CITRIX SYSTEMS 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 ¨

As of May 2, 2005 there were 169,267,756 shares of the registrant’s Common Stock, $.001 par value per share, outstanding.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. All adjustments, which, in the opinion of management, are considered necessary for a fair presentation of the results of operations for the periods shown, are of a normal recurring nature and have been reflected in the unaudited condensed consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of the results expected for the full year or for any future period. The information included in these unaudited condensed consolidated financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this report and the consolidated financial statements and accompanying notes included in the Citrix Systems, Inc. (the “Company”) Form 10-K for the year ended December 31, 2004.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. While the Company believes that such estimates are fair when considered in conjunction with the condensed consolidated financial position and results of operations taken as a whole, the actual amount of such estimates, when known, will vary from these estimates.

The Company markets and licenses products and appliances primarily through value-added resellers, channel distributors, system integrators, independent software vendors and other equipment manufacturers. The Company’s product licenses are generally perpetual. The Company also separately sells, primarily direct to end-users, license updates and services, which may include product training, technical support and consulting services, as well as Web-based desktop access services.

The Company’s packaged products are typically purchased by medium and small-sized businesses with a minimal number of locations. In these cases, the product license is delivered with the packaged product. Electronic license arrangements are used with more complex multiserver environments typically found in larger business enterprises that deploy the Company’s products on a department or enterprise-wide basis, which could require differences in product features and functionality at various customer locations. Once the Company receives a product license agreement and purchase order, the enterprise customer licenses are electronically delivered. “Software activation keys” that enable the feature configuration ordered by the end-user are delivered separately from the software. Products may be delivered indirectly by a channel distributor or other equipment manufacturers, via download from the Company’s website or directly to the end-user by the Company.

Revenue is recognized when it is earned. The Company’s revenue recognition policies are in compliance with Statement of Position (“SOP”) 97-2 Software Revenue Recognition (as amended by SOP 98-4 and SOP 98-9) and related interpretations. In addition, the Company’s Web-based desktop access services revenue is recognized in accordance with Emerging Issues Task Force (“EITF”) No. 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of the arrangement exists; delivery has occurred and the Company has no remaining obligations; the fee is fixed or determinable; and collectibility is probable. The Company defines these four criteria as follows:

negotiated a master packaged product distribution or resale agreement. For electronic and paper license arrangements, the Company typically requires a purchase order from the distributor, reseller or end-user (depending on the arrangement) and an executed product license agreement from the end-user. For technical support, product training and consulting services, the Company requires a purchase order and an executed agreement. For Web-based desktop access services, the Company requires the customer or the reseller to electronically accept the terms of an online services agreement or execute a contract and generally submit a purchase order.

Net revenues include the following categories: Product Licenses, License Updates and Services. Product Licenses primarily represent fees related to the licensing of the Company’s products and appliances. These revenues are reflected net of sales allowances, provisions for stock balancing return rights and, as applicable, appliance warranties. Product License Updates consists of fees related to the Subscription Advantage program (the Company’s terminology for post contract support) that are recognized ratably over the term of the contract, which is typically 12-24 months. Subscription Advantage is a renewable program that provides subscribers with automatic delivery of software upgrades, enhancements and maintenance releases when and if they become available during the term of subscription. Services consist primarily of technical support services and Web-based desktop access services revenue recognized ratably over the contract term, revenue from product training and certification, and consulting services revenue related to implementation of the Company’s products, which is recognized as the services are provided.

The Company licenses its products bundled with an initial subscription for license updates that provide the end-user with free enhancements and upgrades to the licensed product on a when and if available basis. Customers may also elect to purchase technical support, product training or consulting services. The Company allocates revenue to license updates and any other undelivered elements of the arrangement based on VSOE of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria described above have been met. The balance of the revenue, net of any discounts inherent in the arrangement, is allocated to the delivered product using the residual method and recognized at the outset of the arrangement as the product licenses are delivered. If management cannot objectively determine the fair value of each undelivered element based on VSOE, revenue recognition is deferred until all elements are delivered, all services have been performed, or until fair value can be objectively determined.

In the normal course of business, the Company does not permit product returns, but it does provide most of its distributors and value added resellers with stock balancing and price protection rights. In accordance with the provisions of its warranties, the Company also provides end-users of its appliances the right to replacement appliances, as applicable. Stock balancing rights permit distributors to return products to the Company by the forty-fifth day of the fiscal quarter, subject to ordering an equal dollar amount of the Company’s other products prior to the last day of the same fiscal quarter. Price protection rights require that the Company grant retroactive price adjustments for inventories of products held by distributors or resellers if it lowers prices for such products. Warranty claims for appliances must be made within 12 months of the date of sale. The Company establishes provisions for estimated returns for stock balancing and price protection rights, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors, estimated distributor inventory levels by product, the impact of any new product releases and projected economic conditions. Actual product returns for stock balancing and price protection provisions incurred are, however, dependent upon future events, including the amount of stock balancing activity by distributors and the level of distributor inventories at the time of any price adjustments. Actual appliance replacements are dependent upon the number of warranty claims received. The Company continually monitors the factors that influence the pricing of its products and distributor inventory levels and makes adjustments to these provisions when it believes actual returns and other allowances could differ from established reserves. The Company’s ability to recognize revenue upon shipment to distributors is predicated on its ability to reliably estimate future stock balancing returns. If actual experience or changes in market condition impairs the Company’s ability to estimate returns, it would be required to defer the recognition of revenue until the delivery of the product to the end-user. Allowances for estimated product returns amounted to approximately $1.5 million and $2.3 million at March 31, 2005 and December 31, 2004, respectively. The Company has not reduced and has no current plans to reduce its prices for inventory currently held by distributors or resellers. Accordingly, there were no reserves required for price protection at March 31, 2005 and December 31, 2004. Allowances for estimated warranty replacements were immaterial at March 31, 2005 and December 31, 2004. The Company also records estimated reductions to revenue for customer programs and incentive offerings including volume-based incentives. If market conditions were to decline, the Company could take actions to increase its customer incentive offerings, which could result in an incremental reduction to revenue at the time the incentive is offered.

The Company’s stock-based compensation program is a broad based, long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interest. At March 31, 2005, the Company had six stock-based employee compensation plans, including two plans assumed from the Net6 acquisition. In addition, at the Company’s Annual Meeting of Stockholders on May 5, 2005, the Company’s stockholders approved the Company’s 2005 Equity Incentive Plan and 2005 Employee Stock Purchase Plan (collectively, the “2005 Plans”). The Company’s Board of Directors has agreed that upon stockholder approval of the 2005 Plans, no new awards will be granted under the Company’s Amended and Restated 1995 Stock Option Plan, the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan, the Amended and Restated 1995 Non-Employee Director Stock Option Plan and the Third Amended and Restated 1995 Employee Stock Purchase Plan, although awards granted under these plans and still outstanding will continue to be subject to all terms and conditions of such plans, as applicable. The number and frequency of stock option grants made under these stock-based compensation plans are based on competitive practices, operating results of the Company, the number of options available for grant under the Company’s stockholder approved plans, and other factors. All employees are eligible to participate in the Company’s stock-based program.

Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, defines a fair value method of accounting for issuance of stock options and other equity instruments. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are not required to adopt the fair value method of accounting for employee stock-based transactions. Companies are permitted to account for such transactions by applying the intrinsic value method of accounting under Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the consolidated financial statements pro forma net income and per share amounts as if a company had applied the fair value method prescribed by SFAS No. 123.

The Company applies APB Opinion No. 25 and related interpretations in accounting for its plans and stock options granted to its employees and non-employee directors and has complied with the disclosure requirements of SFAS No. 123.

Except for non-employee directors, the Company has not granted any options to non-employees. The Company has elected to follow APB Opinion No. 25 because the alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models, including the Black-Scholes model, that were developed for market traded options and not as a tool to value stock options granted to employees.

No stock-based employee compensation cost is reflected in net income, except for amounts related to the 51,546 shares issuable under options assumed as part of the acquisition of Net6, Inc., which were accounted for in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25). Substantially all options granted under the Company’s six stock-based compensation plans, including two plans assumed from Net 6, Inc., have an exercise price equal to or above market value of the underlying common stock on the date of grant. Had compensation cost for the grants issued at an exercise price equal to or above market value under the Company’s stock-based compensation plans had been determined based on the fair value at the grant dates for grants under those plans consistent with the fair value method of SFAS No. 123, the Company’s cash flows would have remained unchanged; however, net income and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands, except per share information):

For purposes of the pro forma calculations, the fair value of each option is estimated on the date of the grant using the Black-Scholes option-pricing model, assuming no expected dividends and the following assumptions:

Basic earnings per share is calculated by dividing income available to shareholders by the weighted-average number of common shares outstanding during each period. Diluted earnings per share is computed using the weighted average number of common and dilutive common share equivalents outstanding during the period. Dilutive common share equivalents consist of shares issuable upon the exercise of stock options (calculated using the treasury stock method) during the period they were outstanding.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share information):

On December 8, 2004, the Company acquired all of the issued and outstanding capital stock of Net6, Inc. (“Net6”), a leader in secure access gateways. The acquisition extends the Company’s ability to provide easy and secure access to virtually any resource, in both data and voice format, on-demand. Results of operations of Net6 are included as part of the Company’s Americas geographic segment and revenue from these appliances is included in Product Licenses revenue in the accompanying condensed consolidated statements of income. The consideration for this transaction was approximately $49.2 million and was paid in cash. In addition to the purchase price, direct transaction costs associated with the acquisition were approximately $1.7 million. The sources of funds for consideration paid in this transaction consisted of available cash and investments.

On February 27, 2004, the Company acquired all of the issued and outstanding capital stock of Expertcity.com, Inc. (“Expertcity”), a market leader in Web-based desktop access, as well as a leader in Web-based training and customer assistance services. Results of operations are reflected in the Company’s Citrix Online reportable segment and revenue from the Citrix Online division is included in Services revenue in the accompanying condensed consolidated statements of income. The consideration for this transaction was approximately $241.8 million, comprised of approximately $112.6 million in cash, approximately 5.8 million shares of the Company’s common stock valued at approximately $124.8 million and direct transaction costs of approximately $4.4 million. These amounts include additional common stock earned by Expertcity upon the achievement of certain revenue and other financial milestones during 2004 pursuant to the merger agreement, which were issued during March 2005. The fair value of the common stock earned as additional purchase price consideration was recorded as goodwill on the date earned. There is no further contingent consideration related to the transaction. The sources of funds for consideration paid in this transaction consisted of available cash and investments and shares of the Company’s authorized common stock.

The fair values used in determining the purchase price allocation for certain intangible assets for Expertcity and Net6 were based on estimated discounted future cash flows, royalty rates and historical data, among other information. Purchased in-process research and development (“IPR&D”) of approximately $18.7 million was expensed immediately upon closing of the Expertcity acquisition in the first quarter of 2004 and $0.4 million was expensed immediately upon closing of the Net6 acquisition in the fourth quarter of 2004 in accordance with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, because such IPR&D pertained to technology that was not currently technologically feasible, meaning it had not reached the working model stage, did not contain all of the major functions planned for the product, was not ready for initial customer testing and had no alternative future use at the time of the closing of the applicable transaction. The fair value assigned to in-process research and development was determined using the income approach, which includes estimating the revenue and expenses associated with a project’s sales cycle and by estimating the amount of after-tax cash flows attributable to the projects. The future cash flows were discounted to present value utilizing an appropriate risk-adjusted rate of return, which ranged from 17% to 25%. The rate of return included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.

Goodwill. There were no material changes in the carrying amount of goodwill for the three months ended March 31, 2005. The Company recorded $166.1 million of goodwill related to the Expertcity acquisition which was assigned to the Citrix Online reportable segment. In addition, the Company recorded $33.5 million of goodwill related to the Net6 acquisition which was assigned to the Americas reportable segment. The goodwill recorded in relation to the Expertcity and Net6 acquisitions was not deductible for tax purposes. See Note 4 for additional information regarding the Company’s acquisitions and Note 7 for segment information.

Intangible Assets. Intangible assets are recorded at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally one to seven years. Intangible assets consist of the following (in thousands):

Amortization of core and product technology was $3.3 million and $3.0 million for the three months ended March 31, 2005 and 2004, respectively, and is classified as a component of cost of revenues on the accompanying condensed consolidated statements of income. Amortization of other intangible assets was $2.2 million and $0.7 million for the three months ended March 31, 2005 and 2004, respectively and is classified as a component of operating expenses on the accompanying condensed consolidated statements of income. Estimated future amortization expense is as follows (in thousands):

In March 1999, the Company sold $850 million principal amount at maturity of its zero coupon convertible subordinated debentures (the “Debentures”) due March 22, 2019, in a private placement. On March 22, 2004, the Company redeemed all of the outstanding Debentures for a redemption price of approximately $355.7 million. The Company used the proceeds from its held-to-maturity investments that matured on March 22, 2004 and available cash to fund the aggregate redemption price. At the date of redemption, the Company incurred a charge for the associated deferred debt issuance costs of approximately $7.2 million.

The Company operates in a single market consisting of the design, development, marketing, sales and support of access infrastructure products and services for enterprise applications, as well as Web-based desktop access. The Company’s revenues are derived from sales of MetaFrame Access Suite products and related services in the Americas, Europe, the Middle East and Africa (“EMEA”) and Asia-Pacific regions and from Web-based desktop access services sold by its Citrix Online division. These three geographic regions and the Citrix Online division constitute the Company’s four reportable segments.

The Company does not engage in intercompany revenue transfers between segments. The Company’s management evaluates performance based primarily on revenues in the geographic locations in which the Company operates and separately evaluates revenues from the Citrix Online division. Segment profit for each segment includes certain sales,

marketing, research and development, general and administrative expenses directly attributable to the segment and excludes certain expenses that are managed outside the reportable segments. Costs excluded from segment profit primarily consist of research and development costs associated with the MetaFrame Access Suite products, amortization of core and product technology and other intangible assets, interest, corporate expenses and income taxes, as well as charges for in-process research and development. Corporate expenses are comprised primarily of corporate marketing costs, operations and certain general and administrative expenses, which are separately managed. Accounting policies of the segments are the same as the Company’s consolidated accounting policies.

Net revenues and segment profit, classified by the Company’s four reportable segments are as follows (in thousands):

As of March 31, 2005 and December 31, 2004, the Company had $9.6 million and $12.6 million of derivative assets, respectively, and $5.7 million and $7.9 million of derivative liabilities, respectively, representing the fair values of the Company’s outstanding derivative instruments, which are recorded in other current assets, other assets, accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. The change in derivatives recognized in other comprehensive income includes unrealized gains or losses that arose from changes in market value of derivatives that were held during the period, and gains or losses that were previously unrealized, but have been recognized in current period net income due to termination or maturities of derivative contracts. This reclassification has no effect on total comprehensive income or stockholders’ equity. The following table presents these components of other comprehensive income, net of tax for the Company’s derivative instruments (in thousands):

Cash Flow Hedges. As of March 31, 2005 and December 31, 2004, the Company had in place foreign currency forward sale contracts with a notional amount of $48.0 million and $39.0 million, respectively, and foreign currency forward purchase contracts with a notional amount of $163.1 million and $165.0 million, respectively. The fair value of these contracts at March 31, 2005 and December 31, 2004 were assets of $5.4 million and $11.5 million, respectively and liabilities of $2.7 million and $3.5 million, respectively. A substantial portion of the Company’s anticipated overseas expense will be transacted in local currencies. To protect against fluctuations in operating expenses and the volatility of future cash flows caused by changes in currency exchange rates, the Company has established a program that uses forward foreign exchange contracts to reduce a portion of its exposure to these potential changes. The terms of these instruments, and the hedged transactions to which they relate, generally do not exceed 12 months. Currencies hedged are Euros, British pounds sterling, Swiss francs, Australian dollars, Japanese yen and Canadian dollars. There was no material ineffectiveness of the Company’s foreign currency forward contracts for the three months ended March 31, 2005 or 2004.

Fair Value Hedges. The Company uses interest rate swap instruments to hedge against the changes in fair value of certain of its available-for-sale securities due to changes in interest rates. At March 31, 2005, the instruments had an aggregate notional amount of $182.4 million related to specific available-for-sale securities and expire on various dates through September 2008. Each of the instruments swap the fixed rate interest on the underlying investments for a variable rate based on the London Interbank Offered Rate, or LIBOR, plus a specified margin. Changes in the fair value of the interest rate swap instruments are recorded in earnings along with related designated changes in the value of the underlying investments. The fair value of the instruments at March 31, 2005 and December 31, 2004 were assets of $4.2 million and $1.1 million, respectively, and liabilities of approximately $3.0 million and $4.4 million, respectively. There was no material ineffectiveness of the Company’s interest rate swaps for the three months ended March 31, 2005 or 2004.

Derivatives Not Designated as Hedges. The Company utilizes credit derivatives and other instruments for investment purposes that either do not qualify or are not designated for hedge accounting treatment under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related interpretations. Accordingly, changes in the fair value of these contracts, if any, are recorded in other income, net. Under the terms of these contracts, the Company assumes the default risk, above a certain threshold, of a portfolio of specified referenced issuers in exchange for a fixed yield that is recorded in interest income. In the event of default by underlying referenced issuers above specified amounts, the Company will pay the counterparty an amount equivalent to its loss, not to exceed the notional value of the contract. The primary risk associated with these contracts is the default risk of the underlying issuers. The risk levels of these instruments are equivalent to “AAA,”, or better, single securities. The purpose of the credit default contracts is to provide additional yield on certain of the Company’s underlying available-for-sale investments.

The Company is a party to three credit default contracts that have an aggregate notional amount of $75.0 million that expire on various dates through March 2008. At March 31, 2005, the Company had restricted approximately $83.5 million of investment securities as collateral for these credit default contracts and interest rate swaps, which is included in restricted cash equivalents and investments in the accompanying condensed consolidated balance sheets. The Company maintains the ability to manage the composition of the restricted investments within certain limits and to withdraw and use excess investment earnings from the restricted collateral for operating purposes. The fixed yield earned on these credit default contracts was not material for the three months ended March 31, 2005 and 2004, and is included in interest income in the accompanying condensed consolidated statements of income. To date there have been no credit events for the underlying referenced entities resulting in losses to the Company. As of March 31, 2005, the fair value of these credit default contracts was not material.

The components of comprehensive income, net of tax, are as follows (in thousands):

The Company maintains certain operational and administrative processes in overseas subsidiaries and its foreign earnings are taxed at lower foreign tax rates. The Company’s effective tax rate was approximately 21% for the three months ended March 31, 2005 and the three months ended March 31, 2004.

On October 22, 2004, the American Jobs Creation Act (“the AJCA”) was signed into law. The AJCA includes a deduction for 85% of certain foreign earnings that are repatriated, as defined in the AJCA. The Company may elect to apply this provision to repatriate qualifying earnings in 2005. The Company has started an evaluation of the effects of the repatriation provision, including the impact in state and international tax jurisdictions; however, the Company does not expect to be able to complete this evaluation until after Congress or the United States Treasury Department provides guidance concerning the key elements of the provision. The Company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the anticipated guidance. Per the provisions of the AJCA, the range of possible amounts that the Company is eligible to repatriate under this provision is between zero and $500 million. The related potential range of income tax is between zero and $52 million. Other than considering the one-time repatriation provision within the AJCA, the Company does not expect to remit earnings from its foreign subsidiaries.

The Company’s Board of Directors authorized an ongoing stock repurchase program with a total repurchase authority granted to the Company of $1 billion, of which $200 million was authorized in February 2005. The objective of the Company’s stock repurchase program is to improve stockholders’ returns. At March 31, 2005, approximately $202.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock.

The Company is authorized to make open market purchases of its common stock using general corporate funds. Additionally, the Company enters into structured stock repurchase arrangements with large financial institutions using general corporate funds as part of its stock repurchase program in order to lower the average cost to acquire shares. These programs include terms that require the Company to make up front payments to the counter-party financial institution and result in the receipt of stock during or at the end of the agreement or the receipt of either stock or cash at the maturity of the agreement, depending on market conditions.

The Company expended approximately $40.0 million during the three months ended March 31, 2005, net of premiums received, under all of its stock repurchase transactions. There was no cash expended during the first three months of 2004 under stock repurchase transactions. During the three months ended March 31, 2005, the Company took delivery of a total of 2,554,352 shares of outstanding common stock with an average per share price of $22.74. During the three months ended March 31, 2004, the Company took delivery of a total of 709,969 shares of outstanding common stock with an average per share price of $20.96. Some of these shares were received pursuant to prepaid programs. Since the inception of the stock repurchase program, the average cost of shares acquired was $16.90 per share compared to an average close price during open trading windows of $19.96 per share. In addition, a significant portion of the funds used to repurchase stock was funded by proceeds from employee stock option exercises and the related tax benefit. As of March 31, 2005, the Company has remaining prepaid notional amounts of approximately $34.9 million under structured stock repurchase agreements. Due to the fact that the total shares to be received for the open repurchase agreements at March 31, 2005 is not determinable until the contracts mature, the above price per share amounts exclude the remaining shares to be received subject to the agreements.

During 2002, the Company became a party to a synthetic lease arrangement totaling approximately $61.0 million for its corporate headquarters office space in Fort Lauderdale, Florida. The synthetic lease represents a form of off-balance sheet financing under which an unrelated third party lessor funded 100% of the costs of acquiring the property and leases the asset to the Company. The synthetic lease qualifies as an operating lease for accounting purposes and as a financing lease for tax purposes. The Company does not include the property or the related lease debt as an asset or a liability on its consolidated balance sheets. Consequently, payments made pursuant to the lease are recorded as operating expenses in the Company’s consolidated statements of income. The Company entered into the synthetic lease in order to lease its headquarters properties under more favorable terms than under its previous lease arrangements.

The initial term of the synthetic lease is seven years. Upon approval by the lessor, the Company can renew the lease twice for additional two-year periods. At any time during the lease term, the Company has the option to sublease the property and upon thirty-days’ written notice, the Company has the option to purchase the property for an amount representing the original property cost and transaction fees of approximately $61.0 million plus any lease breakage costs and outstanding amounts owed. Upon at least 180 days notice prior to the termination of the initial lease term, the Company has the option to remarket the property for sale to a third party. If the Company chooses not to purchase the property at the end of the lease term, it has guaranteed a residual value to the lessor of approximately $51.9 million and possession of the buildings will be returned to the lessor. On a periodic basis, the Company evaluates the property for indicators of impairment. If an evaluation were to indicate that fair value of the building were to decline below $51.9 million, the Company would be responsible for the difference under its residual value guarantee, which could have a material adverse effect on the Company’s results of operations and financial condition.

The synthetic lease includes certain financial covenants including a requirement for the Company to maintain a pledged balance of approximately $62.8 million in cash and/or investment securities as collateral. This amount is included in restricted cash equivalents and investments in the accompanying condensed consolidated balance sheets. The Company maintains the ability to manage the composition of the restricted investments within certain limits and to withdraw and use excess investment earnings from the restricted collateral for operating purposes. Additionally, the Company must maintain a minimum cash and investment balance of $100.0 million, excluding the Company’s collateralized investments and equity investments, as of the end of each fiscal quarter. As of March 31, 2005, the Company had approximately $357.5 million in cash and investments in excess of those required levels. The synthetic lease includes non-financial covenants including the maintenance of the properties and adequate insurance, prompt delivery of financial statements to the lender of the lessee and prompt payment of taxes associated with the properties. As of March 31, 2005, the Company was in compliance with all material provisions of the arrangement.

During 2002 and 2001, the Company took actions to consolidate certain of its offices, including the exit of certain leased office space and the abandonment of certain leasehold improvements. Lease obligations related to these existing operating leases continue to 2025 with a total remaining obligation at March 31, 2005 of approximately $21.6 million, of which $2.7 million was accrued for as of March 31, 2005, and is reflected in accrued expenses and other liabilities in the accompanying condensed consolidated balance sheets. In calculating this accrual, the Company made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. The Company periodically re-evaluates its estimates and if actual circumstances prove to be materially worse than management has estimated, the total charges for these vacant facilities could be significantly higher.

The Company is a defendant in various matters of litigation generally arising out of the normal course of business. Although it is difficult to predict the ultimate outcome of these cases, management believes, based on discussions with counsel, that any ultimate outcome would not materially affect the Company’s financial position, results of operations or cash flows.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires companies to expense the value of employee stock option and similar awards. SFAS No. 123R is effective as of the beginning of the fiscal year that begins after June 15, 2005 (i.e. January 1, 2006 for the Company). As of the effective date, the Company will be required to expense all awards granted, modified, cancelled or repurchased as well as the portion of prior awards for which the requisite service has not been rendered, based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123. SFAS No. 123R permits public companies to adopt its requirements using one of two methods: A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123R for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.

The Company currently expects to adopt SFAS No. 123R using the modified prospective method. The Company believes that the adoption of SFAS No. 123R’s fair value method will have a material adverse impact on the Company’s results of operations; however, currently, the impact the adoption of SFAS No. 123R will have on the Company’s results of operations cannot be quantified because, among other things, it will depend on the levels of share-based payments granted in the future.

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

We design, develop and market access infrastructure software, services and appliances. We market and license our products through multiple channels such as value-added resellers, channel distributors, system integrators, independent software vendors, our websites and other equipment manufacturers. We also promote our products through relationships with a wide variety of industry participants, including Microsoft Corporation (“Microsoft”).

On December 8, 2004, we acquired all of the issued and outstanding capital stock of Net6, Inc. or Net6, a leader in providing secure access gateways. The acquisition extends our ability to provide easy and secure access to virtually any resource, both data and voice, on-demand. Results of operations of Net6 are included as part of our Americas geographic segment and revenue from these appliances is included in our Product Licenses revenue in our condensed consolidated statements of income. The consideration for this transaction was approximately $49.2 million paid in cash. In addition to the purchase price, there were direct transaction costs associated with the acquisition of approximately $1.7 million. The sources of funds for consideration paid in this transaction consisted of available cash and investments.

On February 27, 2004, we acquired all of the issued and outstanding capital stock of Expertcity.com, Inc. or Expertcity, a market leader in Web-based desktop access as well as a leader in Web-based training and customer assistance services. Results of operations are reflected in our Citrix Online reportable segment and revenue from our Citrix Online division is included in our Services revenue in our condensed consolidated statements of income. The consideration for this transaction was approximately $241.8 million, comprised of approximately $112.6 million in cash, approximately 5.8 million shares of our common stock valued at approximately $124.8 million and direct transaction costs of approximately $4.4 million. These amounts include additional common stock earned by Expertcity upon the achievement of certain revenue and other financial milestones during 2004 pursuant to the merger agreement, which were issued in March 2005. The fair value of the common stock earned as additional purchase price consideration was recorded as goodwill on the date earned. The sources of funds for consideration paid in this transaction consisted of available cash and investments and our authorized common stock. There is no additional contingent consideration related to the transaction.

Purchased in-process research and development of approximately $18.7 million was expensed immediately upon closing of the Expertcity acquisition in the first quarter of 2004 and $0.4 million was expensed immediately upon closing of the Net6 acquisition in the fourth quarter of 2004. For more information regarding the in-process research and development acquired from Expertcity and Net6 see note 4 to our condensed consolidated financial statements.

The accounting related to revenue recognition in the software industry is complex and affected by interpretations of the rules and an understanding of industry practices, both of which are subject to change. As a result, revenue recognition accounting rules require us to make significant judgments. In addition, our judgment is required in assessing the probability of collection, which is generally based on evaluation of customer-specific information, historical collection experience and economic market conditions. If market conditions decline, or if the financial condition of our distributors or customers deteriorates, we may be unable to determine that collectibility is probable, and we could be required to defer the recognition of revenue until we receive customer payments.

We sell our MetaFrame Access Suite products bundled with an initial subscription for license updates that provide the end-user with free enhancements and upgrades to the licensed product on a when and if available basis. Customers may also elect to purchase technical support, product training or consulting services. We allocate revenue to license updates and any other undelivered elements of the arrangement based on vendor specific objective evidence, or VSOE, of fair value of each element and such amounts are deferred until the applicable delivery criteria and other revenue recognition criteria have been met. The balance of the revenue, net of any discounts inherent in the arrangement, is allocated to the delivered product using the residual method and recognized at the outset of the arrangement as the licenses are delivered. If we cannot objectively determine the fair value of each undelivered element based on VSOE, we defer revenue recognition until all elements are delivered, all services have been performed, or until fair value can be objectively determined. We must apply judgment in determining all elements of the arrangement and in determining the VSOE of fair value for each element, considering the price charged for each product or applicable renewal rates for license updates.

In the normal course of business, we do not permit product returns, but we do provide most of our distributors and value added resellers with stock balancing and price protection rights. In accordance with the provisions of our warranties, we also provide end-users of our appliances the right to replacement appliances, as applicable. Stock balancing rights permit distributors to return products to us up to the forty-fifth day of the fiscal quarter, subject to ordering an equal dollar amount of our other products prior to the last day of the same fiscal quarter. Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors or resellers if we lower our prices for such products. Warranty claims for our appliances must be made within 12 months of the date of sale. We establish provisions for estimated returns for stock balancing and price protection rights, as well as other sales allowances, concurrently with the recognition of revenue. The provisions are established based upon consideration of a variety of factors, including, among other things, recent and historical return rates for both specific products and distributors, estimated distributor inventory levels by product, the impact of any new product releases and projected economic conditions. Actual product returns for stock balancing and price protection provisions incurred are, however, dependent upon future events, including the amount of stock balancing activity by our distributors and the level of distributor inventories at the time of any price adjustments. Actual appliance replacements are dependent upon the number of warranty claims received. We continually monitor the factors that influence the pricing of our products and distributor inventory levels and make adjustments to these provisions when we believe actual returns and other allowances could differ from established reserves. Our ability to recognize revenue upon shipment to our distributors is predicated on our ability to reliably estimate future stock balancing returns. If actual experience or changes in market condition impairs our ability to estimate returns, we would be required to defer the recognition of revenue until the delivery of the product to the end-user. Allowances for estimated product returns amounted to approximately $1.5 million at March 31, 2005 and $2.3 million at December 31, 2004. The decrease in allowances for estimated product returns is a reflection of the decrease in stock rotation experience primarily due to a reduction in packaged product inventory held by our distributors resulting from an increase in enterprise customer license arrangements, which are typically delivered electronically. We have not reduced and have no current plans to reduce our prices for inventory currently held by distributors or resellers. Accordingly, there were no reserves required for price protection at March 31, 2005 and December 31, 2004. Allowances for estimated warranty replacements were immaterial at March 31, 2005 and December 31, 2004. We also record reductions to revenue for customer programs and incentive offerings including volume-based incentives, at the time the sale is recorded. If market conditions were to decline, we could take actions to increase our customer incentive offerings, which could result in an incremental reduction to our revenue at the time the incentive is offered.

Our stock-based compensation program is a broad based, long-term retention program that is intended to attract and reward talented employees and align stockholder and employee interest. The number and frequency of stock option grants are based on competitive practices, our operating results, the number of options available for grant under our shareholder approved plans and other factors. All employees are eligible to participate in the stock-based compensation program.

Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, defines a fair value method of accounting for issuance of stock options and other equity instruments.

Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. Pursuant to SFAS No. 123, companies are not required to adopt the fair value method of accounting for employee stock-based transactions. Companies are permitted to account for such transactions under Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, but are required to disclose in a note to the consolidated financial statements pro forma net income and per share amounts as if a company had applied the methods prescribed by SFAS No. 123.

As of March 31, 2005, we had six stock-based compensation plans, including two plans assumed in our acquisition of Net6, Inc. In addition, at our Annual Meeting of Stockholders on May 5, 2005, our stockholders approved our 2005 Equity Incentive Plan and 2005 Employee Stock Purchase Plan. Our Board of Directors has agreed that upon stockholder approval of the 2005 Equity Incentive Plan and the 2005 Employee Stock Purchase Plan, no new awards will be granted under our Amended and Restated 1995 Stock Option Plan, the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan, the Amended and Restated 1995 Non-Employee Director Stock Option Plan and the Third Amended and Restated 1995 Employee Stock Purchase Plan, although awards granted under these plans and still outstanding will continue to be subject to all terms and conditions of such plans, as applicable. We typically grant stock options for a fixed number of shares to employees and non-employee directors with an exercise price equal to or above the fair value of the shares at the date of grant. As discussed above and in note 2 to our condensed consolidated financial statements, we apply the intrinsic

value method under APB Opinion No. 25 and related interpretations in accounting for our plans except for 51,546 shares issuable under options assumed as part of the Net6 acquisition, which were accounted for with Financial Accounting Standards Board, or FASB, Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25). No stock-based compensation cost has been reflected in net income except for the amounts related to the 51,546 options assumed as part of the Net6 acquisition, which had an exercise price below market value on the date of grant. The impact of our fixed stock plans and our stock purchase plan on our condensed consolidated financial statements from the use of options is reflected in the calculation of earnings per share in the form of dilution.

The following table (in thousands, except option price) provides information as of March 31, 2005 about the securities authorized for issuance to our employees and non-employee directors under our fixed stock compensation plans, consisting of our Amended and Restated 1995 Stock Plan, the Second Amended and Restated 1995 Employee Stock Purchase Plan, the 1995 Non-Employee Director Option Plan and the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan, the Amended and Restated 2000 Stock Incentive Plan of Net6 Inc. and the Amended and Restated 2003 Stock Incentive Plan of Net6, Inc.:

The following table provides information about stock options granted for the three months ended March 31, 2005 and for the year ended December 31, 2004 for employees, non-employee directors and for certain executive officers. The stock option data for listed officers relates to our Named Executive Officers. The “Named Executive Officers” for the three months ended March 31, 2005 and for the year ended December 31, 2004 consist of our chief executive officer and our four other most highly compensated executive officers who earned a total salary and bonus in excess of $100,000 in 2004, as reported in our Proxy Statement dated April 1, 2005 and who are current employees:

The following table presents our option activity from December 31, 2003 through March 31, 2005 (in thousands, except weighted-average exercise price). Some amounts may not add due to rounding.

A summary of our in-the-money and out-of-the-money option information as of March 31, 2005 is as follows (in thousands, except weighted average exercise price):

There were no stock options or awards granted to our current Named Executive Officers during the fiscal quarter ended March 31, 2005.

The following table presents certain information regarding option exercises and outstanding options held by our current Named Executive Officers as of and for the quarter ended March 31, 2005:

For further information regarding our stock-based compensation plans, see note 2 to our condensed consolidated financial statements.

Our discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the year ended December 31, 2004, for further information regarding our critical accounting policies and estimates.

The notes to our consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2004, the unaudited interim condensed consolidated financial statements and the related notes to the unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q and the factors and events described elsewhere in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including in “Certain Factors Which May Affect Future Results,” contain additional information related to our accounting policies and should be read in conjunction with the following discussion and analysis relating to the individual financial statement captions and our overall financial performance, operations and financial position.

Our operations consist of the design, development, marketing and support of access infrastructure software, appliances and services that enable effective and efficient enterprise-wide deployment and management of applications and information. The following table sets forth our condensed consolidated statements of income data and presentation of that data as a percentage of change from period-to-period (in thousands).

Net Revenues. Net revenues include the following categories: Product Licenses, License Updates, and Services. Product Licenses primarily represent fees related to the licensing of our MetaFrame Access Suite products and our appliances. These amounts are reflected net of sales allowances and provisions for stock balancing return rights. The MetaFrame Presentation Server product accounted for approximately 91.2% of our Software License revenue for the three months ended March 31, 2005 and 96.3% of our Product License revenue for the three months ended March 31, 2004. License Updates consists of fees related to our Subscription Advantage program that are recognized ratably over the term of the contract, which is typically 12 to 24 months. Subscription Advantage (our terminology for post contract support) is an annual renewable program that provides subscribers with automatic delivery of software upgrades, enhancements and maintenance releases when and if they become available during the term of the subscription. Services consist primarily of technical support services and Web-based desktop access services revenue recognized ratably over the contract term, revenue from product training and certification, and consulting services revenue related to implementation of our software products, which are recognized as the services are provided.

Net revenues increased $40.6 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. Product License revenue increased $2.6 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. License Updates revenue increased $18.3 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 due to the continued acceptance of our renewable Subscription Advantage program. Services revenue increased $19.7 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 primarily due to the Expertcity acquisition in February 2004. We currently expect Product License revenue and Services revenue, which includes revenues from our Citrix Online division, to increase during 2005. In addition, we expect Subscription Advantage to be of importance to our business in 2005 because it fosters long-term customer relationships and gives us improved visibility and predictability due to the recurring nature of this revenue stream.

During 2004, we launched our Advisor Rewards Program which gives sales incentives to resellers for the sale of certain license types and extended our Advisor Rewards Program to a broader range of license types, which we currently anticipate will continue to stimulate demand for our MetaFrame products. Revenues associated with our Advisor Rewards Program are partially offset by the associated incentives to our resellers.

Deferred revenues, primarily related to Services revenues, increased approximately $4.8 million as compared to December 31, 2004. This increase was due primarily to an increase in revenues from our Citrix Online division and, to a lesser extent, an increase in our technical services revenue, which is comprised of consulting, education and technical support. We currently expect deferred revenue to increase during 2005.

International and Segment Revenues. International revenues (sales outside of the United States) accounted for approximately 52.1% of net revenues for the three months ended March 31, 2005 and 56.0% the three months ended March 31, 2004. For detailed information on international revenues, please refer to note 7 to our condensed consolidated financial statements appearing in this report.

An analysis of our reportable segment net revenue is presented below (in thousands):

With respect to our segment revenues, the increase in net revenues for the three months ended March 31, 2005 compared to the three months ended March 31, 2004, was due primarily to the factors previously discussed across the Americas, EMEA and Asia-Pacific segments. On February 27, 2004, we acquired Expertcity and after the date of acquisition revenues are reflected in our Citrix Online division. Revenues from our Citrix Online division increased $17.6 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 due primarily to the full quarter impact in 2005 of our Expertcity acquisition. For additional information, please refer to note 4, Acquisitions, and note 7, Segment Information, to our condensed consolidated financial statements.

Cost of Revenues. Cost of revenues consisted primarily of the amortization of product and core technology, compensation cost and other personnel-related costs of providing services, as well as costs of product media and duplication, manuals, packaging materials, shipping expense, service capacity costs and royalties. Cost of product license revenues remained relatively unchanged for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. The $1.7 million increase in cost of services revenues for the three months ended March 31, 2005 compared to the three months ended March 31, 2004, was due primarily to an increase in cost of revenues resulting from the Expertcity acquisition. The moderate increase in amortization of core and product technology for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 was primarily due to our acquisition of Net6 and Expertcity. For more information regarding the acquisitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisitions” and note 4 to our condensed consolidated financial statements.

Gross Margin. Gross margin as a percent of revenue was 95.4% for the three months ended March 31, 2005 and 95.5% for the three months ended March 31, 2004. We currently anticipate that in the next 12 months, gross margin as a percentage of net revenues will remain relatively unchanged as compared with current levels. However, gross margin could fluctuate from time to time based on a number of factors attributable to the cost of revenues as described above.

Research and Development Expenses. Research and development expenses consisted primarily of personnel-related costs. We expensed substantially all development costs included in the research and development of software products and enhancements to existing products as incurred except for certain core technologies with an alternative future use. Research and development expenses increased approximately $6.0 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004, primarily due to increased headcount and related personnel costs, an increase in staffing and associated personnel costs related to the Expertcity acquisition as well as an increase in external consulting costs. We currently expect research and development expenses to increase moderately in 2005 as we continue to make investments in our business and hire personnel to achieve our product development goals.

Sales, Marketing and Support Expenses. Sales, marketing and support expenses increased approximately $20.3 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 primarily due to an increase in headcount and the associated increase in salaries, commissions and other variable compensation and employee related expenses as well as an increase in staffing and associated personnel costs related to the Expertcity acquisition. These increases were partially offset by a decrease in marketing program costs due to the 2004 launch of our worldwide brand awareness and advertising campaigns and the Expertcity acquisition. We currently expect sales, marketing and support expenses to increase moderately in 2005 as we continue to make investments in our business and hire personnel to achieve our strategic goals.

General and Administrative Expenses. General and administrative expenses increased approximately $2.7 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004, primarily due to an increase in headcount, associated salaries and employee related expenses partially offset by decreases in external consulting and services, which were higher in 2004 due to the implementation of new regulatory requirements and information systems and a decrease in provision for doubtful accounts.

Amortization of Other Intangible Assets. Amortization of other intangible assets increased $1.5 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 due primarily to certain finite lived intangible assets associated with Expertcity and Net6 acquisitions. For more information regarding the Expertcity and Net6 acquisition see “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Acquisitions” and note 4 to our condensed consolidated financial statements.

In-process Research and Development. In February 2004, we acquired Expertcity, and $18.7 million of the purchase price was allocated to in-process research and development, or IPR&D. The amount allocated to IPR&D had not yet reached technological feasibility, had no alternative future use and was written off at the date of the acquisition in accordance with Financial Accounting Standards Board Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. There were no write-offs of IPR&D during the three months ended March 31, 2005. For more information regarding the acquisitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Acquisitions” and note 4 to our condensed consolidated financial statements.

Our efforts with respect to the acquired technologies currently consist of design and development that may be required to support the release of the technologies into updated versions of existing service offerings and potentially new product and service offerings by our Citrix Online division. We currently expect that we will successfully develop new products or services utilizing the acquired in-process technology, but there can be no assurance that commercial viability of future product or service offerings will be achieved. Furthermore, future developments in the software industry, changes in technology, changes in other products and offerings or other developments may cause us to alter or abandon product plans. Failure to complete the development of projects in their entirety, or in a timely manner, could have a material adverse impact on our financial condition and results of operations.

The fair value assigned to IPR&D was based on valuations prepared using methodologies and valuation techniques consistent with those used by independent appraisers. All fair values were determined using the income approach, which includes estimating the revenue and expenses associated with a project’s sales cycle and by estimating the amount of after-tax cash flows attributable to the projects. The future cash flows were discounted to present value utilizing an appropriate risk-adjusted rate of return, which ranged from 17% to 20%. The rate of return included a factor that takes into account the uncertainty surrounding the successful development of the IPR&D.

Interest Income. Interest income decreased approximately $1.1 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 primarily due to higher overall average cash, cash equivalent and investment balances held during the first quarter of 2004 as compared to the first quarter of 2005. The interest earned on the higher overall average cash balance in 2004 was partially offset by two expenditures that occurred late in the first quarter of 2004. We used approximately $112.6 million in cash for our Expertcity acquisition on February 27, 2004 and approximately $355.7 million for the redemption of our convertible subordinated debentures on March 22, 2004. A portion of the funds used to redeem our convertible subordinated debentures were provided by the maturity of our investment in AAA-zero coupon corporate securities in the amount of $195.4 million. For more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions” and “ – Liquidity and Capital Resources” and notes 4 and 6 to our condensed consolidated financial statements.

Interest Expense. Interest expense decreased approximately $4.3 million for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 and primarily due to the redemption of our convertible subordinated debentures on March 22, 2004. For more information see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” and note 6 to our condensed consolidated financial statements.

Other Income, Net. Other income, net remained relatively unchanged on an absolute basis for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 and is primarily comprised of remeasurement and foreign currency transaction gains (losses) and realized gains (losses) on the sale of our investments.

Income Taxes. On October 22, 2004, the American Jobs Creation Act, or the AJCA, was signed into law. The AJCA includes a deduction for 85% of certain foreign earnings that are repatriated, as defined in the AJCA. We may elect to apply this provision to qualifying earnings repatriations in 2005. We have started an evaluation of the repatriation provision, including the impact in state and international tax jurisdictions; however, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provides guidance concerning key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the anticipated guidance. Based on the provisions of the AJCA, the range of possible amounts that we are eligible to repatriate under this provision is between zero and $500 million. As such, the related potential range of income tax is between zero and $52 million.

We maintain certain operational and administrative processes in overseas subsidiaries and our foreign earnings are taxed at lower foreign tax rates. Our tax rate may fluctuate based on the actual geographic mix of sales in a given quarter. Other than considering the one-time repatriation provision within the AJCA, we do not expect to remit earnings from our foreign subsidiaries. Our effective tax rate was approximately 21% for both the three months ended March 31, 2005 and the three months ended March 31, 2004.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires companies to expense the value of employee stock option and similar awards. SFAS No. 123R is effective as of the beginning of the fiscal year that begins after June 15, 2005 (i.e. January 1, 2006 for the Company). As of the effective date, we will be required to expense all awards granted, modified, cancelled or repurchased as well as the portion of prior awards for which the requisite service has not been rendered, based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123. SFAS No. 123R permits public companies to adopt its requirements using one of two methods: A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123R for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce our net operating cash flows and increase net financing cash flows in periods after adoption.

We currently expect to adopt SFAS No. 123R using the modified prospective method. We believe that the adoption of SFAS No. 123R’s fair value method will have a material adverse impact on our results of operations; however, currently, the impact the adoption of SFAS No. 123R will have on our results of operations cannot be quantified because, among other things, it will depend on the levels of share-based payments granted in the future.

During the three months ended March 31, 2005, we generated positive operating cash flows of $73.4 million. These cash flows related primarily to net income of $38.6 million, adjusted for, among other things, tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of $4.5 million, non-cash charges, including depreciation and amortization expenses of $10.4 million, and an aggregate increase in cash flow from our operating assets and liabilities of $19.6 million. Our investing activities provided $1.3 million of cash consisting primarily of the net proceeds, after reinvestment, from sales and maturities of investments of $5.6 million, partially offset by the expenditure of $4.3 million for the purchase of property and equipment. Our financing activities used cash of $27.2 million related primarily to our expenditure of $40.0 million for our stock repurchase program, partially offset by $12.7 million of proceeds received from the issuance of common stock under our employee stock-based compensation plans.

During the three months ended March 31, 2004, we generated positive operating cash flows of $78.0 million. These cash flows related primarily to net income of $9.3 million, adjusted for, among other things, tax benefits from the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options of $4.0 million, non-cash charges, including depreciation and amortization expenses of $8.7 million, the write-off of in-process research and development associated with the Expertcity acquisition of $18.7 million, the write-off of deferred debt issuance costs on our convertible subordinated debentures of $7.2 million and an aggregate increase in cash flow from our operating assets and liabilities of $23.3 million. Our investing activities provided $216.1 million of cash consisting primarily of the net proceeds, after reinvestment, from sales and maturities of investments of $312.4 million, partially offset by cash paid for the Expertcity acquisition, net of cash acquired, of $90.8 million, and the expenditure of $4.2 million for the purchase of property and equipment. Our financing activities used cash of $345.4 million related primarily to our expenditure of $355.7 million to redeem our convertible subordinated debentures.

As of March 31, 2005, we had $458.0 million in cash, cash equivalents and investments compared to $417.1 million at December 31, 2004. The increase in cash, cash equivalents and investments as compared to December 31, 2004, was due primarily to lower cash balances in December 2004 as a result of our expenditures for the Net6 acquisition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Acquisitions” and “ – Liquidity and Capital Resources” and note 4 to our condensed consolidated financial statements. We generally invest our cash and cash equivalents in investment grade, highly liquid securities to allow for flexibility in the event of immediate cash needs. Our short and long-term investments primarily consist of interest bearing securities.

In December 2000, we invested $158.1 million in held-to-maturity investments managed by an investment advisor. Our investments matured on March 22, 2004, and we received $195.4 million, all of which was used to redeem a portion of our convertible subordinated debentures.

As of March 31, 2005, we had $147.2 million in restricted cash equivalents and investments compared to $149.1 million at December 31, 2004. Restricted cash equivalents and investments are primarily comprised of approximately $62.8 million in investment securities and cash equivalents pledged as collateral for specified obligations under our synthetic lease arrangement and approximately $83.5 million in investment securities were pledged as collateral for certain of our credit default contracts and interest rate swap agreements. The $1.9 million decrease in restricted cash and investments is primarily due to a decrease in the liability position of the collateralized interest rate swap agreements. We maintain the ability to manage the composition of the restricted cash equivalents and investments within certain limits and to withdraw and use excess investment earnings from the pledged collateral for operating purposes. For further information regarding our synthetic lease, credit default contracts and interest rate swaps, see notes 8 and 12 to our condensed consolidated financial statements.

At March 31, 2005, we had approximately $85.5 million in accounts receivable, net of allowances. The $22.9 million decrease in accounts receivable as compared to December 31, 2004 resulted primarily from increased collections in January of 2005 and to a lesser extent lower sales in the last month of the first quarter of 2005 as compared to the last month of the fourth quarter of 2004. Our allowance for returns was $1.5 million at March 31, 2005 compared to $2.3 million at December 31, 2004. The decrease of $0.8 million is comprised of $1.8 million in credits issued for stock balancing rights during the first quarter of 2005 partially offset by $1.0 million of provisions for returns recorded during the first quarter of 2005. The overall decrease in our allowance for returns is primarily due to a decrease in our overall returns experience as a percentage of our sales. Our allowance for doubtful accounts was $1.5 million at March 31, 2005 compared to $2.6 million at December 31, 2004. The decrease of $1.1 million is comprised primarily of a $0.7 million reduction of our allowance for doubtful accounts and $0.5 million of uncollectible accounts written off, net of recoveries. From time to time, we could maintain individually significant accounts receivable balances from our distributors or customers, which are comprised of large business enterprises, governments and small and medium-sized businesses. If the financial condition of our distributors or customers deteriorates, our operating results could be adversely affected. At March 31, 2005, no distributor or customer accounted for more than 10% of our accounts receivable.

In March 1999, we sold $850 million principal amount at maturity of our zero coupon convertible subordinated debentures due March 22, 2019, in a private placement. On March 22, 2004, we redeemed all of the outstanding debentures for a redemption price of approximately $355.7 million. We used the proceeds from our held-to-maturity investments that matured on March 22, 2004 and cash on hand to fund the aggregate redemption price. At the date of redemption, we incurred a charge for the associated deferred debt issuance costs of approximately $7.2 million.

Our Board of Directors has authorized an ongoing stock repurchase program with a total repurchase authority granted to us of $1 billion, of which $200 million was authorized in February 2005. The objective of our stock repurchase program is to improve stockholders’ return. At March 31, 2005, approximately $202.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock.

We are authorized to make open market purchases of our common stock using general corporate funds. Additionally, we enter into structured stock repurchase arrangements with large financial institutions using general corporate funds as part of our stock repurchase program in order to lower the average cost to acquire shares. These programs include terms that require us to make up front payments to the counter-party financial institution and result in the receipt of stock during or at the end of the agreement or the receipt of either stock or cash at the maturity of the agreement, depending on market conditions.

We expended approximately $40.0 million during the three months ended March 31, 2005, net of premiums received, under all stock repurchase transactions. There was no cash expended during the first three months of 2004 under stock repurchase transactions. During the three months ended March 31, 2005, we took delivery of a total of 2,554,352 shares of outstanding common stock with an average per share price of $22.74. During the three months ended March 31, 2004, we took delivery of a total of 709,969 shares of outstanding common stock with an average per share price of $20.96. Some of these shares were received pursuant to prepaid programs. Since the inception of the stock repurchase programs, the average cost of shares acquired was $16.90 per share compared to an average close price during open trading windows of $19.96 per share. In addition, a significant portion of the funds used to repurchase stock was funded by proceeds from employee stock option exercises and the related tax benefit. As of March 31, 2005, we have remaining prepaid notional amounts of approximately $34.9 million under structured stock repurchase agreements. Due to the fact that the total shares to be received for the open repurchase agreements at March 31, 2005 is not determinable until the contracts mature, the above price per share amounts exclude the remaining shares to be received subject to the agreements.

During 2002, we became a party to a synthetic lease arrangement totaling approximately $61.0 million for our corporate headquarters office space in Fort Lauderdale, Florida. The synthetic lease represents a form of off-balance sheet financing under which an unrelated third party lessor funded 100% of the costs of acquiring the property and leases the asset to us. The synthetic lease qualifies as an operating lease for accounting purposes and as a financing lease for tax purposes. We do not include the property or the related lease debt as an asset or a liability on our condensed consolidated balance sheets. Consequently, payments made pursuant to the lease are recorded as operating expenses in our condensed consolidated statements of income. We entered into the synthetic lease in order to lease our headquarters properties under more favorable terms than under our previous lease arrangements.

The initial term of the synthetic lease is seven years. Upon approval by the lessor, we can renew the lease twice for additional two-year periods. At any time during the lease term, we have the option to sublease the property and upon thirty-days’ written notice, we have the option to purchase the property for an amount representing the original property cost and transaction fees of approximately $61.0 million plus any lease breakage costs and outstanding amounts owed. Upon at least 180 days notice prior to the termination of the initial lease term, we have the option to remarket the property for sale to a third party. If we choose not to purchase the property at the end of the lease term, we have guaranteed a residual value to the lessor of approximately $51.9 million and possession of the buildings will be returned to the lessor. On a periodic basis, we evaluate the property for indicators of impairment. If an evaluation were to indicate that the fair value of the building had decline below $51.9 million, we would be responsible for the difference under its residual value guarantee, which could have a material adverse effect on our results of operations and financial condition.

The synthetic lease includes certain financial covenants including a requirement for us to maintain a pledged balance of approximately $62.8 million in cash and/or investment securities as collateral. This amount is included in restricted cash equivalents and investments in our accompanying condensed consolidated balance sheets. We maintain the ability to manage the composition of the restricted investments within certain limits and to withdraw and use excess investment earnings from the restricted collateral for operating purposes. Additionally, we must maintain a minimum cash and investment balance of $100.0 million, excluding our collateralized investments and equity investments, as of the end of each fiscal quarter. As of March 31, 2005, we had approximately $357.5 million in cash and investments in excess of those required levels. The synthetic lease includes non-financial covenants including the maintenance of the properties and adequate insurance, prompt delivery of financial statements to the lender of the lessee and prompt payment of taxes associated with the properties. As of March 31, 2005, we were in compliance with all material provisions of the arrangement.

During 2002 and 2001, we took actions to consolidate certain of our offices, including the exit of certain leased office space and the abandonment of certain leasehold improvements. Lease obligations related to these existing operating leases continue until 2025 with a total remaining obligation of approximately $21.6 million, of which $2.7 million, net of anticipated sublease income, was accrued for as of March 31, 2005, and is reflected in accrued expenses and other liabilities in our condensed consolidated financial statements. In calculating this accrual, we made estimates, based on market information, including the estimated vacancy periods and sublease rates and opportunities. We periodically re-evaluate our estimates and if actual circumstances prove to be materially worse than management has estimated, the total charges for these vacant facilities could be significantly higher.

Historically, significant portions of our cash inflows were generated by our operations. We currently expect this trend to continue throughout 2005. We believe that our existing cash and investments together with cash flows expected from operations will be sufficient to meet expected operating and capital expenditure requirements for the next 12 months. We continue to search for suitable acquisition candidates and could acquire or make investments in companies we believe are related to our strategic objectives. We could from time to time seek to raise additional funds through the issuance of debt or equity securities for larger acquisitions.

Our operating results and financial condition have varied in the past and could in the future vary significantly depending on a number of factors. From time to time, information provided by us or statements made by our employees could contain “forward-looking” information that involves risks and uncertainties. In particular, statements contained in this Form 10-Q, and in the documents incorporated by reference into this Form 10-Q, that are not historical facts, including, but not limited to statements concerning new products, product development and offerings, Subscription Advantage, the Citrix Online division, competition and strategy, product price and inventory, deferred revenues, economic and market conditions, revenue recognition, profits, growth of revenues, Product License revenues, License Update revenues, Services revenues, cost of revenues, operating expenses, sales, marketing and support expenses, research and development expenses, valuations of investments and derivative instruments, technology relationships, reinvestment or repatriation of foreign earnings, gross margins, amortization expense and intangible assets, impairment charges, anticipated operating and capital expenditure requirements, cash inflows, contractual obligations in-process research and development, acquisitions, stock repurchases, investment transactions, liquidity, litigation matters, intellectual property matters, distribution channels, stock price, Advisor Rewards Program, SFAS 123R, third party licenses and potential debt or equity financings constitute forward-looking statements and are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees. Our actual results of operations and financial condition have varied and could in the future vary significantly from those stated in any forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-Q, in the documents incorporated by reference into this Form 10-Q or presented elsewhere by our management from time to time. Such factors, among others, could have a material adverse effect upon our business, results of operations and financial condition.

Our long sales cycle for enterprise-wide sales could cause significant variability in our revenue and operating results for any particular period.

In recent quarters, a growing number of our large and medium-sized customers have decided to implement our enterprise customer license arrangements on a department or enterprise-wide basis. Our long sales cycle for these large-scale deployments makes it difficult to predict when these sales will occur, and we may not be able to sustain these sales on a predictable basis.

The continued long sales cycle for these large-scale deployment sales could make it difficult to predict the quarter in which sales will occur. Delays in sales could cause significant variability in our revenue and operating results for any particular period.

We face intense competition, which could result in fewer customer orders and reduced revenues and margins.

We compete in intensely competitive markets. Some of our competitors and potential competitors have significantly greater financial, technical, sales and marketing and other resources than we do.

For example, our ability to market the MetaFrame Access Suite, and its individual products including: MetaFrame Presentation Server, MetaFrame Secure Access Manager, MetaFrame Conferencing Manager and MetaFrame Password Manager, and other future product offerings could be affected by Microsoft’s licensing and pricing scheme for client devices, servers and applications. Further, the announcement of the release, and the actual release, of new Windows-based server operating systems or products incorporating similar features to our products could cause our existing and potential customers to postpone or cancel plans to license certain of our existing and future product and service offerings.

In addition, alternative products for secure, remote access in the Internet software and hardware markets directly and indirectly compete with our current MetaFrame product line and our Web-based desk-top access products and services, including GoToAssist, GoToMyPC and GoToMeeting and anticipated future product and service offerings.

Existing or new products and services that extend Internet software and hardware to provide Web-based information and application access or interactive computing can materially impact our ability to sell our products and services in this market. Our current competitors in this market include Microsoft, Oracle Corporation, Sun Microsystems, Inc., Cisco Systems, Inc., Webex Communications, Inc., Symantec Corporation, and other makers of secure remote access solutions.

As the markets for our products and services continue to develop, additional companies, including companies with significant market presence in the computer hardware, software and networking industries could enter the markets in which we compete and further intensify competition. In addition, we believe price competition could become a more significant competitive factor in the future. As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.

Sales of products within our MetaFrame product line constitute a substantial majority of our revenue.

We anticipate that sales of products within our MetaFrame Access Suite and related enhancements will constitute a substantial majority of our revenue for the foreseeable future. Our ability to continue to generate revenue from our MetaFrame Access Suite products will depend on market acceptance of Windows Server Operating Systems and/or UNIX Operating Systems. Declines in demand for our MetaFrame Access Suite products could occur as a result of:

If our customers do not continue to purchase our MetaFrame Access Suite products as a result of these or other factors, our revenue would decrease and our results of operations and financial condition would be adversely affected.

If we do not develop new products and services or enhancements to our existing products and services, our business, results of operations and financial condition could be adversely affected.

Our future success depends on our ability to continually enhance our current products, and services and develop and introduce new products, and services that our customers choose to buy. If we are unable to keep pace with technological developments and customer demands by introducing new products and services and enhancements to our existing products and services, our business, results of operations and financial condition could be adversely affected. Our future success could be hindered by:

For example, we cannot guarantee that our access infrastructure software will achieve the broad market acceptance by our channel and entities with which we have a strategic or technology relationship, customers and prospective customers necessary to generate significant revenue. In addition, we cannot guarantee that we will be able to respond effectively to technological changes or new product announcements by others. If we experience material delays or sales shortfalls with respect to our new products and services or new releases of our current products and services, those delays or shortfalls could have a material adverse effect on our business, results of operations and financial condition.

Our business could be adversely impacted by the failure to renew our agreements with Microsoft for source code access.

In December 2004, we entered into a five-year technology collaboration and licensing agreement with Microsoft Corporation or Microsoft. The arrangement includes a new technology initiative for closer collaboration on terminal server functionality in future server operating systems, continued access to source code for key components of Microsoft’s current and future server operating systems, and a patent cross-licensing agreement. This technology collaboration and licensing agreement replaces the agreement we signed with Microsoft in May 2002, that provided us access to Microsoft Windows Server source code for current and future Microsoft server operating systems, including access to Windows Server 2003 and terminal services source code. There can be no assurances that our current agreements with Microsoft will be extended or renewed by Microsoft after their respective expirations. In addition, Microsoft could terminate the current agreements before the expiration of the term for breach or upon a change in our control. The early termination or the failure to renew certain terms of these agreements with Microsoft in a manner favorable to us could negatively impact the timing of our release of future products and enhancements.

Our business could be adversely impacted by conditions affecting the information technology market.

The demand for our products and services depends substantially upon the general demand for business-related computer hardware and software, which fluctuates based on numerous factors, including capital spending levels, the spending levels and growth of our current and prospective customers and general economic conditions. Fluctuations in the demand for our products and services could have a material adverse effect on our business, results of operations and financial condition. In the past, adverse economic conditions decreased demand for our products and negatively impacted our financial results. Future economic projections for the IT sector are uncertain. If an uncertain IT spending environment persists, it could negatively impact our business, results of operations and financial condition.

The anticipated benefits to us of acquiring Expertcity may not be realized.

We acquired Expertcity, now known as Citrix Online in February 2004, with the expectation that the acquisition would result in various benefits including, among other things, enhanced revenue and profits, greater market presence and development, and enhancements to our product portfolio and customer base. We expect that the acquisition will enhance our position in the access infrastructure market through the combination of our technologies, products, services, distribution channels and customer contacts with those of Citrix Online, and will enable us to broaden our customer base to include individuals, professionals and small office/home office customers as well as extend our presence in the enterprise access infrastructure market. We may not fully realize some of these benefits and the acquisition may result in the deterioration or loss of significant business. For example, if our business or Citrix Online’s business fails to meet the demands of the marketplace, customer acceptance of the products and services of the combined companies could decline, which could have a material adverse effect on our results of operations and financial condition.

Acquisitions present many risks, and we may not realize the financial and strategic goals we anticipate at the time of an acquisition.

Our growth is dependent upon market growth, our ability to enhance existing products and services, and our ability to introduce new products and services on a timely basis. We intend to continue to address the need to develop new products and services and enhance existing products and services through acquisitions of other companies, product lines and/or technologies.

Acquisitions, including those of high-technology companies, are inherently risky. We cannot assure anyone that our previous acquisitions or any future acquisitions will be successful in helping us reach our financial and strategic goals either for that acquisition or for us generally. The risks we commonly encounter are:

These factors could have a material adverse effect on our business, results of operations and financial condition. We cannot guarantee that the combined company resulting from any acquisition can continue to support the growth achieved by the companies separately. We must also focus on our ability to manage and integrate any acquisition. Our failure to manage growth effectively and successfully integrate acquired companies could adversely affect our business and operating results.

If we determine that any of our goodwill or intangible assets, including technology purchased in acquisitions, are impaired, we would be required to take a charge to earnings, which could have a material adverse effect on our results of operations.

We have a significant amount of goodwill and other intangible assets, such as product and core technology, related to our acquisitions of Sequoia Software Corporation in 2001 and Expertcity and Net6 in 2004. We do not amortize goodwill and intangible assets that are deemed to have indefinite lives. However, we do amortize certain product and core technologies, trademarks, patents and other intangibles. We periodically evaluate our intangible assets, including goodwill, for impairment. As of March 31, 2005 we had $361.8 million of goodwill. We review for impairment annually, or sooner if events or changes in circumstances indicate that the carrying amount could exceed fair value. Fair values are based on discounted cash flows using a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model. Due to uncertain market conditions and potential changes in our strategy and product portfolio, it is possible that the forecasts we use to support our goodwill could change in the future, which could result in non-cash charges that would adversely affect our results of operations and financial condition.

At March 31, 2005, we had $82.0 million, net, of unamortized identified intangibles with estimable useful lives, which consist of core technology we purchased in acquisitions and core technology we purchased under third party licenses. We have commercialized and currently market the Sequoia and other licensed technology through our secure access infrastructure software, which includes Citrix MetaFrame Secure Access Manager and Citrix MetaFrame Password Manager. We currently market the technologies acquired in the Expertcity and Net6 acquisitions through our Citrix Online and Citrix Gateway divisions. However, our channel distributors and entities with which we have technology relationships, customers or prospective customers may not purchase or widely accept our new line of products and services. If we fail to complete the development of our anticipated future product and service offerings, if we fail to complete them in a timely manner, or if we are unsuccessful in selling these new products and services, we could determine that the value of the purchased technology is impaired in whole or in part and take a charge to earnings. We could also incur additional charges in later periods to reflect costs associated with completing those projects that could not be completed in a timely manner. If the actual revenues and operating profit attributable to acquired product and core technologies are less than the projections we used to initially value product and core technologies when we acquired it, such intangible assets may be deemed to be impaired. If we determine that any of our intangible assets are impaired, we would be required to take a related charge to earnings that could have a material adverse effect on our results of operations.

We recorded approximately $270.7 million of goodwill and intangible assets in connection with our 2004 acquisitions. If the actual revenues and operating profit attributable to acquired intangible assets are less than the projections we used to initially value these intangible assets when we acquired them, then these intangible assets may be deemed to be impaired. If we determine that any of the goodwill or other intangible assets associated with our acquisitions of Expertcity or Net6 are impaired, then we would be required to reduce the value of those assets or to write them off completely by taking a related charge to earnings. If we are required to write down or write off all or a portion of those assets, or if financial analysts or investors believe we may need to take such action in the future, our stock price and operating results could be materially adversely affected.

If we fail to manage our operations and grow revenue or fail to continue to effectively control expenses, our future operating results could be adversely affected.

Historically, the scope of our operations, the number of our employees and the geographic area of our operations and our revenue have grown rapidly. In addition, we have acquired both domestic and international companies. This growth and the assimilation of acquired operations and their employees could continue to place a significant strain on our managerial, operational and financial resources. To manage our growth, if any, effectively, we need to continue to implement and improve additional management and financial systems and controls. We may not be able to manage the current scope of our operations or future growth effectively and still exploit market opportunities for our products and services in a timely and cost-effective way. Our future operating results could also depend on our ability to manage:

In addition, to the extent our revenue grows, if at all, we believe that our cost of revenues and certain operating expenses could also increase. We believe that we could incur additional costs and royalties as we develop, license or buy new technologies or enhancements to our existing products and services. These added costs and royalties could increase our cost of revenues and operating expenses. However, we cannot currently quantify the costs for such transactions that have not yet occurred. In addition, we may need to use a substantial portion of our cash and investments or issue additional shares of our common stock to fund these additional costs.

We attribute most of our growth during recent years to the introduction of the MetaFrame software for Windows operating systems in mid-1998. We cannot assure you that the access infrastructure software market, in which we operate, will grow. We cannot assure you that the release of our access infrastructure software suite of products or other new products or services will increase our revenue growth rate.

We cannot assure you that our operating expenses will be lower than our estimated or actual revenues in any given quarter. If we experience a shortfall in revenue in any given quarter, we likely will not be able to further reduce operating expenses quickly in response. Any significant shortfall in revenue could immediately and adversely affect our results of operations for that quarter. Also, due to the fixed nature of many of our expenses and our current expectation for revenue growth, our income from operations and cash flows from operating and investing activities could be lower than in recent years.

We could change our licensing programs, which could negatively impact the timing of our recognition of revenue.

We continually re-evaluate our licensing programs, including specific license models, delivery methods, and terms and conditions, to market our current and future products and services. We could implement different licensing models in certain circumstances, for which we would recognize licensing fees over a longer period. Changes to our licensing programs, including the timing of the release of enhancements, discounts and other factors, could impact the timing of the recognition of revenue for our products, related enhancements and services and could adversely affect our operating results and financial condition.

Sales of our Subscription Advantage product constitute all of our License Updates revenue and a majority of our deferred revenue.

We anticipate that sales of our Subscription Advantage product will continue to constitute all of our License Updates revenue and a majority of our deferred revenue for the foreseeable future. Our ability to continue to generate both recognized and deferred revenue from our Subscription Advantage product will depend on our customers continuing to perceive value in

automatic delivery of our software upgrades and enhancements. A decrease in demand for our Subscription Advantage product could occur as a result of a decrease in demand for our Metaframe Access Suite products. If our customers do not continue to purchase our Subscription Advantage product, our License Updates revenue and deferred revenue would decrease significantly and our results of operations and financial condition would be adversely affected.

As our international sales and operations grow, we could become increasingly subject to additional risks that could harm our business.

We conduct significant sales and customer support operations in countries outside of the United States. During the first quarter of 2005, we derived approximately 52% of our revenues from sales outside the United States. Our continued growth and profitability could require us to further expand our international operations. To successfully expand international sales, we must establish additional foreign operations, hire additional personnel and recruit additional international resellers. Our international operations are subject to a variety of risks, which could cause fluctuations in the results of our international operations. These risks include:

Our results of operations are also subject to fluctuations in foreign currency exchange rates. In order to minimize the impact on our operating results, we generally initiate our hedging of currency exchange risks one year in advance of anticipated foreign currency expenses. As a result of this practice, foreign currency denominated expenses will be higher or lower in the current year depending on the weakness or strength of the dollar in the prior year. There is a risk that there will be fluctuations in foreign currency exchange rates beyond the one year timeframe for which we hedge our risk. Because the dollar was generally weak in 2004, operating expenses are expected to be higher in 2005, but further dollar weakness in 2005 will not have an additional material impact on our operating expenses until 2006.

Our success depends, in part, on our ability to anticipate and address these risks. We cannot guarantee that these or other factors will not adversely affect our business or operating results.

Our proprietary rights could offer only limited protection. Our products could infringe third-party intellectual property rights, which could result in material costs.

Our efforts to protect our proprietary rights may not be successful. We rely primarily on a combination of copyright, trademark, patent and trade secret laws, confidentiality procedures and contractual provisions, to protect our proprietary rights. The loss of any material trade secret, trademark, trade name, patent or copyright could have a material adverse effect on our business. Despite our precautions, it could be possible for unauthorized third parties to copy or reverse engineer certain portions of our products or to otherwise obtain and use our proprietary information. If we cannot protect our proprietary technology against unauthorized copying or use, we may not remain competitive. Any patents owned by us could be invalidated, circumvented or challenged. Any of our pending or future patent applications, whether or not being currently challenged, may not be issued with the scope we seek, if at all, and if issued, may not provide any meaningful protection or competitive advantage.

In addition, our ability to protect our proprietary rights could be affected by:

We are subject to risks associated with our strategic and technology relationships.

Our business depends on strategic and technology relationships. We cannot assure you that those relationships will continue in the future. In addition to our relationship with Microsoft, we rely on strategic or technology relationships with such companies as SAP, International Business Machines Corporation, Hewlett-Packard Company, Dell Inc. and others. We depend on the entities with which we have strategic or technology relationships to successfully test our products, to incorporate our technology into their products and to market and sell those products. We cannot assure you that we will be able to maintain our current strategic and technology relationships or to develop additional strategic and technology relationships. If any entities in which we have a strategic or technology relationship are unable to incorporate our technology into their products or to market or sell those products, our business, operating results and financial condition could be materially adversely affected.

If we lose access to third party licenses, releases of our products could be delayed.

We believe that we will continue to rely, in part, on third party licenses to enhance and differentiate our products. Third party licensing arrangements are subject to a number of risks and uncertainties, including:

If we lose or are unable to maintain any of these third party licenses or are required to modify software obtained under third party licenses, it could delay the release of our products. Any delays could have a material adverse effect on our business, results of operations and financial condition.

The market for our Web-based training and customer assistance products is volatile, and if it does not develop or develops more slowly than we expect, our Citrix Online division will be harmed.

The market for our Web-based training and customer assistance products is new and unproven, and it is uncertain whether these services will achieve and sustain high levels of demand and market acceptance. Our success with our Citrix Online division will depend to a substantial extent on the willingness of enterprises, large and small, to increase their use of application services in general and for GoToMyPC, GoToMeeting and GoToAssist, in particular. Many enterprises have invested substantial personnel and financial resources to integrate traditional enterprise software into their businesses, and therefore may be reluctant or unwilling to migrate to application services. Furthermore, some enterprises may be reluctant or unwilling to use application services because they have concerns regarding the risks associated with security capabilities, among other things, of the technology delivery model associated with these services. If enterprises do not perceive the benefits of application services, then the market for these services may not further develop at all, or it may develop more slowly than we expect, either of which would significantly adversely affect our financial condition and the operating results for our Citrix Online division.

Our success depends on our ability to attract and retain and further penetrate large enterprise customers.

We must retain and continue to expand our ability to reach and penetrate large enterprise customers by adding effective channel distributors and expanding our consulting services. Our inability to attract and retain large enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Large enterprise customers usually request special pricing and generally have longer sales cycles, which could negatively impact our revenues. By granting special pricing, such as bundled pricing or discounts, to these large customers, we may have to defer recognition of some portion of the revenue from such sales. This deferral could reduce our revenues and operating profits for a given reporting period. Additionally, as we attempt to attract and penetrate large enterprise customers, we may need to increase corporate branding and marketing activities, which could increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.

Our success may depend on our ability to attract and retain small-sized customers.

In order to successfully attract new customer segments to our MetaFrame products and expand our existing relationships with enterprise customers, we must reach and retain small-sized customers and small project initiatives within our larger enterprise customers. We have begun a marketing initiative to reach these customers that includes extending our Advisor Rewards program to include a broader range of license types. We cannot guarantee that our small-sized customer marketing initiative will be successful. Our failure to attract and retain small sized customers and small project initiatives within our larger enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Additionally, as we attempt to attract and retain small sized customers and small project initiatives within our larger enterprise customers, we may need to increase corporate branding and broaden our marketing activities, which could increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.

Our business could be adversely affected if we are unable to expand and diversify our distribution channels.

We currently intend to continue to expand our distribution channels by leveraging our relationships with independent hardware and software vendors and system integrators to encourage them to recommend or distribute our products. In addition, an integral part of our strategy is to diversify our base of channel relationships by adding more channel members with abilities to reach larger enterprise customers. This will require additional resources, as we will need to expand our internal sales and service coverage of these customers. If we fail in these efforts and cannot expand or diversify our distribution channels, our business could be adversely affected. In addition to this diversification of our base, we will need to maintain a healthy mix of channel members who cater to smaller customers. We may need to add and remove distribution members to maintain customer satisfaction and a steady adoption rate of our products, which could increase our operating expenses. Through our accessPARTNER network, Citrix Authorized Learning Centers and other programs, we are currently investing, and intend to continue to invest, significant resources to develop these channels, which could reduce our profits.

We rely on indirect distribution channels and major distributors that we do not control.

We rely significantly on independent distributors and resellers to market and distribute our products. We do not control our distributors and resellers. Additionally, our distributors and resellers are not obligated to buy our products and could also represent other lines of products. Some of our distributors and resellers maintain inventories of our packaged products for resale to smaller end-users. If distributors and resellers reduce their inventory of our packaged products, our business could be adversely affected. Further, we could maintain individually significant accounts receivable balances with certain distributors. The financial condition of our distributors could deteriorate and distributors could significantly delay or default on their payment obligations. Any significant delays or defaults could have a material adverse effect on our business, results of operations and financial condition.

Our products could contain errors that could delay the release of new products and may not be detected until after our products are shipped.

Despite significant testing by us and by current and potential customers, our products, especially new products or releases, could contain errors. In some cases, these errors may not be discovered until after commercial shipments have been made. Errors in our products could delay the development or release of new products and could adversely affect market acceptance of our products. Additionally, our products depend on third party products, which could contain defects and could reduce the performance of our products or render them useless. Because our products are often used in mission-critical applications, errors in our products or the products of third parties upon which our products rely could give rise to warranty or other claims by our customers.

Our synthetic lease is an off-balance sheet arrangement that could negatively affect our financial condition and results.

In April 2002, we entered into a seven-year synthetic lease with a lessor for our headquarters office buildings in Fort Lauderdale, Florida. The synthetic lease qualifies for operating lease accounting treatment under SFAS No. 13, Accounting for Leases, so we do not include the property or the associated lease debt on our consolidated balance sheet. However, if the lessor were to change its ownership of our property or significantly change its ownership of other properties that it currently holds, under FIN No. 46, Consolidation of Variable Interest Entities(revised) we could be required to consolidate the entity, the leased facility and the debt at that time.

If we elect not to purchase the property at the end of the lease term, we have guaranteed a minimum residual value of approximately $51.9 million to the lessor. Therefore, if the fair value of the property declines below $51.9 million, our residual value guarantee would require us to pay the difference to the lessor, which could have a material adverse effect on our results of operations and financial condition.

If our security measures are breached and unauthorized access is obtained to our Citrix Online division customers’ data, our services may be perceived as not being secure and customers may curtail or stop using our service.

Use of our GoToMyPC, GoToMeeting or GoToAssist services involves the storage and transmission of customers’ proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to one of our online customers’ data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access to or sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If any compromises of security were to occur, it could have the effect of substantially reducing the use of the Web for commerce and communications. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. The Internet is a public network, and data is sent over this network from many sources. In the past, computer viruses, software programs that disable or impair computers, have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt our network or make it inaccessible to our Citrix Online division customers. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose sales and customers for our Citrix Online division, which would significantly adversely affect our financial condition and the operating results for our Citrix Online division.

Evolving regulation of the Web may adversely affect our Citrix Online division.

As Web commerce continues to evolve, increasing regulation by federal, state or foreign agencies becomes more likely. For example, we believe increased regulation is likely in the area of data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or consumer information could affect our online customers’ ability to use and share data and restricting our ability to store, process and share data with these customers. In addition, taxation of services provided over the Web or other charges imposed by government agencies or by private organizations for accessing the Web may also be imposed. Any regulation imposing greater fees for Web use or restricting information exchange over the Web could result in a decline in the use of the Web and the viability of Web-based services, which would significantly adversely affect our financial condition and the operating results for our Citrix Online division.

If we do not generate sufficient cash flow from operations in the future, we may not be able to fund our operations and fulfill our future obligations.

Our ability to generate sufficient cash flow from operations to fund our operations and product development, including the payment of cash consideration in acquisitions and the payment of our other obligations, depends on a range of economic, competitive and business factors, many of which are outside our control. We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to liquidate our investments, repatriate cash and investments held in our overseas subsidiaries, sell assets or raise equity or debt financings when needed or desirable. An inability to fund our operations or fulfill outstanding obligations could have a material adverse effect on our business, financial condition and results of operations. For further information, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

If we lose key personnel or cannot hire enough qualified employees, our ability to manage our business could be adversely affected.

Our success depends, in large part, upon the services of a number of key employees. Except for certain key employees of acquired businesses, we do not have long-term employment agreements with any of our key personnel. Any officer or employee can terminate his or her relationship with us at any time. The effective management of our growth, if any, could depend upon our ability to retain our highly skilled technical, managerial, finance and marketing personnel. If any of those employees leave, we will need to attract and retain replacements for them. We also need to add key personnel in the future. The market for these qualified employees is competitive. We could find it difficult to successfully attract, assimilate or retain sufficiently qualified personnel in sufficient numbers. Furthermore, we may hire key personnel in connection with our future acquisitions; however, any of these employees will be able to terminate his or her relationship with us at any time. If we cannot retain and add the necessary staff and resources for these acquired businesses, our ability to develop acquired products, markets and customers could be adversely affected. Also, we may need to hire additional personnel to develop new products, product enhancements and technologies. If we cannot add the necessary staff and resources, our ability to develop future enhancements and features to our existing or future products could be delayed. Any delays could have a material adverse effect on our business, results of operations and financial condition.

If stock balancing returns or price adjustments exceed our reserves, our operating results could be adversely affected.

We provide most of our distributors with stock balancing return rights, which generally permit our distributors to return products to us by the forty-fifth day of a fiscal quarter, subject to ordering an equal dollar amount of our products prior to the last day of the same fiscal quarter. We also provide price protection rights to most of our distributors. Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors if we lower our prices for those products within a specified time period. To cover our exposure to these product returns and price adjustments, we establish reserves based on our evaluation of historical product trends and current marketing plans. However, we cannot assure you that our reserves will be sufficient to cover our future product returns and price adjustments. If we inadequately forecast reserves, our operating results could be adversely affected.

Our stock price could be volatile, and you could lose the value of your investment.

Our stock price has been volatile and has fluctuated significantly to date. The trading price of our stock is likely to continue to be highly volatile and subject to wide fluctuations. Your investment in our stock could lose value. Some of the factors that could significantly affect the market price of our stock include:

The stock market in general, The Nasdaq National Market and the market for software companies and technology companies in particular, have experienced extreme price and volume fluctuations. These broad market and industry factors could materially and adversely affect the market price of our stock, regardless of our actual operating performance.

Changes in financial accounting standards related to share-based payments are expected to have a material adverse impact on our results of operations.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R requires companies to expense the value of employee stock options and similar awards and is effective as of January 1, 2006 for the Company. The adoption of the new standard is expected to have a material adverse impact on our results of operations for periods after its effectiveness. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current financial accounting standards. This requirement will reduce our net operating cash flows and increase net financing cash flows in periods after effectiveness of the new standard. Additionally, SFAS No. 123R could adversely impact our ability to provide accurate financial guidance concerning our results of operations on a GAAP basis for periods after its effectiveness due to the variability of the factors used to estimate the values of share-based payments. As a result, the adoption of the new standard in the first quarter of 2006 could negatively affect our stock price and our stock price volatility.

Our business and investments could be adversely impacted by unfavorable economic political and social conditions.

General economic and market conditions, and other factors outside our control including terrorist and military actions, could adversely affect our business and impair the value of our investments. Any further downturn in general economic conditions could result in a reduction in demand for our products and services and could harm our business. These conditions make it difficult for us, and our customers, to accurately forecast and plan future business activities and could have a material adverse effect on our business, financial condition and results of operations. In addition, an economic downturn could result in an impairment in the value of our investments requiring us to record losses related to such investments. Impairment in the value of these investments may disrupt our ongoing business and distract management. As of March 31, 2005, we had $458.7 million of short and long-term investments, including restricted investments, with various issuers and financial institutions. In many cases we do not attempt to reduce or eliminate our market exposure on these investments and could incur losses related to the impairment of these investments. Fluctuations in economic and market conditions could adversely affect the value of our investments, and we could lose some of our investment portfolio. A total loss of an investment could adversely affect our results of operations and financial condition. For further information on these investments, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources.”

There have been no material changes with respect to the information on Quantitative and Qualitative Disclosures About Market Risk appearing in Part II, Item 7A to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

As of March 31, 2005, the Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Vice President and Chief Financial Officer concluded that, as of March 31, 2005, the Company’s disclosure controls and procedures were effective in ensuring that material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such material information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this report, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s Board of Directors has authorized an ongoing stock repurchase program with a total repurchase authority granted to the Company of $1.0 billion, of which $200 million was authorized in February 2005, the objective of which is to manage actual and anticipated dilution and to improve stockholders’ returns. At March 31, 2005, approximately $202.0 million was available to repurchase common stock pursuant to the stock repurchase program. All shares repurchased are recorded as treasury stock. The following table shows the monthly activity related to the Company’s stock repurchase program for the three month period ending March 31, 2005:

On February 27, 2004, the Company completed an acquisition of Expertcity.com, Inc., a privately-held company. The purchase was completed in part through the issuance of approximately 5.8 million shares of the Company’s common stock valued at approximately $124.8 million, including 0.2 million shares of common stock issued to Expertcity upon the achievement of certain revenue and other financial milestones during 2004 pursuant to the merger agreement. The issuance of shares in this transaction was made in reliance of an exemption from registration under the Securities Act of 1933, pursuant to Section 3(a)(10) of that act. The Company relied on a public fairness hearing conducted before the Department of Corporations of the State of California pursuant to Section 25142 of the California Corporate Securities Law, resulting in the Company obtaining a permit dated February 24, 2004 to issue the shares of the Company’s common stock.

The Company’s policy governing transactions in its securities by its directors, officers and employees permits its officers, directors and employees to enter into trading plans in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. The Company has been advised that David R. Friedman, Vice President and General Counsel, has entered into a trading plan during February 2005 in accordance with Rule 10b5-1 and the Company’s policy governing transactions in its securities. The Company undertakes no obligation to update or revise the information provided herein, including for revision or termination of an established trading plan.

At the annual stockholders meeting held on May 5, 2005, the Company’s stockholders approved the Citrix Systems, Inc. 2005 Equity Incentive Plan (the “2005 Plan”). The purposes of the 2005 Plan are:

The Board of Directors has agreed that upon approval by the stockholders approval of the 2005 Plan, no new awards will be granted under the Company’s Amended and Restated 1995 Stock Option Plan (the “1995 Plan”), the Second Amended and Restated 2000 Director and Officer Stock Option and Incentive Plan (the “Director Plan”) and the Amended and Restated 1995 Non-Employee Director Stock Option Plan (the “NEDSOP Plan”), although awards granted under each plan and still outstanding will continue to be subject to all terms and conditions of such plan.

The 2005 Plan is described in greater detail in the Company’s proxy statement filed with the Securities and Exchange Commission in connection with the annual meeting of shareholders held on May 5, 2005 and a copy of the 2005 Plan is attached to this Quarterly Report on Form 10-Q as Exhibit 10.1.

At the annual stockholders meeting held on May 5, 2005, the Company’s stockholders approved the Citrix Systems, Inc. 2005 Employee Stock Purchase Plan (the “2005 ESPP”). The purposes of the 2005 ESPP are:

Upon stockholder approval of the 2005 ESPP, no new awards will be granted under the Company’s Third Amended and Restated 1995 Employee Stock Purchase Plan, which will expire in September 2005 pursuant to its terms.

The 2005 ESPP is described in greater detail in the Company’s proxy statement filed with the Securities and Exchange Commission in connection with the annual meeting of shareholders held on May 5, 2005 and a copy of the 2005 ESPP is attached to this Quarterly Report on Form 10-Q as Exhibit 10.2.

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 on this 6^th day of May 2005.


CITRIX SYSTEMS, INC.

By:		/s/ DAVID J. HENSHALL
		David J. Henshall
		Vice President and Chief Financial Officer
		(Authorized Officer and Principal Financial Officer)


Delaware		75-2275152
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

851 West Cypress Creek Road Fort Lauderdale, Florida		33309
(Address of principal executive offices)		(Zip Code)


		Page Number
PART I: FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets: March 31, 2005 (Unaudited) and December 31, 2004	3

	Condensed Consolidated Statements of Income: Three Months ended March 31, 2005 and 2004 (Unaudited)	4

	Condensed Consolidated Statements of Cash Flows: Three Months ended March 31, 2005 and 2004 (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 & Qualitative Disclosures about Market Risk	38

Item 4.	Controls and Procedures	38

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	39

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	39

Item 5.	Other Information	39

Item 6.	Exhibits	42

Signature		43


	March 31, 2005			December 31, 2004
	(unaudited)
	(In thousands, except par value)
Assets
Current assets:
Cash and cash equivalents	$	120,947		$	73,485
Short-term investments		189,691			159,656
Accounts receivable, net of allowances of $3,039 and $4,916 at March 31, 2005 and December 31, 2004, respectively		85,459			108,399
Prepaid expenses and other current assets		32,105			41,159
Current portion of deferred tax assets		44,113			43,881

Total current assets		472,315			426,580
Restricted cash equivalents and investments		147,176			149,051
Long-term investments		147,385			183,974
Property and equipment, net		68,235			69,281
Goodwill, net		361,783			361,452
Other intangible assets, net		82,013			87,172
Other assets		11,318			8,574

	$	1,290,225		$	1,286,084

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	15,196		$	17,554
Accrued expenses		104,841			113,733
Current portion of deferred revenues		216,422			210,872

Total current liabilities		336,459			342,159
Long-term portion of deferred revenues		13,561			14,271
Other liabilities		4,540			4,749

Commitments and contingencies

Stockholders’ equity:
Preferred stock at $.01 par value: 5,000 shares authorized, none issued and outstanding		—			—
Common stock at $.001 par value: 1,000,000 shares authorized; 214,169 and 212,991 shares issued and outstanding at March 31, 2005 and December 31, 2004, respectively		214			213
Additional paid-in capital		907,533			872,659
Deferred compensation		(960	)		(1,063	)
Retained earnings		816,846			778,286
Accumulated other comprehensive income		2,795			7,489

		1,726,428			1,657,584
Less— common stock in treasury, at cost (45,163 and 42,608 shares at March 31, 2005 and December 31, 2004, respectively)		(790,763	)		(732,679	)

Total stockholders’ equity		935,665			924,905

	$	1,290,225		$	1,286,084


	Three Months Ended March 31,
	2005			2004
	(In thousands, except per share information)
Revenues:
Product licenses	$	90,062		$	87,426
License updates		77,175			58,897
Services		34,653			14,987

Total net revenues		201,890			161,310

Cost of revenues:
Cost of product license revenues		1,368			1,413
Cost of services revenues		4,515			2,823
Amortization of core and product technology		3,318			3,034

Total cost of revenues		9,201			7,270

Gross margin		192,689			154,040

Operating expenses:
Research and development		25,065			19,038
Sales, marketing and support		94,394			74,128
General and administrative		27,411			24,751
Amortization of other intangible assets		2,177			726
In-process research and development		—			18,700

Total operating expenses		149,047			137,343

Income from operations		43,642			16,697
Interest income		4,632			5,685
Interest expense		(8	)		(4,344	)
Write-off of deferred debt issuance costs		—			(7,219	)
Other income, net		464			985

Income before income taxes		48,730			11,804
Income taxes		10,170			2,479

Net income	$	38,560		$	9,325

Earnings share:
Basic	$	0.23		$	0.06

Diluted	$	0.22		$	0.05

Weighted average shares outstanding:
Basic		170,139			166,457

Diluted		175,913			172,584


	Three Months Ended March 31,
	2005			2004
	(In thousands)
OPERATING ACTIVITIES
Net income	$	38,560		$	9,325
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets		5,495			3,760
Depreciation and amortization of property and equipment		4,886			4,895
Amortization of deferred stock-based compensation		103			—
Write-off of deferred debt issuance costs		—			7,219
Realized gain on termination of interest rate swap		—			(406	)
In-process research and development		—			18,700
(Recovery of) provision for doubtful accounts		(673	)		798
Provision for product returns		990			1,828
Provision for inventory reserves		28			402
Tax benefit related to the exercise of non-statutory stock options and disqualifying dispositions of incentive stock options		4,509			3,953
Accretion of original issue discount and amortization of financing cost		—			4,318
Other non-cash items		(50	)		(142	)

Total adjustments to reconcile net income to net cash provided by operating activities		15,288			45,325
Changes in operating assets and liabilities, net of the effects of acquisition:
Accounts receivable		22,623			20,047
Prepaid expenses and other current assets		3,099			7,879
Other assets		(1,144	)		(454	)
Deferred tax assets, net		(237	)		19
Accounts payable		(2,358	)		(1,230	)
Accrued expenses		(7,131	)		(17,736	)
Deferred revenues		4,840			13,605
Other liabilities		(140	)		1,186

Total changes in operating assets and liabilities, net of the effects of acquisitions		19,552			23,316

Net cash provided by operating activities		73,400			77,966

INVESTING ACTIVITIES
Purchases of available-for-sale investments		(86,049	)		(21,894	)
Proceeds from sales of available-for-sale investments		76,015			128,422
Proceeds from maturities of available-for-sale investments		15,640			10,514
Proceeds from maturities of held-to-maturity investments		—			195,350
Purchases of property and equipment		(4,322	)		(4,150	)
Cash paid for licensing agreements and core technology		—			(1,442	)
Cash paid for acquisitions, net of cash acquired		—			(90,750	)

Net cash provided by investing activities		1,284			216,050

FINANCING ACTIVITIES
Proceeds from issuance of common stock		12,739			10,235
Cash paid under stock repurchase programs		(39,961	)		—
Cash paid to repurchase convertible subordinated debentures		—			(355,659	)

Net cash used in financing activities		(27,222	)		(345,424	)

Change in cash and cash equivalents		47,462			(51,408	)
Cash and cash equivalents at beginning of period		73,485			182,969

Cash and cash equivalents at end of period	$	120,947		$	131,561

Supplemental non-cash investing activity:
(Decrease) increase in restricted cash equivalents and investments	$	(1,875	)	$	2,927


	Stock options granted during the three months ended
	March 31, 2005		March 31, 2004
Expected volatility factor	0.35		0.42
Approximate risk free interest rate	3.8	%	3.0	%
Expected lives	3.32 years		4.75 years


	March 31, 2005				December 31, 2004
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Core and product technologies	$	125,248	$	70,806	$	125,248	$	67,488
Other		43,768		16,197		43,432		14,020

	$	169,016	$	87,003	$	168,680	$	81,508


Year ending December 31,
2005	$	23,286
2006		19,237
2007		14,180
2008		11,715
2009		8,129


	(A)	(B)		(C)
Plan	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (A))
Equity compensation plans approved by security holders	36,494	$	25.43	51,937
Equity compensation plans not approved by security holders*	51		3.84	—

Total	36,545	$	25.40	51,937


	Three Months Ended March 31, 2005		Year Ended December 31, 2004
Net grants to all employees, non-employee directors and executive officers as a percent of outstanding shares (1) (2)	0.18	%	1.73	%

Grants to Named Executive Officers as a percent of outstanding shares (2)	—		0.17	%

Grants to Named Executive Officers as a percent of total options granted	—		4.83	%

Cumulative options held by Named Executive Officers as a percent of total options outstanding (3)	9.75	%	9.66	%


			Options Outstanding
	Shares Available for Grant		Number of Shares		Weighted Average Exercise Price
Balance at December 31, 2003	37,025		38,222		$	24.56
Granted at market value	(5,638	)	5,638			20.97
Granted below market value	(52	)	52			3.86
Exercised	—		(4,492	)		13.06
Forfeited/cancelled	2,491		(2,491	)		25.14
Additional shares reserved	9,046		N/A			N/A

Balance at December 31, 2004	42,872		36,928			25.20

Granted at market value	(716	)	716			23.03
Exercised	—		(690	)		13.41
Forfeited/cancelled	409		(409	)		23.70
Additional shares reserved	9,371		N/A			N/A

Balance at March 31, 2005	51,937		36,545			25.40


	Exercisable		Unexercisable		Total
	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price	Shares	Weighted Average Exercise Price
In-the-money	13,162	$15.93	8,617	$16.05	21,779	$15.98
Out-of-the-money (1)	13,017	41.04	1,749	26.22	14,766	39.29

Total options outstanding	26,179	28.42	10,366	17.76	36,545	25.40


	Shares Acquired on Exercise (#)	Value Realized ($)(1)		Number of Securities Underlying Unexercised Options at March 31, 2005		Values of Unexercised In-the-Money Options at March 31, 2005 ($)
	Shares Acquired on Exercise (#)	Value Realized ($)(1)		Exercisable	Unexercisable	Exercisable		Unexercisable(2)
Mark Templeton	—		—	2,031,927	170,573	$	8,844,049	$	1,246,446
John Burris	—		—	447,939	132,187	$	782,306	$	823,359
David Friedman	—		—	75,365	114,635	$	1,194,499	$	1,428,876
Stefan Sjostrom	4,011	$	72,198	249,876	81,176	$	307,429	$	640,441
David Henshall	—		—	95,833	164,167	$	906,580	$	1,140,770


	Three Months Ended March 31,						Increase/(Decrease) for the Three Months Ended March 31, 2005 vs. March 31, 2004
	2005			2004
Revenues:
Product licenses	$	90,062		$	87,426		3.0	%
License updates		77,175			58,897		31.0
Services		34,653			14,987		131.2

Total net revenues		201,890			161,310		25.2

Cost of revenues:
Cost of product license revenues		1,368			1,413		(3.2	)
Cost of services revenues		4,515			2,823		59.9
Amortization of core and product technology		3,318			3,034		9.4

Total cost of revenues		9,201			7,270		26.6

Gross margin		192,689			154,040		25.1

Operating expenses:
Research and development		25,065			19,038		31.7
Sales, marketing and support		94,394			74,128		27.3
General and administrative		27,411			24,751		10.7
Amortization of other intangible assets		2,177			726		199.9
In-process research and development		—			18,700		*

Total operating expenses		149,047			137,343		8.5

Income from operations		43,642			16,697		161.4
Interest income		4,632			5,685		(18.5	)
Interest expense		(8	)		(4,344	)	(99.8	)
Write-off of deferred debt issuance costs		—			(7,219	)	*
Other income, net		464			985		(52.9	)

Income before income taxes		48,730			11,804		312.8
Income taxes		10,170			2,479		310.2

Net income	$	38,560		$	9,325		313.5	%


	Three Months Ended March 31,				Increase (Decrease) for the Three Months Ended March 31, 2005 vs. March 31, 2004
	2005		2004
Americas (1)	$	86,165	$	74,890	15.1%
EMEA (2)		77,432		69,511	11.4
Asia-Pacific		17,928		14,113	27.0
Citrix Online division		20,365		2,796	628.4

Net revenues	$	201,890	$	161,310	25.2%


	(a) Total Number of Shares (or Units) Purchased (1)	(b) Average Price Paid per Share	(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or approximate dollar value) of Shares (or Units) that may yet be Purchased under the Plans or Programs
January 1, 2005 through January 31, 2005	162,889	$22.46⁽²⁾	162,889	$241,954⁽³⁾
February 1, 2005 through February 28, 2005	1,059,855	22.04⁽²⁾	1,059,855	236,746
March 1, 2005 through March 31, 2005	1,331,608	23.33⁽²⁾	1,331,608	201,993

Total	2,554,352	$22.74⁽²⁾	2,554,352	$201,993


Exhibit No.		Description
10.1*		2005 Equity Incentive Plan

10.2*		2005 Employee Stock Purchase Plan

10.3*		2005 Equity Incentive Plan Incentive Stock Option Master Agreement (Domestic)

10.4*		2005 Equity Incentive Plan Non-Qualified Stock Option Master Agreement (Domestic)

10.5 (1)*		2005 Executive Bonus Plan

31.1		Rule 13a-14(a) / 15d-14(a) Certification

31.2		Rule 13a-14(a) / 15d-14(a) Certification

32.1		Section 1350 Certifications