the six months ended May 31, 2004 as compared to the same period of the prior year resulted primarily from increased third party contractors, compensation costs and travel costs that were partially offset by a decrease in facilities costs. Service revenue increased 21% in the first half of fiscal 2004 as compared to the same period of 2003, and, as a result of this increase in consulting activities, third party consulting costs increased $2.2 million, compensation costs increased $2.7 million and travel costs increased $1.6 million. These costs were partially offset by a $1.1 million cost savings from the purchase of our corporate facilities.

Research and development expenses consist primarily of personnel, third party contractors and related costs associated with the development and enhancement of our suite of products.

The decrease in research and development expense for the second quarter of fiscal 2004 as compared to the same quarter of 2003 was primarily due to savings from the purchase of our corporate facilities, lower compensation, third party consulting and portion of shared information technology costs. The purchase of our corporate facilities resulted in a net savings of approximately $1.2 million for the second quarter of fiscal 2004. Compensation expenses decreased by approximately $0.6 million as a result of a reduction in research and development staff. The decrease in headcount also resulted in savings of approximately $0.4 million due to a lower portion of shared information technology costs. In addition, we reduced the use of third party consultants which resulted in a $0.2 million cost savings.

The decrease in research and development expense for the six months ended May 31, 2004 as compared to the same period of 2003 was primarily due to savings from the purchase of our corporate facilities, lower compensation, third party consulting and portion of shared information technology costs. The purchase of our corporate facilities resulted in a net savings of approximately $2.4 million for the six months ended May 31, 2004. Compensation expenses decreased by approximately $1.9 million as a result of a reduction in research and development staff. The decrease in headcount also resulted in savings of approximately $0.8 million due to a lower portion of shared information technology costs. In addition, we reduced the use of third party consultants which resulted in a $0.5 million cost savings.

We believe that continued investment in research and development is important to attaining our strategic objectives and, as a result, expect that, excluding the impact of our acquisition of Staffware, spending on research and development will remain relatively stable for the remainder of fiscal 2004.

Sales and marketing expenses consist primarily of personnel and related costs of our direct sales force and marketing staff and the cost of marketing programs, including customer conferences, promotional materials, trade shows and advertising.

The decrease in sales and marketing expense for the second quarter of fiscal 2004 as compared to the same quarter of 2003 was primarily due to savings from the purchase of our corporate facilities and lower compensation and advertising costs, partially offset by an increase in sales commissions. A targeted advertising campaign in the first half of fiscal 2003 was not repeated in fiscal 2004 resulting in savings of approximately $1.6 million during the quarter. The purchase of our corporate facilities resulted in a net savings of approximately $1.0 million for the second quarter of fiscal 2004. Compensation expenses decreased by approximately $0.7 million as a result of a reduction in sales and marketing staff. License revenue increased 47% during the three months ended May 31, 2004, resulting in an additional $1.0 million increase in sales commissions expense.

The decrease in sales and marketing expense for the six months ended May 31, 2004 as compared to the same period of 2003 was primarily due to savings from the purchase of our corporate facilities and lower compensation and advertising costs partially offset by an increase in sales commissions and travel costs. A targeted advertising campaign in the first half of fiscal 2003 was not repeated in fiscal 2004 resulting in savings of approximately $1.8 million during the period. The purchase of our corporate facilities resulted in a net savings of approximately $1.5 million for the six months ended May 31, 2004. Compensation expenses decreased by approximately $1.9 million as a result of a reduction in sales and marketing staff. License revenue increased 31% during the six months ended May 31, 2004, resulting in an additional $2.1 million increase in sales commissions expense and a $0.8 million increase in travel costs from the increased business activity.

We intend to continue to maintain our current focus on our direct sales organization and on developing product-marketing programs and, accordingly, expect that, excluding the impact of our acquisition of Staffware, sales and marketing expenditures will remain relatively stable for the remainder of fiscal 2004.

General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including executive, legal, finance, accounting and human resources.

General and administrative expenses remained relatively flat for the second fiscal quarter of 2004 as compared to the same quarter of 2003 primarily due to an increase in compensation costs offset by a reduction in the use of third party contractors and the purchase of our corporate facilities. Compensation costs that are based on company performance increased approximately $1.5 million which was offset by a decrease in third party contractor costs of approximately $0.6 million. The purchase of our corporate facilities resulted in a net savings of approximately $0.6 million for the second quarter of fiscal 2004.

General and administrative expenses remained relatively flat for the six months ended May 31, 2004 as compared to the same period of 2003 primarily due to an increase in compensation costs offset by a reduction in the use of third party contractors and the purchase of our corporate facilities. Compensation costs that are based on company performance increased approximately $2.2 million which was offset by a decrease in third party contractor costs of approximately $1.4 million. The purchase of our corporate facilities resulted in a net savings of approximately $0.7 million for the six months ended May 31, 2004.

We expect that, excluding the impact of our acquisition of Staffware, general and administrative expenses will remain relatively stable as a percentage of revenue for the remainder of fiscal 2004.

Stock-based compensation expense principally relates to stock options assumed in acquisitions, stock options granted to consultants and the employer portion of payroll taxes due as a result of employee exercises of stock options. We account for employee stock-based compensation as discussed in Note 2 to our condensed consolidated financial statements. Stock-based compensation expense related to stock options granted to consultants is recognized as earned using the multiple option method and is shown by expense category. At each reporting date, we re-value the consultants’ stock options using the Black-Scholes option-pricing model. As a result, stock-based compensation expense will fluctuate as the fair market value of our common stock fluctuates.

The decrease in stock-based compensation for the second quarter of fiscal 2004 as compared to the same quarter of 2003 is primarily due to a $0.3 million decrease in employee- and acquisition- related stock-based compensation. Stock-based compensation related to consultants remained flat quarter over quarter and employer-required payroll taxes for nonqualified stock option exercises were negligible for the second quarter of fiscal 2004 and 2003.

The decrease in stock-based compensation in absolute dollars for the six months ended May 31, 2004 as compared to the same period of 2003 is primarily due to a $0.7 million decrease in employee- and acquisition- related stock-based compensation. Stock-based compensation income related to consultants decreased by $0.1 million. Employer-required payroll taxes for nonqualified stock option exercises were negligible for the six month period ended May 31, 2004 and 2003.

During fiscal 2001 through fiscal 2003, we recorded restructuring charges totaling $71.6 million, consisting of $5.6 million for headcount reductions, $54.3 million for consolidation of facilities, $11.1 million for related write-down of leasehold improvements and $0.6 million of other related restructuring charges. These restructuring charges were recorded to align our cost structure with changing market conditions. We are currently working with corporate real estate brokers to sublease unoccupied facilities.

The following sets forth our accrued excess facilities costs as of May 31, 2004. These costs represent our estimated loss on abandoned facilities, net of sublease income, which we expect to pay over the next six years. See Notes 2 and 14 to our condensed consolidated financial statements.

Intangible assets are comprised of trademarks and established customer bases, as well as non-compete, maintenance and OEM customer royalty agreements.

We did not acquire any new intangibles or make any adjustments to our existing acquired intangibles. As a result, amortization of acquired intangibles remained stable year over year.

Interest and other income (expense), net, includes interest income, realized gains and losses on investments and other miscellaneous income and expense items.

The decrease in interest and other income, net, in absolute dollars for the second quarter of fiscal 2004 as compared to the same quarter of 2003 was primarily due to lower interest income in 2004 combined with net foreign exchange losses. Interest income

decreased 40.5% from $3.5 million in the second quarter of fiscal 2003 to $2.1 million in the second quarter of fiscal 2004. This decrease was primarily due to the decline in interest rates on our investments combined with a decrease in our investment asset base as a result of our repurchase and retirement of $115.0 million of our common stock and the acquisition related commitment of $150.0 million. During the second quarter of fiscal 2004 and 2003, we had a net foreign exchange loss of $0.6 million and a net foreign exchange gain of $0.5 million, respectively. This increase in expense was the result of the volatility of the dollar against the Euro and the British Pound.

The decrease in interest and other income in absolute dollars for the six months ended May 31, 2004 as compared to the same period of the prior year was primarily due to lower interest income in 2004 combined with net foreign exchange losses. Interest income decreased 44.5% from $7.5 million for the six months ended May 31, 2003 to $4.2 million for the six months ended May 31, 2004. This decrease was primarily due to the decline in interest rates on our investments combined with a decrease in our investment asset base as a result of our repurchase and retirement of $115.0 million of our common stock and the acquisition related commitment of $150.0 million. During the six months ended May 31, 2004 and 2003, we had a net foreign exchange loss of $0.9 million and a net foreign exchange gain of $1.2 million, respectively. This increase in expense was the result of the volatility of the dollar against the Euro and the British Pound.

Interest expense relates to interest incurred in connection with the corporate headquarters purchase in June 2003. We recorded a $54.0 million mortgage note payable to a financial institution collateralized by the commercial real property acquired. The mortgage note payable carries a fixed annual interest rate of 5.09% and a 20-year amortization. The principal balance remaining at the end of the 10-year term of $33.9 million is due as a final balloon payment on July 1, 2013.

Our current estimate of our annual effective tax rate on anticipated operating income for the 2004 tax year is 41%. The estimated annual effective tax rate of 41% has been used to record the provision for income taxes for the six-month period ended May 30, 2004 compared with an effective tax rate of 40% used to record the provision for income taxes for the comparable period in 2003. The estimated annual effective tax rate differs from the U.S. statutory rate primarily due to state taxes, foreign tax rate differences, and R&D tax credits. We reassess the appropriateness of our valuation allowance each quarter and have maintained a full valuation allowance on our deferred tax assets because we expect that it is more likely than not that all deferred tax assets will not be realized in the foreseeable future. In future quarters, however, a full valuation allowance may not be required and could result in the recording of a deferred tax benefit.

At May 31, 2004, we had cash and cash equivalents of $101.3 million, representing an increase of $18.0 million from November 30, 2003.

Net cash provided by operations for the six months ended May 31, 2004 was $33.0 million compared to $5.2 million for the comparable period of the prior year. Cash provided by operating activities for the six months ended May 31, 2004 resulted primarily from net income of $18.1 million combined with non-cash charges of $19.0 million partially offset by a net decrease in assets and liabilities of $4.1 million. Cash provided by operating activities for the six months ended May 31, 2003 resulted primarily from net income of $1.1 million that was combined with non-cash charges of $10.0 million offset by a net decrease in assets and liabilities of $5.9 million.

To the extent that the non-cash items increase or decrease our future operating results, there will be no corresponding impact on our cash flows. After excluding the effects of these non-cash charges, the primary changes in cash flows relating to operating activities result from changes in working capital. Our primary source of operating cash flows is the collection of accounts receivable from our customers. Our operating cash flows are also impacted by the timing of payments to our vendors for accounts payable. We generally pay our vendors and service providers in accordance with the invoice terms and conditions. The timing of cash payments in future periods will be impacted by the terms of accounts payable arrangements and management’s assessment of our cash inflows.

Net cash provided by investing activities was $88.7 million and $50.5 million for the six months ended May 31, 2004 and 2003, respectively. Net cash provided by investing activities for the six months ended May 31, 2004 related primarily from net sales and maturities of short-term investments of $242.3 million offset by $150.0 million restricted cash recorded in connection with our offer to acquire Staffware. Net cash provided by investing activities for the six months ended May 31, 2003 related primarily from net sales and maturities of short-term investments of $51.5 million.

Net cash used in financing activities for the six months ended May 31, 2004 was $104.1 million resulting primarily from the $115.0 million purchase of our common stock pursuant to our repurchase agreement with Reuters, partially offset by $11.7 million in proceeds from the exercise of stock options and stock purchases under our Employee Stock Purchase Program. Net cash provided by financing activities in the six months ended May 31, 2003 was $3.4 million in proceeds from the exercise of stock options and stock purchases under our Employee Stock Purchase Program.

At May 31, 2004 and November 30, 2003, we had $379.4 million and $604.7 million in cash, cash equivalents and investments, respectively. We expect our operating expenses to remain relatively stable for the foreseeable future and, as a result, we intend to fund our operating expenses through cash flows from operations. We expect to use our cash resources to fund capital expenditures as well as acquisitions or investments in complementary businesses, technologies or product lines. We believe that our current cash, cash equivalents and investments and cash flows from operations will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for at least the next twelve months.

In February 2004, Reuters sold 69 million shares of our outstanding common stock at a price of $6.85 per share in a registered public offering. Pursuant to our Registration and Repurchase agreement with Reuters, we repurchased approximately 16.8 million shares of our common stock at the same price of $6.85 per share, totaling $115.0 million. This completed our obligation under the agreement to repurchase shares from Reuters.

We lease office space and equipment under non-cancelable operating leases with various expiration dates through March 2014. Rental expense was approximately $1.5 million and $5.6 million for the second quarter of fiscal 2004 and 2003, respectively and $3.0 million and $11.2 million for the six month periods ended May 31, 2004 and 2003, respectively.

As of May 31, 2004, contractual commitments associated with indebtedness and lease obligations is as follows, (in thousands):

As of May 31, 2004, future minimum lease payments under restructured non-cancelable operating leases include $35.2 million provided for as accrued restructuring costs and $3.3 million for acquisition integration liabilities. These amounts are included in Accrued Excess Facilities Costs on our Condensed Consolidated Balance Sheets.

In April 2004, in order to cover the cash component of our agreement to acquire Staffware, we placed $150.0 million into a restricted cash account. The acquisition became unconditional and we acquired approximately 85% of the outstanding Staffware stock on June 7, 2004.

In connection with the mortgage note payable, we have a $20.0 million revolving line of credit that matures on June 23, 2005. As of February 29, 2004, no amounts were drawn on this line of credit. We are required to maintain a minimum unrestricted cash, cash equivalent, and short-term investment balance of $150.0 million as well as other non-financial covenants defined in the agreement. We were in compliance with all covenants at May 31, 2004.

As of May 31, 2004, we had a $13.0 million irrevocable standby letter of credit in connection with the mortgage note payable. This letter of credit automatically renews for successive one-year periods, until the mortgage note payable has been satisfied in full. The letter of credit is collateralized by the revolving line of credit described above.

As of May 31, 2004, we had a $5.0 million irrevocable standby letter of credit outstanding in connection with a facility lease. The letter of credit automatically renews annually for the duration of the lease term, which expires in December 2010. The investments pledged for security of the letter of credit are presented as restricted cash and included in Other Assets on the Condensed Consolidated Balance Sheets.

As of May 31, 2004, we had a $0.9 million irrevocable standby letter of credit outstanding in connection with a facility surrender agreement. The letter of credit automatically renews annually for the duration of the letter of credit requirement of the surrender agreement, which expires in June 2006. The investments pledged for security of the letter of credit are presented as restricted cash and included in Other Assets on the Condensed Consolidated Balance Sheets.

Our software license agreements typically provide for indemnification of customers for intellectual property infringement claims. To date, no such claims have been filed against us. We also warrant to customers that software products operate substantially in accordance with specifications. Historically, minimal costs have been incurred related to product warranties, and as such no accruals for warranty costs have been made. In addition, we indemnify our officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to our certificate of incorporation, bylaws, and applicable provisions of Delaware law. To date, we have not incurred any costs related to these indemnification arrangements.

The following risk factors could materially and adversely affect our future operating results and could cause actual events to differ materially from those predicted in the forward-looking statements we make about our business.

Any failure to successfully integrate Staffware’s business operations could adversely affect our financial results.

We intend to complete our acquisition of Staffware in the third quarter of fiscal 2004. We intend to integrate certain of our operations with those of Staffware to reduce the expenses of the combined company. If we are unable to integrate our operations with Staffware’s operations in a timely manner, we may be unable to achieve the anticipated synergies. The challenges of integrating Staffware include, among other things:

We have incurred and expect to incur significant costs associated with the acquisition of Staffware, which could have an adverse effect on our shares.

We have incurred and expect to incur significant costs associated with the acquisition and integration of Staffware. These costs may be substantial and include adviser’s fees, reorganization or closure of facilities, severance and employee retention and other employee related costs, costs for lease terminations, meetings, training, re-branding, integration of information technology systems and other integration costs. We believe the combined entity may incur charges to operations, which are not currently reasonably estimable, in the quarters which follow, to reflect costs associated with integrating the two companies. We expect to incur charges to earnings for amortization of intangibles, consisting primarily of purchased technology, acquired in the acquisition. Our financial results, including earnings per share, could be adversely affected by a number of financial adjustments required by U.S. GAAP due to these or any additional charges in the future to reflect additional costs associated with the acquisition. Each of these charges would negatively impact earnings, which could have an adverse effect on the price of TIBCO shares.

Our future revenue is unpredictable and we expect our quarterly operating results to fluctuate, which may cause our stock price to decline.

Period-to-period comparisons of our operating results may not be a good indication of our future performance. Moreover, our operating results in some quarters have not in the past, and may not in the future, meet the expectations of stock market analysts and investors. This has in the past and may in the future cause our stock price to decline. As a result of our limited operating history and the evolving nature of the markets in which we compete, we have difficulty accurately forecasting our revenue in any given period. In addition to the factors discussed elsewhere in this section, a number of factors may cause our revenue to fall short of our expectations or cause fluctuations in our operating results, including:

In addition, while we may in future quarters record positive net income and/or increases in net income over prior periods, we may not show period-over-period earnings per share growth, or earnings per share growth that meets the expectations of stock market analysts, as a result of increases in the number of our shares outstanding during such periods. In such case, our stock price may decline.

We have a history of losses, we may incur future losses, and if we are unable to sustain profitability our business will suffer and our stock price may decline.

We may not be able to achieve revenue or earnings growth or obtain sufficient revenue to sustain profitability. While we achieved a modest profit of $9.6 million in the second quarter of fiscal 2004, we had a net loss of $0.6 million in the second quarter of fiscal 2003 and net losses in seven of the past fourteen quarters. As of May 31, 2004, we had an accumulated deficit of $140.3 million.

We have invested significantly in building our sales and marketing organization and in our technology research and development. We expect to continue to spend financial and other resources on developing and introducing enhancements to our existing and new software products and our direct sales and marketing activities. As a result, we need to generate significant revenue to maintain profitability. In addition, we believe that we must continue to dedicate a significant amount of our resources to our research and development efforts to maintain our competitive position. However, we do not expect to receive significant revenues from these investments for several years.

Our business is subject to seasonal variations which make quarter-to-quarter comparisons difficult.

Our business is subject to variations throughout the year due to seasonal factors in the U.S. and worldwide. These factors include fewer selling days in Europe during the summer vacation season which has a disproportionate effect on sales in Europe, including sales of Staffware products and the impact of the holidays and a slow down in capital expenditures by our customers at calendar year-end (during our first fiscal quarter). These factors typically result in lower sales activity in our first and third fiscal quarters compared to the rest of the year and make quarter-to-quarter comparisons of our operating results less meaningful.

The slowdown in the growth of the market for infrastructure software has caused our revenue to decline in the past and could cause our revenue or results of operations to fall below expectations in the future.

The market for infrastructure software is relatively new and evolving. We earn a substantial portion of our revenue from sales of our infrastructure software, including application integration software and related services. We expect to earn substantially all of our revenue in the foreseeable future from sales of these products and services. Our future financial performance will depend on continued growth in the number of organizations demanding software and services for application integration and information delivery and companies seeking outside vendors to develop, manage and maintain this software for their critical applications. A recently weak and slowly recovering United States and global economy, which has had a disproportionate impact on information technology spending by businesses, has led to a reduction in sales in the past and may continue to do so in the future. Many of our potential customers have made significant investments in internally developed systems and would incur significant costs in switching to third-party products, which may substantially inhibit the growth of the market for infrastructure software. If the market fails to grow, or grows more slowly than we expect, our sales will be adversely affected. There can be no assurance that as the economy revives and companies make greater investments in information technology and infrastructure software that revenue will grow at the same pace.

Our strategy contemplates possible future acquisitions which may result in us incurring unanticipated expenses or additional debt, difficulty in integrating our operations, dilution to our stockholders and may harm our operating results.

Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands, and competitive pressures. We have in the past and may in the future acquire complementary businesses, products or technologies. In this regard, we intend to complete our acquisition of Staffware in the third quarter of fiscal 2004 and have acquired the businesses of Talarian Corporation in 2002, Praja, Inc. in 2002, Extensibility, Inc. in 2000 and InConcert, Inc. in 1999. We do not know if we will be able to complete any acquisition or that we will be able to successfully integrate any acquired business, operate it profitably, or retain its key employees. Integrating any newly acquired business, product or technology could be expensive and time-consuming, could disrupt our ongoing business and could distract our management. We may face competition for acquisition targets from larger and more established companies with greater financial resources. In addition, in order to finance any acquisition, we might need to raise additional funds through public or private financings or use our cash reserves. In that event, we could be forced to obtain equity or debt financing on terms that are not favorable to us and, in the case of equity financing, that results in dilution to our stockholders. Use of our cash reserves for acquisitions could limit our financial flexibility in the future. Moreover, the terms of existing loan agreements may prohibit certain acquisitions or may place limits on our ability to incur additional indebtedness or issue additional equity securities to finance acquisitions. If we are unable to integrate any newly acquired entity, products or technology effectively, our business, financial condition and operating results would suffer. In addition, any amortization or impairment of acquired intangible assets, stock-based compensation or other charges resulting from the costs of acquisitions could harm our operating results.

The loss of any significant customer could harm our business and cause our stock price to decline.

We do not have long-term sales contracts with any of our customers. There can be no assurance that any of our customers, including Reuters, will continue to purchase our products in the future. As a result, a customer that generates substantial revenue for us in one period may not be a source of revenue in subsequent periods. For example, in each of the first and second quarters of fiscal 2004, a single customer accounted for over 15% of total revenue during such period. In addition, sales to Reuters, our largest customer, accounted for 9% of our total revenue in fiscal 2002 and 12% of our total revenue in fiscal 2003.

Our licensing, distribution and maintenance agreement with Reuters places certain limitations on our ability to conduct our business and involves various execution risks to our business.

In October 2003, we entered into a new agreement with Reuters relating to the licensing, distribution and maintenance of Reuters’ products. Prior to such time, we were restricted from selling our products to customers in the financial services market. Pursuant to the terms of the new agreement with Reuters, we are now permitted to market and sell our products, other than risk management and market data distribution products, directly and through third party resellers (other than four specified resellers) to customers in the financial services market. Reuters is phasing-out its role as a general reseller of our products through March 2005, at which time Reuters’ distribution rights will terminate. Reuters will continue to have a non-exclusive right to distribute our products in connection with certain project implementations for a limited number of its existing customers and for pre-existing customer leads until March 2005. After such time, Reuters may continue to internally use and embed our products in its solutions. Consequently, our revenue from the financial services market will be dependent upon our ability to directly market and sell our products in such market or indirectly with resellers other than Reuters.

Reuters’ obligation to pay us minimum guaranteed distribution fees terminates in March 2005. Any distribution fees from Reuters beyond these guaranteed minimums would be dependent on Reuters’ success in marketing and selling our products in the financial services market. We believe that Reuters may choose to devote their sales and marketing resources toward developing other aspects of their business and accordingly may not devote sufficient resources to effectively market and sell our products. There can be no assurances that we will be successful in generating enough revenue from financial services market customers to replace these minimum guaranteed payments after such time. Any inability on our part to replace the minimum guaranteed revenue from Reuters would adversely affect our business and operating results.

Neither Reuters nor any third-party reseller or distributor has any contractual obligation to distribute minimum quantities of our products. Reuters and other distributors may choose not to market and sell our products or may elect to sell competitive third-party products, either of which may adversely affect our market share and revenue.

Reuters began transitioning maintenance and support of our products for its customers, as well as the associated revenue, to us upon entering into the new agreement. As a result, we began providing maintenance and support services directly to customers transitioned from Reuters in the fourth quarter of fiscal 2003. Although we have had no difficulties to date, this transition process has not yet been completed. If our support organization experiences an unexpected burden as a result of this transition, we may be unable to provide maintenance and support services in accordance with our current plans or customer expectations, which could have a negative impact on our customer relationships. While we have no current plans to significantly expand our support organization, we may be compelled to do so to maintain these customer relationships. Moreover, we expect service and maintenance revenue and associated costs to increase as a result of our assumption of Reuters’ contracts and the development of our direct sales organization for the financial services market through at least fiscal 2004. To the extent, as a result of our increased service and maintenance obligations, our cost of revenue increases faster than our service and maintenance revenue, our gross margins will be adversely affected.

Under our new agreement with Reuters, we are no longer prohibited from selling our products and providing consulting services directly to companies in the financial services market; however we are restricted from directly selling risk management and market data distribution products in such markets through May 2008. While we currently do not offer any risk management and market data distribution solutions as part of our product offerings, if we were to develop any such products, we would have to rely on Reuters to sell those products in the financial services market until these restrictions end. Reuters is not required to help us sell any of these products in those markets and there can be no assurance that Reuters would choose to sell our products over products of our competitors.

Our license agreement with Reuters also imposes certain practical restrictions on our ability to acquire companies in certain business segments. The license agreement places no specific restrictions on our ability to acquire companies with less than half of their business in the sale of risk management and market data distribution products into the financial services market and to continue such business. However, under the terms of the license agreement, if we acquire companies which derive more than half of their revenue from the sale of risk management and market data distribution products into the financial services market, or if we combine our technology with any acquired company’s risk management or market data distribution products and services for the financial services market, then the acquired company’s risk management or market data distribution solutions would become subject to our restrictions on selling risk management and market data distribution solutions to the financial services market until May 2008. This prohibition could prevent us from realizing potential synergies with companies we acquire or from pursuing acquisitions that could benefit our business.

Any failure by us to meet the requirements of current or newly-targeted customers may have a detrimental impact on our business or operating results.

If we fail to meet the expectations or product and service requirements of our current customers, our reputation and business may be harmed. In addition, we may wish to expand our customer base into markets in which we have limited experience. In some cases, customers in different markets, such as financial services or government, have specific regulatory or other requirements which we must meet. For example, in order to maintain contracts with the U.S. Government, we must comply with specific rules and regulations relating to and that govern such contracts. If we fail to meet such requirements, we could be subject to civil or criminal liability or a reduction of revenue which could harm our business, operating results and financial condition.

Any losses we incur as a result of our exposure to the credit risk of our customers could harm our results of operations.

Most of our licenses are on an “open credit” basis. We monitor individual customer payment capability in granting such open credit arrangements, seek to limit credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts.

Because of the recent slowdown and slow recovery in the global economy, our exposure to credit risks has increased. Although these losses have not been material to date, future losses, if incurred, could harm our business and have an adverse effect on our business, operating results and financial condition.

Our stock price may be volatile, which could cause investors to lose all or part of their investments in our stock or negatively impact the effectiveness of our equity incentive plans.

The stock market in general, and the stock prices of technology companies in particular, have experienced volatility which has often been unrelated to the operating performance of any particular company or companies. During fiscal 2003, for example, our stock price fluctuated between a high of $8.10 and a low of $3.92. If market or industry-based fluctuations continue, our stock price could decline in the future regardless of our actual operating performance and investors could lose all or part of their investments.

In addition, we have historically used equity incentive programs, such as employee stock options and stock purchase plans, as a substantial part of overall employee compensation arrangements. Continued stock price volatility may negatively impact the value of such equity incentives, thereby diminishing the value of such incentive programs to employees and decreasing the effectiveness of such programs as retention tools.

We have in the past incurred significant expenses in both hiring new employees and reducing our headcount in response to changing market conditions, and the volatile nature of our industry makes it likely that we will continue to expend significant resources in managing our operations.

Our ability to successfully offer products and services and implement our business plan in a rapidly evolving market requires an effective planning and management process. We have increased the scope of our operations both domestically and internationally. We must successfully integrate new employees into our operations and generate sufficient revenues to justify the costs associated with these employees. If we fail to successfully integrate employees or to generate the revenue necessary to offset employee-related expenses, we may be forced to reduce our headcount, which would force us to incur significant expenses and would harm our business and operating results. For example, in response to changing market conditions, in fiscal 2001 and 2002, we recorded restructuring charges totaling $70.5 million, including $66.0 million related to abandoned and other facilities and $4.5 million related to a reduction of our headcount by approximately 235 employees. During fiscal 2003, we recorded an additional restructuring charge of $1.1 million related to a reduction of our headcount by approximately 44 employees. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures and continue to train and manage our workforce worldwide. Furthermore, we expect that we will be required to manage an increasing number of relationships with various customers and other third parties. Failure to control costs in any of the foregoing areas efficiently and effectively could interfere with the growth of our business as a whole.

If we do not retain our key management personnel and attract and retain other highly skilled employees, we may not be able to execute our business strategy effectively.

If we fail to retain and recruit key management and other skilled employees, our business and our ability to obtain new customers, develop new products and provide acceptable levels of customer service could suffer. The success of our business is heavily dependent on the leadership of our key management personnel, including Vivek Ranadivé, our President and Chief Executive Officer. The loss of one or more key employees could adversely affect our continued operations. We have experienced changes in our management organization over the past several years and may experience additional management changes in the future. In this regard, certain members of our senior management team will terminate their employment with us in 2004. If we are unsuccessful in replacing these employees or if our current management team is unable to assume the duties of these employees successfully, our business would be harmed. Uncertainty created by turnover of key employees could also result in reduced confidence in our financial performance which could cause fluctuations in our stock price and result in further turnover of our employees.

Our success also depends on our ability to recruit, retain and motivate highly skilled sales, marketing and engineering personnel. Competition for these people in the software industries is intense, and we may not be able to successfully recruit, train or retain qualified personnel. In addition, we have in the past and may in the future experienced turnover in our marketing and sales management. In particular, members of the Staffware sales force may leave as a result of our acquisition of Staffware, negatively impacting our ability to realize the synergies we expect from the combination of our business with that of Staffware.

Our business may be harmed if Reuters uses the technology we license from it to compete with us or grants licenses to such technology to others who use it to compete with us.

We license from Reuters the intellectual property that was incorporated into early versions of some of our software products. We do not own this licensed technology. Because Reuters has access to intellectual property used in our products, it could use this intellectual property to compete with us. Reuters is not restricted from using the licensed technology it has licensed to us to produce products that compete with our products, and it can grant limited licenses to the licensed technology to others who may compete with us. In addition, we must license to Reuters all of the products, and the source code for certain products, we create through December 2011. This may place Reuters in a position to more easily develop products that compete with ours.

Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

We cannot be certain that our products do not infringe issued patents or other intellectual property rights of others. In addition, because patent applications in the United States are not publicly disclosed until a patent is issued, applications covering technology used in our software products may have been filed without our knowledge. We may be subject to legal proceedings and claims from time to time, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Intellectual property litigation is expensive and time-consuming and could divert our management’s attention away from running our business and seriously harm our business. If we were to discover that our products violated the intellectual property rights of others, we would have to obtain licenses from these parties in order to continue marketing our products without substantial reengineering. We might not be able to obtain the necessary licenses on acceptable terms or at all, and if we could not obtain such licenses, we might not be able to reengineer our products successfully or in

a timely fashion. If we fail to address any infringement issues successfully, we would be forced to incur significant costs, including damages and potentially satisfying indemnification obligations that we have with our customers, and we could be prevented from selling certain of our products.

Our intellectual property or proprietary rights could be misappropriated, which could force us to become involved in expensive and time-consuming litigation.

We regard our copyrights, service marks, trademarks, trade secrets, patents (licensed or others) and similar intellectual property as critical to our success. Any misappropriation of our proprietary information by third parties could harm our business, financial condition and operating results. In addition, the laws of some countries do not provide the same level of protection of our proprietary information as do the laws of the United States. If our proprietary information were misappropriated, we might have to engage in litigation to protect it. We might not succeed in protecting our proprietary information if we initiate intellectual property litigation, and, in any event, such litigation would be expensive and time-consuming, could divert our management’s attention away from running our business and could seriously harm our business.

The market for our products and services is extremely competitive and subject to rapid change. We compete with various providers of enterprise application integration solutions, including webMethods and SeeBeyond. We also compete with various providers of webservices such as Microsoft, BEA and IBM. We believe that of these companies, IBM has the potential to offer the most complete set of products for enterprise application integration. We also face competition for certain aspects of our product and service offerings from major systems integrators. We expect additional competition from other established and emerging companies.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and larger customer bases than we do. Our present or future competitors may be able to develop products comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends or customer requirements, or devote greater resources to the development, promotion and sale of their products than we do. Accordingly, we may not be able to compete effectively in our markets or competition may intensify and harm our business and operating results. If we are not successful in developing enhancements to existing products and new products in a timely manner, achieving customer acceptance or generating higher average selling prices, our gross margins may decline, and our business and operating results may suffer.

Market acceptance of new platforms and web services standards may require us to undergo the expense of developing and maintaining compatible product lines.

Our software products can be licensed for use with a variety of platforms. There may be future or existing platforms that achieve popularity in the marketplace which may not be architecturally compatible with our software products. In addition, the effort and expense of developing, testing and maintaining software products will increase as more platforms achieve market acceptance within our target markets. Moreover, future or existing user interfaces that achieve popularity within the enterprise application integration marketplace may not be compatible with our current software products. If we are unable to achieve market acceptance of our software products or adapt to new platforms, our sales and revenues will be adversely affected.

Developing and maintaining different software products could place a significant strain on our resources and software product release schedules, which could harm our revenue and financial condition. If we are not able to develop software for accepted platforms or fail to adopt webservice standards, our license and service revenues and our gross margins could be adversely affected. In addition, if the platforms we have developed software for are not accepted, our license and service revenues and our gross margins could be adversely affected.

Recently enacted and proposed regulatory changes may cause us to incur increased costs, limit our ability to obtain director and officer liability insurance and make it more difficult for us to attract and retain qualified officers and directors.

The Sarbanes-Oxley Act of 2002 and newly proposed or enacted rules of the SEC and Nasdaq, may cause us to incur increased costs as we implement and respond to new requirements. The new rules could make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, or as executive officers. In order to comply with the Sarbanes-Oxley Act and other new rules and regulations, we may be required to hire additional personnel and use additional outside legal, accounting and advisory services. We are presently evaluating and monitoring developments with respect to these new and proposed rules, and we cannot predict or estimate the amount of the additional costs we may incur or the timing of such costs.

The outcome of litigation pending against us could require us to expend significant resources and could harm our business and financial resources.

We, certain of our directors and officers and certain investment bank underwriters have been named in a putative class action for violation of the federal securities laws in the U.S. District Court for the Southern District of New York, captioned “In re TIBCO Software Inc. Initial Public Offering Securities Litigation.” This is one of the number of cases challenging underwriting practices in the initial public offerings (IPOs) of more than 300 companies, which have been coordinated for pretrial proceedings as “In re Initial Public Offering Securities Litigation.” Plaintiffs generally allege that the underwriters engaged in undisclosed and improper underwriting activities, namely the receipt of excessive brokerage commissions and customer agreements regarding post-offering purchases of stock in exchange for allocations of IPO shares. Plaintiffs also allege that various investment bank securities analysts issued false and misleading analyst reports. The complaint against us claims that the purported improper underwriting activities were not disclosed in the registration statements for our IPO and secondary public offering and seeks unspecified damages on behalf of a purported class of persons who purchased our securities or sold put options during the time period from July 13, 1999 to December 6, 2000.

A proposal to settle the claims against all of the issuers and individual defendants in the coordinated litigation was conditionally accepted by us and Talarian on June 20, 2003. The completion of the settlement is subject to a number of conditions, including Court approval. Under the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in the action, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay an amount equal to $1.0 billion less any amounts ultimately collected by the plaintiffs from the underwriter defendants in all the cases. Unlike most of the defendant issuers’ insurance policies, including ours, Talarian’s policy contains a specific self-insured retention in the amount of $500,000 for IPO “laddering” claims, including those alleged in this matter. Thus, under the proposed settlement, if any payment is required under the insurers’ guaranty, our subsidiary, Talarian, would be responsible for paying its pro rata share of the shortfall, up to $500,000 of the self-insured retention remaining under its policy.

The uncertainty associated with substantial unresolved lawsuits could harm our business, financial condition and reputation. The defense of the lawsuits could result in the diversion of our management’s time and attention away from business operations, which could harm our business. Negative developments with respect to the lawsuits could cause our stock price to decline. In addition, although we are unable to determine the amount, if any, that we may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, any such payment could seriously harm our financial condition and liquidity.

Natural or other disasters could disrupt our business and result in loss of revenue or in higher expenses.

Natural disasters and other business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters and many of our operations are located in California, a seismically-active region. A natural disaster or other unanticipated business disruption could have a material adverse impact on our business, operating results and financial condition.

If we are required to treat employee stock option and employee stock purchase plans as a compensation expense, it could significantly reduce our net income and earnings per share.

There has been ongoing public debate whether employee stock option and employee stock purchase plans shares should be treated as a compensation expense and, if so, how to properly value such charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. For example in fiscal year 2003, had we accounted for stock-based compensation plans as a compensation expense, annual diluted earnings per share would have been reduced by $0.22 per share. Although we are not currently required to record any compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair market value and for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as a compensation expense using the fair value method.

Some provisions in our certificate of incorporation and bylaws, as well as a stockholder rights plan we adopted in February 2004, may have anti-takeover effects.

In February 2004, our Board of Directors adopted a stockholder rights plan and declared a dividend distribution of one right for each outstanding share of our common stock. Each right, when exercisable, entitles the registered holder to purchase certain securities at a specified purchase price. The rights plan may have the anti-takeover effect of causing substantial dilution to a person or group that attempts to acquire TIBCO on terms not approved by our Board of Directors. The existence of the rights plan could limit the price that certain investors might be willing to pay in the future for shares of our common stock and could discourage, delay or prevent a merger or acquisition that stockholders may consider favorable. In addition, provisions of our current certificate of incorporation and bylaws, as well as Delaware corporate law, could make it more difficult for a third-party to acquire us without the support of our Board of Directors, even if doing so would be beneficial to our stockholders.

We invest in marketable securities in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer or type of investment. The maximum allowable duration of a single issue is 2.5 years and the maximum allowable duration of the portfolio is 1.3 years.

At May 31, 2004, we had an investment portfolio of fixed income securities totaling $278.1 million, excluding those classified as cash and cash equivalents and restricted funds, respectively. Our investments consist primarily of bank and finance notes, various government obligations and asset-backed securities. These securities are classified as available-for-sale and are recorded on the balance sheet at fair market value with unrealized gains or losses reported as a separate component of stockholders’ equity. Unrealized losses are charged against income when a decline in fair market value is determined to be other than temporary. The specific identification method is used to determine the cost of securities sold.

The investment portfolio is subject to interest rate risk and will fall in value in the event market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 basis points (approximately 48.8% of current rates in the portfolio) from levels as of May 31, 2004, the fair market value of the portfolio would decline by approximately $3.1 million.

We develop products in the United States and sell in North America, South America, Europe, Asia and the Middle East. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. A majority of sales are currently made in U.S. dollars; however, a strengthening of the dollar could make our products less competitive in foreign markets. We enter into foreign currency forward exchange contracts (“forward contracts”) to manage exposure related to accounts receivable denominated in foreign currencies. We do not enter into derivative financial instruments for trading purposes. We had outstanding forward contracts with notional amounts totaling approximately $6.9 million at May 31, 2004. These open contracts mature at various dates through December 2004 and are economic hedges of certain foreign currency transaction exposures in the Euro, Singapore Dollar and the Australian Dollar. The fair value of these contacts at May 31, 2004 was approximately $7.0 million.

Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has significantly affected, or is reasonably likely to significantly affect, our internal control over financial reporting.

At our annual meeting of stockholders on April 15, 2004 the following two proposals were voted on and approved as follows:

PROPOSAL I (To elect six directors to serve until our next annual meeting of stockholders, or until their successors are duly elected and qualified.)

PROPOSAL II (To ratify the appointment of PricewaterhouseCoopers LLP as our independent public accountants for the fiscal year ending November 30, 2004.)

We filed a Current Report on Form 8-K on March 17, 2004 to furnish the press release we issued on March 17, 2004 entitled “TIBCO Software Reports First Quarter Financial Results.”

We filed a Current Report on Form 8-K on April 23, 2004 to announce that we had agreed to the terms of a cash and share offer for the issued share capital of Staffware plc and to furnish the press release we issued on April 22, 2004 entitled “Recommended Cash and Share Offer by TIBCO Software Inc. and by Banc of America Securities Limited (on its behalf outside the United States) for Staffware plc.”

We filed a Current Report on Form 8-K on June 17, 2004 to furnish the press release we issued on June 17, 2004 entitled “TIBCO Software Reports Second Quarter Financial Results.”

We filed a Current Report on Form 8-K on June 18, 2004 to furnish the press release we issued on June 7, 2004, announcing that the Recommended Cash and Share Offer by Banc of America Securities Limited on behalf of TIBCO Software Inc. (and in the United States by TIBCO Software Inc.) for Staffware plc had been declared unconditional in all respects.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED.


TIBCO SOFTWARE INC.

By:		/s/ Christopher G. O’Meara
		Christopher G. O’Meara
		Executive Vice President, Finance and Chief Financial Officer

By:		/s/ Sydney Carey
		Sydney Carey
		Corporate Controller and Chief Accounting Officer



Item		Page No.

	PART I – FINANCIAL INFORMATION

Item 1	Financial Statements:

	Condensed Consolidated Balance Sheets as of May 31, 2004 and November 30, 2003 (Unaudited)	3

	Condensed Consolidated Statements of Operations for the three-months and six-months ended May 31, 2004 and May 31, 2003 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the six-months ended May 31, 2004 and May 31, 2003 (Unaudited)	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4	Controls and Procedures	36

	PART II – OTHER INFORMATION

Item 4	Submission of Matters to a Vote of Security Holders	38

Item 6	Exhibits and Reports on Form 8-K	38

	Signatures	39


	May 31, 2004			November 30, 2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	101,254		$	83,278
Short-term investments		278,165			521,391
Accounts receivable, net of allowances; $4,208 and $4,715, respectively		70,528			53,659
Due from related parties		2,598			4,454
Cash restricted for acquisition		150,000			—
Other current assets		16,863			15,549

Total current assets		619,408			678,331
Property and equipment, net of accumulated depreciation; $50,755 and $44,590, respectively		115,567			119,124
Other assets		35,725			34,923
Goodwill		98,691			103,006
Acquired intangibles, net of accumulated amortization; $25,110 and $21,745, respectively		4,510			7,875

	$	873,901		$	943,259

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,968		$	3,692
Amounts due related parties		1			1,641
Accrued liabilities		47,280			36,219
Accrued excess facilities costs		38,509			42,522
Deferred revenue		49,458			42,914
Current portion of long term debt		1,666			1,624

Total current liabilities		140,882			128,612

Long term debt		51,009			51,853
Commitments and contingencies (Note 6)
Stockholders’ equity:
Common stock		199			213
Additional paid-in capital		822,554			921,038
Unearned stock-based compensation		(174	)		(254	)
Accumulated other comprehensive income (loss)		(267	)		225
Accumulated deficit		(140,302	)		(158,428	)

Total stockholders’ equity		682,010			762,794

	$	873,901		$	943,259


	Three Months Ended May 31,						Six Months Ended May 31,
	2004			2003			2004			2003
	(Unaudited)						(Unaudited)
License revenue:
Non-related parties	$	41,261		$	27,977		$	77,720		$	52,762
Related parties		4,057			2,823			8,368			13,013

Total license revenue		45,318			30,800			86,088			65,775

Service and maintenance revenue:
Non-related parties		31,644			26,303			60,986			51,211
Related parties		3,317			3,826			6,836			7,049
Reimbursable expenses		970			539			1,740			1,086

Total service and maintenance revenue		35,931			30,668			69,562			59,346

Total revenue		81,249			61,468			155,650			125,121
Cost of revenue:
Stock based compensation		9			65			23			119
Other cost of revenue non-related parties		18,410			14,489			34,809			28,913
Other cost of revenue related parties		—			199			—			602

Gross profit		62,830			46,715			120,818			95,487

Operating expenses:
Research and development:
Stock-based compensation		7			148			32			375
Other research and development		13,832			17,119			26,926			34,395
Sales and marketing:
Stock-based compensation		20			100			56			137
Other sales and marketing		26,871			29,099			53,471			55,948
General and administrative:
Stock-based compensation		9			18			12			57
Other general and administrative		5,727			5,728			10,530			10,753
Restructuring charges		—			—			—			1,100
Amortization of acquired intangibles		483			499			982			998

Total operating expenses		46,949			52,711			92,009			103,763

Income (loss) from operations		15,881			(5,996	)		28,809			(8,276	)
Interest and other income (expense), net		849			4,992			3,161			10,095
Interest expense		(691	)		—			(1,388	)		—

Income (loss) before income taxes		16,039			(1,004	)		30,582			1,819
Provision for (benefit from) income taxes		6,441			(444	)		12,456			718

Net income (loss)	$	9,598		$	(560	)	$	18,126		$	1,101

Net income (loss) per share:
Basic	$	0.05		$	(0.00	)	$	0.09		$	0.01

Weighted average common shares outstanding		198,816			211,213			204,002			210,718

Net income (loss) per share:
Diluted	$	0.05		$	(0.00	)	$	0.08		$	0.01

Weighted average common shares outstanding		212,658			211,213			217,555			218,646


	Six Months Ended
	May 31, 2004			May 31, 2003
	(Unaudited)
Cash flows from operating activities:
Net income	$	18,126		$	1,101
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		6,300			7,249
Amortization of acquired intangibles		3,365			3,382
Amortization of stock-based compensation		117			688
Realized (gain) loss on investments, net		119			(1,362	)
Acquisition and stock option related tax benefits		9,131			—
Changes in assets and liabilities:
Accounts receivable		(16,869	)		11,196
Due from related parties, net		216			(3,368	)
Other assets		(1,440	)		(1,484	)
Accounts payable		276			(894	)
Accrued liabilities and excess facilities		7,126			(9,447	)
Deferred revenue		6,544			(1,858	)

Net cash provided by operating activities		33,011			5,203

Cash flows from investing activities:
Purchases of short-term investments		(390,339	)		(441,098	)
Sales and maturities of short-term investments		632,637			492,614
Purchases of property and equipment, net		(2,743	)		(974	)
Cash and short-term investments pledged as security		(150,748	)		—
Purchases of private equity investments		(121	)		—

Net cash provided by investing activities		88,686			50,542

Cash flows from financing activities:
Proceeds from exercise of stock options		9,236			596
Proceeds from employee stock purchase program		2,423			2,783
Payment for purchase of retired shares		(115,000	)		—
Principal payments on long term debt		(802	)		—

Net cash provided by (used for) financing activities		(104,143	)		3,379

Effect of exchange rate changes on cash		422			(7	)

Net change in cash and cash equivalents		17,976			59,117
Cash and cash equivalents at beginning of period		83,278			57,229

Cash and cash equivalents at end of period	$	101,254		$	116,346


	Three Months Ended						Six Months Ended
	May 31, 2004			May 31, 2003			May 31, 2004			May 31, 2003
Net income (loss), as reported	$	9,598		$	(560	)	$	18,126		$	1,101
Add: Total stock-based employee compensation expense determined under intrinsic value based method for all awards, net of related tax effects		20			316			74			775
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(7,591	)		(13,870	)		(17,877	)		(29,167	)

Pro forma net income (loss)	$	2,027		$	(14,114	)	$	323		$	(27,291	)

Earnings (loss) per share:
Basic – as reported	$	0.05		$	(0.00	)	$	0.09		$	0.01

Basic – pro forma	$	0.01		$	(0.07	)	$	0.00		$	(0.13	)

Diluted – as reported	$	0.05		$	(0.00	)	$	0.08		$	0.01

Diluted – pro forma	$	0.01		$	(0.07	)	$	0.00		$	(0.13	)

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	Amount
Balance as of November 30, 2003	$	103,006
Tax benefit from acquired net operating losses		(4,315	)

Balance as of May 31, 2004	$	98,691


	May 31, 2004							November 30, 2003
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Existing technology	$	21,030	$	(17,872	)	$	3,158	$	21,030	$	(15,490	)	$	5,540
Customer base		4,960		(4,590	)		370		4,960		(4,042	)		918
Trademarks		1,550		(1,394	)		156		1,550		(1,228	)		322
Non-compete agreement		480		(480	)		—		480		(397	)		83
OEM customer royalty agreements		1,000		(417	)		583		1,000		(317	)		683
Maintenance agreements		600		(357	)		243		600		(271	)		329

Total	$	29,620	$	(25,110	)	$	4,510	$	29,620	$	(21,745	)	$	7,875


	Amount
Three months ended, May 31, 2004	$	1,674

Three months ended, May 31, 2003	$	1,691

Six months ended, May 31, 2004	$	3,365

Six months ended, May 31, 2003	$	3,382


	Amount
Remaining 2004	$	2,837
2005		1,391
2006		200
2007		82
Thereafter		—

Total	$	4,510


	Remaining 2004		2005		2006		2007		2008		Thereafter		Total
Operating commitments:
Debt principal	$	823	$	1,709	$	1,798	$	1,892	$	1,990	$	44,463	$	52,675
Debt interest		1,332		2,600		2,511		2,417		2,319		9,358		20,537
Operating leases		1,856		2,027		1,724		1,585		1,590		2,645		11,427

Total operating commitments		4,011		6,336		6,033		5,894		5,899		56,466		84,639
Restructuring-related commitments:
Operating leases, net of sublease income		2,898		6,553		6,351		6,448		6,640		14,993		43,883
Acquisition related commitments		150,000		—		—		—		—		—		150,000

Total commitments	$	156,909	$	12,889	$	12,384	$	12,342	$	12,539	$	71,459	$	278,522


	As of
	May 31, 2004			November 30, 2003
Cumulative translation adjustments	$	431		$	127
Unrealized gains (losses) on investments		(698	)		98

Accumulated other comprehensive income (loss)	$	(267	)	$	225


	Excess Facilities
Balance at November 30, 2003	$	42,522
Cash utilized during first quarter of fiscal 2004		2,051

Balance at February 29, 2004		40,471
Cash utilized during second quarter of fiscal 2004		1,962

Balance at May 31, 2004	$	38,509


	Three Months Ended May 31,				Six Months Ended May 31,
	2004		2003		2004		2003
License revenue:
Non-related parties	51	%	45	%	50	%	43	%
Related parties	5		5		5		10

Total license revenue	56		50		55		53

Service and maintenance revenue:
Non-related parties	39		43		40		40
Related parties	4		6		4		6
Reimbursable expenses	1		1		1		1

Total service and maintenance revenue	44		50		45		47

Total revenue	100		100		100		100
Cost of revenue:
Stock-based compensation	—		—		—		—
Other cost of revenue non-related parties	23		24		22		23
Other cost of revenue related parties	—		—		—		1

Total cost of revenue	23		24		22		24

Gross profit	77		76		78		76

Operating expenses:
Research and development:
Stock-based compensation	—		—		—		—
Other research and development	17		28		17		27
Sales and marketing:
Stock-based compensation	—		—		—		—
Other sales and marketing	33		48		34		45
General and administrative:
Stock-based compensation	—		—		—		—
Other general and administrative	7		9		7		9
Restructuring charges	—		—		—		1
Amortization of acquired intangibles	—		1		1		1

Total operating expenses	57		86		59		83

Income (loss) from operations	20		(10	)	19		(7	)
Interest and other income, net	1		8		2		8
Interest expense	(1	)	—		(1	)	—

Income (loss) before income taxes	20		(2	)	20		1
Provision for (benefit from) income taxes	8		(1	)	8		—

Net income (loss)	12	%	(1	)%	12	%	1	%


	Three-months ended May 31,
	2004			Change		2003
	(in thousands, except percentages)
Total revenue	$	81,249		32.2	%	$	61,468
As percent of total revenue		100.0	%	—			100.0	%


	Six-months ended May 31,
	2004			Change		2003
	(in thousands, except percentages)
Total revenue	$	155,650		24.4	%	$	125,121
As percent of total revenue		100.0	%	—			100.0	%


	Total Vote For Each Director	Total Vote Withheld From Each Director
Vivek Y. Ranadivé	141,355,564	10,197,860
Naren Gupta	136,209,612	15,343,812
Peter Job	142,867,823	8,685,601
William A. Owens ¹	100,554,218	50,999,206
Philip K. Wood	135,836,694	15,716,730
Eric Dunn	137,880,372	13,673,052


10.1		Transition Agreement and Release, dated as of April 30, 2004, by and between David Rice and the Registrant.

31.1		Rule 13a – 14(a) / 15d – 14(a) Certification by Chief Executive Officer.

31.2		Rule 13a – 14(a) / 15d – 14(a) Certification by Chief Financial Officer.

32.1		Section 1350 Certification by Chief Executive Officer.

32.2		Section 1350 Certification by Chief Financial Officer.