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

As of May 31, 2005, there were approximately 393,000,520 shares of the Registrant’s common stock outstanding.

The condensed consolidated financial statements included herein are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the BEA Systems, Inc. (“BEA” or the “Company”) Annual Report on Form 10-K for the fiscal year ended January 31, 2005. The results of operations for the three months ended April 30, 2005 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending January 31, 2006 (“Fiscal 2006”) or thereafter.

The condensed consolidated balance sheet at January 31, 2005 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The condensed consolidated financial statements include the amounts of the Company and all subsidiaries. Intercompany accounts and transactions have been eliminated. The operating results of businesses acquired and accounted for as a purchase are included from the date of their acquisition.

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

The Company recognizes revenues in accordance with the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2, Software Revenue Recognition, as amended.

Revenue from software license agreements is recognized when the basic criteria of software revenue recognition have been met (i.e. persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable, and collection is probable). The Company uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and vendor specific objective evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as license revenue. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.

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

Revenue arrangements with extended payment terms are generally considered not to be fixed or determinable and, the Company generally does not recognize revenue on these arrangements until the customer

payments become due and all other revenue recognition criteria have been met. In certain regions or countries where collection risk is considered to be high, such as Latin America and certain Asian and Eastern European countries, revenue is generally recognized upon receipt of cash.

The Company has a number of strategic partnerships that represent the indirect channel including, system platform companies, packaged application software developers, application service providers, system integrators and independent consultants and distributors. Partners either embed or do not embed our software into their own software products. Partners who embed our software are referred to as Embedded Independent Software Vendors (“ISV’s”), and revenue is recognized upon delivery of our software assuming all other revenue recognition criteria have been met. Partners who do not embed our software are generally referred to as resellers. Due to the particular risk of concessions with respect to transactions with resellers, the Company recognizes revenue once persuasive evidence of sell through to an end user is received and all other criteria have been met. The Company’s partner license agreements do not provide for rights of return.

Services revenues include revenues for consulting services, customer support and education. Consulting services revenues and the related cost of services are generally recognized on a time and materials basis. Revenues from fixed price consulting contracts are recognized as services are performed on a proportional performance basis. The total amount of revenue recognized under the fixed price consulting contracts has been minimal to date. BEA’s consulting arrangements do not include significant customization of the software since the software is essentially a pre-packaged “off the shelf” platform that applications are built on or attached to. Customer support agreements provide technical support and the right to unspecified future upgrades on an if-and-when available basis. Customer support revenues are recognized ratably over the term of the support period (generally one year). Education services revenues are recognized as the related training services are delivered. The unrecognized portion of amounts billed in advance of delivery for services is recorded as deferred revenues.

The Company occasionally purchases software products from vendors who are also customers. These transactions have not been frequent. In such transactions involving the exchange of software products, fair value of the software sold and purchased can not be reasonably estimated. As a result, the Company records such transactions at carryover (i.e. net) basis.

Accounts receivable are stated at cost, net of allowances for doubtful accounts. The Company makes judgments as to its ability to collect outstanding receivables and records allowances when collection becomes doubtful due to liquidity and non-liquidity concerns. The allowance includes both (1) an estimate for uncollectible receivables due to customers’ liquidity concerns and (2) an estimate for uncollectible receivables due to non-liquidity types of concerns. The allowance charges associated with non-liquidity concerns are recorded as reductions to revenue and allowance charges associated with liquidity concerns are recorded as general and administrative expenses. These estimates are based on assessing the credit worthiness of our customers based on multiple sources of information and analysis of such factors as our historical collection experience, collection experience within our industry, industry and geographic concentrations of credit risk, and current economic trends.

The accounts receivable aging is reviewed on a regular basis, and write-offs are recorded on a case by case basis net of any amounts that may be collected.

The Company periodically assesses potential impairment of its long-lived assets with estimable useful lives which include; property, equipment and acquired intangible assets in accordance with the provisions of

Statement of Financial Accounting Standards No. 144 (“FAS 144”), Accounting for the Impairment and Disposal of Long-Lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Company’s overall business, and significant industry or economic trends. When the Company determines that the carrying value of the long-lived assets may not be recoverable based upon the existence of one or more of the above indicators, the Company determines the recoverability by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. The impairment recognized is the amount by which the carrying amount exceeds the fair market value of the asset.

Goodwill represents the excess of the purchase price over the fair value of net tangible and identified intangible assets acquired in business combinations. Goodwill is not amortized but is evaluated at least annually for impairment or when a change in facts and circumstances indicate that the fair value of the goodwill may be below its carrying value.

The Company tests goodwill for impairment at the “reporting unit level” (“Reporting Unit”) at least annually and more frequently if events merit. We perform this test in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“FAS 142”). We have determined that we have only one reporting segment and one Reporting Unit. Accordingly, goodwill is tested for impairment in a two-step process. First, we determine if the carrying amount of our Reporting Unit exceeds the “fair value” of the Reporting Unit, which may initially indicate that goodwill could be impaired. If we determine that such impairment could have occurred, we would compare the “implied fair value” of the goodwill as defined by FAS 142 to its carrying amount to determine the impairment loss, if any.

In fiscal 2002 and fiscal 2005, the Company recorded a facilities consolidation charge for its estimated future lease commitments on excess facilities, net of estimated future sublease income. The estimates used in calculating the charge are reviewed on a quarterly basis and would be revised if estimated future vacancy rates and sublease rates varied from our original estimates. To the extent that new estimates vary adversely from the original estimates, the Company may incur additional losses that are not included in the accrued balance at April 30, 2005. Conversely, unanticipated improvements in vacancy rates or sublease rates, or termination settlements for less than our accrued amounts, may result in a reversal of a portion of the accrued balance and a benefit on our statement of operations in a future period.

Realization of our deferred tax assets is primarily dependent on future U.S. taxable income. FAS 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon available evidence, which includes our historical levels of U.S. taxable income and stock option deductions, we have provided a valuation allowance in an amount equal to the net deferred tax assets dependent upon future taxable income at April 30, 2005. The resulting valuation allowance at April 30, 2005 is primarily attributable to accumulated stock option tax deductions and other, acquisition-related deferred tax assets. Accordingly, in the event that we were to determine that we would be able to realize these deferred tax assets in the future in excess of the recorded amount, an adjustment to the net deferred tax asset would be credited to additional paid-in-capital and goodwill when realized, rather than taken as a reduction of income tax expense.

BEA is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. The Company’s provision for income taxes is based on jurisdictional mix of earnings, statutory rates, and enacted tax rules, including transfer pricing. Significant judgment is required in determining the Company’s provision for income taxes and in evaluating its tax positions on a worldwide basis. The Company believes its tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which it conducts its business. It is possible that these positions may be challenged which may have a significant impact on the Company’s effective tax rate.

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

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

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

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

For purposes of pro forma disclosures, the estimated fair value of the stock-based awards is amortized to expense over the vesting periods of the awards. The pro forma stock-based employee compensation expense has

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

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

The Company has entered into product development agreements with third parties to develop ports and integration tools to co-develop products. The Company has one significant agreement with a third party that provides us with partial reimbursement for research and development and marketing expenses associated with a product of mutual interest. The funding the Company receives is intended to offset certain of our research and development costs and is non-refundable. Such amounts are recorded as a reduction in BEA’s operating expenses. During the three months ended April 30, 2005, the Company received approximately $2.6 million of third party reimbursement, which was used to offset approximately $2.4 million of research and development expenses and $0.2 million of marketing expenses. During the three months ended April 30, 2004, the Company received approximately $2.7 million of third party reimbursement, which was used to offset approximately $2.4 million of research and development expenses and $0.3 million of marketing expenses. Based on the arrangement currently in place, the Company expects to receive approximately $9.7 million of such funding in fiscal 2006.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123(R) (“SFAS 123R”) Share Based Payment, which replaces SFAS 123,

Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123R requires compensation costs relating to share-based payment transactions be recognized in financial statements. The pro forma disclosure previously permitted under SFAS 123 will no longer be an acceptable alternative to recognition of expenses in the financial statements. SFAS 123R is effective as of the beginning of the next fiscal year that begins after June 15, 2005, with early adoption encouraged. We currently measure compensation costs related to share-based payments under APB 25, as allowed by SFAS 123, and provide disclosure in the notes to financial statements as required by SFAS 123. We are required to adopt SFAS 123R effective February 1, 2006. We expect the adoption of SFAS 123R will have a material adverse impact on our net income and net income per share. We are currently in the process of evaluating the extent of such impact.

In December 2004, the FASB issued FASB Staff Position (“FSP”) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP 109-2”), which provides guidance under SFAS No. 109 “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Act”) on income tax expense and deferred tax liabilities. The Jobs Act was enacted on October 22, 2004. FSP 109-2 allows companies additional time to evaluate whether foreign earnings will be repatriated under the repatriation provisions of the Jobs Act and requires specified disclosures for companies needing the additional time to complete the evaluation. Once a decision is made to repatriate the foreign earnings, companies must reflect the deferred tax liabilities attributable to foreign earnings in the period that the decision is made to remit those earnings. The deduction is subject to a number of limitations and uncertainty remains as to how to interpret numerous provisions in the Jobs Act. As such, we are not yet in a position to decide on whether, and to what extent, we might repatriate foreign earnings that have not yet been remitted to the United States.

The following table sets forth the components of deferred revenues (in thousands):

Deferred services revenues include customer support, consulting and education. The balance of deferred services revenues are predominantly comprised of deferred customer support revenues. Deferred customer support revenues are recognized over the term of the contract. Deferred license and consulting revenues are normally a result of revenue recognition requirements and are recognized upon satisfaction of the revenue recognition criteria.

The Company has secured notes receivable from one executive totaling approximately $0.6 million as of April 30, 2005 and from two executives totaling approximately $0.9 million as of January 31, 2005. BEA received $0.3 million in March 2005 to pay off one of the outstanding notes receivable balances. These notes originated prior to June 30, 2002 and are secured by deeds of trust on real property. The remaining note bears interest of 7 percent per annum and is due and payable on April 3, 2006 or upon the termination of employment with us. The note may be repaid at anytime prior to the due date.

In September 1999, the Company issued an unsecured line of credit to Alfred Chuang, our Chief Executive Officer, in the amount of $5.0 million. No borrowings have been made and none were outstanding under this line of credit at April 30, 2005 or January 31, 2005.

The Company occasionally sells software products or services to companies that have board members or executive officers that are also on BEA’s Board of Directors. The total revenues recognized by the Company from such customers in the three months ended April 30, 2005 and 2004 were insignificant.

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

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

The computation of diluted net income per share for the three months ended April 30, 2005 and 2004 excludes the impact of options to purchase 54.1 million and 20.4 million shares of common stock, respectively. The computation of diluted net income per share for the three months ended April 30, 2005 and 2004 also excludes the conversion of the $550 million 4% Convertible Subordinated Notes due December 15, 2006 (“2006 Notes”) which are convertible into 15.9 million shares of common stock at both April 30, 2005 and 2004, respectively, as such impact would be anti-dilutive. These options and 2006 Notes could be dilutive in the future.

An equipment capital lease for $1.6 million was entered into in fiscal 2005 and accumulated amortization was $0.3 million at April 30, 2005 and $0.1 million at January 31, 2005.

On February 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” and as a result will no longer amortize goodwill, but will test for impairment at least annually or more frequently whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.

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

The total amortization expense related to acquired intangible assets is provided in the table below (in thousands):

The total expected future amortization related to acquired intangible assets is provided in the table below (in thousands):

During fiscal 2002, the Company approved a plan to consolidate certain facilities in regions including the United States, Canada, and Germany. A facilities consolidation charge of $20.0 million was calculated using management’s best estimates and was based upon the remaining future lease commitments and brokerage fees for vacant facilities from the date of facility consolidation, net of estimated future sublease income. In fiscal 2005, an additional $0.5 million was accrued due to a reassessment of original estimates of costs of abandoning the leased facilities compared to the actual results and future estimates.

During fiscal 2005, due to a decline in employee and contractor hiring and headcount the Company identified the opportunity to reduce its facilities requirements. The Company approved a plan to consolidate six sites in the United States and Canada. A facilities consolidation charge of $7.7 million was recorded and was comprised of $6.9 million related to future lease commitments and $0.8 million of leasehold improvement write-offs. The $6.9 million of future lease commitments was calculated based on management’s best estimates and the present value of the remaining future lease commitments for vacant facilities, net of present value of the estimated future sublease income.

The estimated costs of abandoning the leased facilities identified above, including estimated costs to sublease, were based on market information and trend analyses, including information obtained from third party real estate industry sources at the time the facilities consolidation was recorded. As of April 30, 2005, $11.4 million of lease termination costs, net of anticipated sublease income, remains accrued and is expected to be fully utilized by fiscal 2012. If actual circumstances prove to be materially different than the amounts management has estimated, the Company’s total charges for these vacant facilities could be significantly higher. Adjustments to the facilities consolidation charge will be made in future periods, if necessary, based upon then current actual events and circumstances. If the Company was unable to receive any of its estimated but uncommitted sublease income in the future, the total additional charge would be approximately $3.6 million.

The following table provides a summary of the accrued facilities consolidation (in thousands):

Notes payable and other long-term obligations consist of the following (in thousands):

Other long-term obligations include an accrual of $8.3 million related to the facilities consolidation.

Notes payable and other obligations consists of accrued rent and other long-term obligations. Scheduled maturities of current and long-term notes payable and other obligations and the capital lease are as follows (in thousands):

In December 1999, the Company completed the sale of $550.0 million of Notes due December 15, 2006 (“2006 Notes”) in an offering to Qualified Institutional Buyers. The 2006 Notes bear interest at a fixed rate of 4 percent and are subordinated to all existing and future senior indebtedness of the Company. The principal amount of the 2006 Notes is convertible at the option of the holder at any time into common stock of the Company at a conversion rate of 28.86 shares per $1,000 principal amount of 2006 Notes (equivalent to an approximate conversion price of $34.65 per share). The 2006 Notes are redeemable at the option of the Company in whole or in part at any time, in cash plus a premium of up to 0.6 percent plus accrued interest, if any, through the redemption date, subject to certain events. Interest is payable semi-annually.

During fiscal 2005, BEA entered into a four year revolving unsecured credit facility with Keybank National Association, as administrative agent, and various other lenders (the “Credit Agreement”) and borrowed $215.0 million under the Credit Agreement in order to, among other things, pay off and terminate the long term debt related to the land lease of $211.7 million.

The Credit Agreement accrues interest based on the London Interbank Offering Rate (“LIBOR”) or a prime-based rate, plus a margin based on the Company’s leverage ratio, determined quarterly. The effective annual interest rate was approximately 4.3 percent as of April 30, 2005. Interest payments are made in cash at intervals ranging from thirty days to twelve months, as elected by us. In connection with the Credit Agreement, the Company must maintain certain covenants, including liquidity, leverage ratios as well as minimum cash balance requirements.

As of April 30, 2005, the Company is in compliance with all financial covenants.

The Company has provided income tax expense of $14.6 million and $10.9 million for the three months ended April 30, 2005 and 2004, respectively. The Company has provided for income taxes for the three months ended April 30, 2005 based on a projected effective tax rate of 30 percent. The Company’s projected effective tax rate is less than the 35 percent U.S. federal statutory rate primarily due to the benefit of projected low taxed current year foreign earnings. The Company’s effective tax rate for the three months ended April 30, 2004 was 30 percent and differed from the U.S. federal statutory rate of 35 percent primarily due to the benefit of low taxed foreign earnings.

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

During the three months ended April 30, 2005, the Company issued 0.8 million shares of common stock and received $3.5 million in proceeds resulting from the exercise of employee stock options and purchases under the employee stock purchase plan.

The Company recorded a tax benefit from stock options of $7.8 million and $6.3 million for the three months ended April 30, 2005 and 2004, respectively.

In September 2001, March 2003, May 2004, and March 2005, the Board of Directors approved stock repurchases that in aggregate equaled $600.0 million of the Company’s common stock under a share repurchase program (the “Share Repurchase Program”).

In the three months ended April 30, 2005, 7.4 million shares were repurchased at a total cost of $60.0 million leaving approximately $255.4 million of the approval limit available for share repurchases under the Share Repurchase Program. During fiscal 2006, we anticipate repurchases will continue to be made opportunistically. Repurchases are a function of market opportunities based on certain price and volume parameters.

In 2003, Software AG and its domestic subsidiary filed a complaint against the Company in the United States District Court for the District of Delaware alleging that certain of its products, including WebLogic Server, WebLogic Integration and WebLogic Workshop infringe U.S. Patent No. 5,329,619 held by Software AG and its domestic subsidiary (the “Software AG Action”). Software AG sought monetary damages and an injunction against infringement. In 2003, the Company counterclaimed against Software AG requesting a declaratory judgment of noninfringement, invalidity and inequitable conduct by Software AG.

On November 29, 2004, the Company filed a complaint against Software AG and Software AG, Inc. in the United States District Court for the Eastern District of Virginia alleging that certain products of Software AG and Software AG, Inc. infringe US. Patent Nos. 6,115,744 and 5,619,710 held by the Company (the “BEA Action”). Software AG has counterclaimed, seeking a declaratory judgment that the Company’s patents are invalid and not infringed.

On April 30, 2005, both the Software AG Action and the BEA Action were settled to the mutual satisfaction of BEA and Software AG. These actions were resolved without any admission or acknowledgement by either party that the patents-in-suit are valid and enforceable or that they were infringed.

The Company generally provides a warranty for its software products and services to its customers and accounts for its warranties under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“FAS 5”). The Company’s products are generally warranted to perform substantially as described in the associated product documentation for a period of 90 days. The Company’s services are generally warranted to be performed consistent with industry standards for a period of 90 days from delivery. In the event there is a failure of such warranties, the Company generally is obligated to correct the product or service to conform to the warranty provision or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company has not provided for a warranty accrual as of April 30, 2005 or January 31, 2005. To date, the Company’s product warranty expense has not been significant.

The Company generally agrees to indemnify its customers against legal claims that the Company’s software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations under FAS 5. In the event of such a claim, the Company is generally obligated to defend its customer against the claim and to either settle the claim at the Company’s expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably possible, to refund the cost of the software, as pro-rated over a three-year period. To date, the Company has not been required to make any payment resulting from infringement claims asserted against our customers. As such, the Company has not recorded a liability for infringement costs as of April 30, 2005.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of BEA Systems, Inc. (referred to herein as “we,” “us,” “BEA” or the “Company”) should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2004, and subsequent filings with the Securities and Exchange Commission (the “SEC”). This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “goals,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions regarding the future. Forward-looking statements include statements regarding: assumptions underlying the calculation of fair values of stock-based awards; the continuation of third party funding of our research and development and marketing expenses pursuant to product development agreements with third parties; future amortization of acquired intangible assets; facilities consolidation charges, including but not limited to future lease commitments, leasehold improvements and costs to sublease; the utilization of lease termination costs; future adjustments to facilities consolidation charges; future stock repurchases under our stock repurchase program; seasonality of orders and sales in the first quarter of a fiscal year; the expansion of the Americas VAR channel, our solutions frameworks and our enterprise account program; our anticipation that our solutions frameworks are targeted to areas of market interest; the development of an expanded product set for SOA service infrastructure through expansion in our messaging, portal infrastructure, data integration, security, Web services management and other technologies; our ability to attract Chief Information Officers to choose our products as the architectural foundation of SOA projects to be implemented over a sustained period of time; the release of a variety of products in our service infrastructure product category; future fluctuations in Tuxedo revenue; the trend toward increased high dollar transactions; future fluctuations in EMEA and APAC revenues as a percentage of total revenues; the belief that cost of license fees will increase; the expectation that future payments of facilities consolidation charges will not significantly impact our liquidity due to our strong cash position; the realizability of deferred tax assets; the fluctuation of deferred revenues; significant cash and/or financing resources needed for the development of our land in San Jose, California for the construction of office facilities; the anticipation that substantial resources will be committed to product development and engineering; valuation allowances; repayment of notes in cash on the maturity date of December 15, 2006; the estimate and fluctuation of interest payments; sufficiency of existing cash; fluctuation of revenues and operating results; continued investment in and enhancement of WebLogic Platform 8.1 and other new products and market acceptance of such products; the continuation of certain products accounting for a majority of revenue; the continuation of work with the VADs and VARs to recruit and train additional VARs and sales representatives at the VARs; the dependence on continued expansion of international operations; the dependence on successfully maintaining existing relationships and further establishing and expanding relationships with distributors, ISVs, OEMs and SIs; our initiative to recruit and train a large number of consultants employed by SIs and to embed our technology in products that our ISV customers offer; the need to expand our relationships with third parties in order to support license revenue growth; the dependence on our ability to attract and retain qualified sales, technical and support personnel; the intention to expand our global organization; continued adoption of Java technologies; the dependence on continued growth in the use of the Web to run software applications; the intention to make additional acquisitions in the future; the effects of accounting standards; the requirement that we expense stock options granted in fiscal periods commencing February 1, 2006, and the resulting accounting charges; annual assessment of impairment charges on the land in San Jose, California pursuant to FAS 144; the dependence on our proprietary technology; the need to continue to improve our operational, financial, disclosure and management controls, reporting systems and procedures and information technology infrastructure; the update of our management information systems to integrate financial and other reporting; the development and roll out of information technology initiatives; the dependence on future performance to meet our debt service obligations; and the requirement of substantial amounts of cash to fund scheduled payments of principal and interest on our indebtedness, future capital expenditures, payments on our operating leases and any increased working capital requirements

BEA^® Systems, Inc. (“BEA” or the “Company”) is a world leader in enterprise infrastructure software. Our BEA WebLogic^® Enterprise Platform^™ delivers a highly reliable, scalable software infrastructure designed to bring new services to market quickly, to help lower operational costs by automating processes, and to help automate relationships with suppliers and distributors. The BEA WebLogic Enterprise Platform^™ consists of BEA WebLogic Server^™, the world’s leading Java 2 Enterprise Edition (“J2EE”) application server, which includes security, management, development and deployment features, as well as support for Web services protocols; BEA WebLogic Integration^™, a standards-based solution for application integration, business process management, business-to-business integration and Web services; BEA WebLogic Portal^™, an infrastructure for building and deploying robust personalized enterprise portals; BEA Liquid Data for WebLogic^™, a solution for providing information integration and data aggregation from various sources in distributed computer systems; BEA WebLogic Workshop^™, a unified, services-oriented development environment for Java and Web applications, Web services, data and application integration, business processes, and portals; BEA WebLogic JRockit^™ JVM, a server-centric Java Virtual Machine (“JVM”); BEA WebLogic Enterprise Security^™, an application security infrastructure solution; and BEA Tuxedo^™, a proven transaction processing platform for mission-critical, large-scale and high-volume distributed enterprise applications. Our products are marketed and sold worldwide primarily through our direct sales force, and also through systems integrators (“SIs”), independent software vendors (“ISVs”), value-added resellers (“VARs”) and hardware vendors that are our partners and distributors. Our products have been adopted in a wide variety of industries, including telecommunications, commercial and investment banking, securities trading, government, manufacturing, retail, airlines, package delivery, pharmaceuticals and insurance. The BEA WebLogic Enterprise Platform provides application infrastructure for building and deploying distributed, integrated information technology (“IT”) environments, allowing customers to integrate private client/server networks, the Internet, intranets, extranets, virtual private networks, and mainframe and legacy systems as system components. Our products serve as a platform, integration tool or portal framework for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading and settlement, online banking, Internet sales, inventory management, supply chain management, enterprise resource planning, scheduling and logistics, and hotel, airline and rental car reservations. Licenses for our products are typically priced on a per-central processing unit basis, but we also offer licenses priced on other metrics.

Seasonality. Our first fiscal quarter license revenues are typically lower than license revenues in the immediately preceding fourth fiscal quarter because our commission plans and other sales incentives are structured for annual performance and contain bonus provisions based on annual quotas that typically are triggered in the later quarters in a fiscal year. In addition, many of our customers begin a new fiscal year on January 1 and it is common for capital expenditures to be lower in an organization’s first quarter than its fourth quarter. We anticipate that the negative impact of seasonality on our first fiscal quarter results will continue.

Investment in Sales and Marketing Programs. In the fourth quarter of fiscal 2005, we announced a strategic focus on expanding three sales and marketing programs—(1) expanding our Americas value-added reseller (“VAR”) channel, (2) expanding our solutions frameworks program and (3) expanding our enterprise account program.

Americas VAR Channel. Our Americas VAR program was created early in fiscal 2005. We continued to expand the program in the fourth quarter of fiscal 2005 and the first quarter of fiscal 2006. As of the end of the first quarter of fiscal 2006, we had recruited and signed relationships with three value-added distributors (“VADs”), who work with the VARs, and approximately 70 VARs. In addition, we provided training on our products to approximately 200 sales representatives employed by the VARs. We work with the VADs and VARs to recruit and train additional VARs, to train additional sales representatives at the VARs, to refine the sales and marketing programs we offer the VARs, and to identify and close sales to customers. There can be no assurance that VADs and VARs will continue to work with us, that they will be successful in their sales and marketing efforts, or that they will not create conflicts with our direct sales efforts.

Solutions Frameworks. We have historically sold a software platform upon which customers implement a solution. Recently, we have expanded our programs to develop pre-packaged solutions that can be sold on top of our platform. Typically, this approach has involved a combination of our products, our consulting organization, products provided by our ISV partners (such as content management and Web services management), and implementation work done by our SI partners. In addition, this approach has required marketing, training and sales enablement programs, for both our direct sales representatives and also our VAR channel. We anticipate that our solutions are targeted to areas of market interest, such as employee and customer self-service portals and telecommunications service delivery platforms. However, there can be no assurance that our program to package, market, sell and implement such solutions will be successful. In addition, we believe our solutions framework transactions will require significant consulting and customization by either BEA and/or a designated third party. As a result, our solutions framework transactions may require that revenue recognition be delayed on the license revenue as well as the services revenue.

Enterprise Account Program. Certain of our sales representatives are assigned a specific list of named accounts, and other representatives are assigned to a geographic territory. In fiscal 2004, we created a team within our sales organization, focused on improving the coordination of our sales, marketing, consulting services and partnership activities relative to approximately 18 named enterprise accounts. We believe that this program significantly increased our sales to these accounts during fiscal 2004 and 2005. During the first quarter of fiscal 2006, we expanded this program to cover approximately 108 named enterprise accounts. During the first quarter of fiscal 2006, we also created specific sales, marketing, and consulting programs to offer to these enterprise accounts, and also worked with our partners to create programs or improve coordination on existing programs, targeted to these enterprise accounts. There can be no assurance that we can successfully scale this program to a larger number of enterprise accounts, that we have identified the right accounts to target, or that we have identified the right sales, marketing, consulting, partnership and other programs to address these accounts.

Investment in Service Infrastructure. We have historically offered products that act as a platform for a new enterprise application. Over the last several years, customers have also used our products as a platform for internal and external portals that access multiple applications. This process is often referred to as “Service-Oriented Architecture” or “SOA.” In the fourth quarter of fiscal 2005, we announced a program to expand our existing products and to introduce new products to better serve the infrastructure needs for SOA, which we refer to as “service infrastructure.” Delivering an expanded product set for service infrastructure will require us to expand our capabilities in areas such as messaging, portal infrastructure, data integration, security, Web services management and other technologies. Selling and marketing service infrastructure products for SOA requires significant investment in marketing to educate customers and prospects, as well as investment to educate our sales force. Goals of the service infrastructure and SOA program include selling to customers’ and prospects’ Chief Information Officers, to be chosen as the architectural foundation of SOA projects that will be implemented over a sustained period of time. This approach may have the effect of lengthening sales cycles and increasing deal sizes, both of which make it harder to predict the timing and size of large deals. We announced our service infrastructure product category and brand in June 2005 together with the first two new products in this category. We are planning to release a variety of products in this category. We are actively working on the transitions inside our sales, marketing and consulting organizations, and are actively hosting educational seminars and other programs designed to appeal to customers’ and prospects’ Chief Information Officers. There can be no assurance that our products or our sales and marketing efforts will be successful.

Investment in Communication Technologies for Voice and Services over Internet Protocol. In the fourth quarter of fiscal 2005, we announced a set of products to provide an infrastructure for telecommunications to provide voice and data services over internet protocol, known as VOIP and SOIP. Sales to telecommunications companies have historically represented our largest vertical market, generally accounting for more than 20% of our annual license revenues over the last few fiscal years. However, these companies have generally used our software as a platform for operational and business support applications, such as applications used in the billing and provisioning of their services. Our products for the VOIP and SOIP market are designed to act as the platform for the service itself, expanding our addressable market within the telecommunications industry. We released the first product to address this market, the BEA WebLogic SIP Server, in the fourth quarter of fiscal

2005, and the second product to address this market, the BEA WebLogic Network Gatekeeper, in the first quarter of fiscal 2006. Our initial sales efforts are focused on 40 telecommunications and network equipment providers included in our enterprise account program. Selling products for the VOIP and SOIP markets requires us to sell to the networking groups inside these customers, when our relationships with these customers have generally been with the information technology groups. There can be no assurance that we will be able to expand our relationships to the networking groups inside our customers, that our product will be accepted for use in their VOIP and SOIP projects, or that VOIP and SOIP projects will be undertaken in the near term.

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

There have been no significant changes in our critical accounting policies during the quarter ended April 30, 2005 as compared to our previous disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2005.

The following table sets forth certain line items in BEA’s consolidated statements of income as a percentage of total revenues for the three and nine months ended April 30, 2005 and 2004.

Our revenues are derived from fees for software licenses and services. Services revenues are comprised of customer support, education and consulting. Total revenue growth from the three months ended April 30, 2005 (the “first quarter of fiscal 2006”) to the three months ended April 30, 2004 (the “first quarter of fiscal 2005”) was 7.3 percent; which was comprised of a 16.3 percent increase in services offset by a 3.4 percent decrease in licenses. The increase in services was primarily due to customer support revenues. A substantial portion of our customer support revenues are derived from existing support contracts from our installed base of customers. Management believes that most of the growth in our customer support revenues was a result of the expansion of the installed base of licenses. The decline in licenses was due in part to the challenging IT spending environment as well as an unusually strong performance in EMEA in the first quarter of the prior year.

Geographically, revenue contribution as a percentage of total revenue was evenly distributed between International revenues (“International” is defined as EMEA and APAC) and Americas revenues (United States, Canada, Mexico and Lain America) for the first quarter of fiscal 2006. The Americas contribution increased 2.6 percent when comparing the first quarter of fiscal 2006 to the first quarter of fiscal 2005, however this geographic revenue distribution for the first quarter of fiscal 2006 was consistent with the distribution in the second, third and fourth quarter of fiscal 2005. In the first quarter of fiscal 2006, total revenues when translated at a constant exchange rate from the same period in the prior year would have been approximately $274.2 million, or a 4.4 percent increase over the same period in fiscal 2005. Many factors that impact our growth are beyond our control and there can be no assurance that our revenues will grow in the future.

Management believes the decline in license revenues for the three months ended April 30, 2005 compared to the three months ended April 30, 2004 was related in part to the challenging IT spending environment as well as an unusually strong performance in EMEA in the prior year. Tuxedo had a relatively strong quarter in the first quarter of fiscal 2006, however Tuxedo revenue would have declined absent one large transaction when comparing this quarter to the same quarter in the prior year. Management believes a decline in Tuxedo revenue may not necessarily be indicative of a future trend due to historical fluctuations of Tuxedo revenue.

Revenue contribution from transactions with license fees greater than $1 million has ranged from approximately 20% to 40% of total license fees over the past eight quarters. Our transaction count increased approximately 4.2% when comparing the quarter ended April 30, 2005 to the same period in the prior year. Management believes transactions greater than $1 million have an inherent volatility related to the timing of the closing of such transactions which increases the risk that reported results may differ from expected results.

These factors were partially offset by positive changes in foreign exchange rates. For the first quarter of fiscal 2006, license fees when translated at a constant exchange rate from the same period in the prior year would have been $112.7 million, or a decline of 6.2 percent compared to the first quarter of fiscal 2005.

Consulting and education revenues consist of professional services related to the deployment and use of our software products. These arrangements are generally structured on a time and materials basis and revenues are recognized as services are performed. Customer support revenues consist of fees for annual maintenance contracts, typically priced as a percentage of the license fee, and recognized ratably over the term of the agreement (generally one year). Total services revenues for the first quarter of fiscal 2006 when translated at a constant exchange rate from the same period in the prior year would have been $161.4 million an increase of 13.3 percent over the same period in the prior fiscal year. The significant increase in customer support revenue for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was driven primarily by maintenance renewals on our existing installed base of software licenses as well as maintenance contracts sold together with new sales of software licenses. In addition, two unusually large support-in-arrears transactions accounted for an aggregate of approximately $3.0 million of customer support revenues which we do not expect to be recurring. The slight increase in consulting and education revenues for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was primarily due to an increase in consulting services performed in the Americas.

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

For each of the twelve fiscal quarters ended April 30, 2005, EMEA and APAC revenues as a percentage of total revenues have ranged between 29 percent to 38 percent for EMEA and 14 percent to 17 percent for APAC. These ranges may fluctuate in the future depending upon regional economic conditions, including but not limited to, foreign currency exchange rates.

For the first quarter of fiscal 2006, the percentage of total revenue contribution from the Americas increased by 2.6 percent compared to the first quarter of fiscal 2005. Management believes the improvement in the Americas revenue contribution was a combination of improved execution by the America’s sales team and the fact that EMEA had an unusually strong quarter in the first quarter of fiscal 2005. The revenue contribution for the first quarter of fiscal 2006 is consistent with the second, third and fourth quarter of fiscal 2005. Americas license revenues grew approximately 7.4 percent and Americas service revenues grew 17.2 percent when comparing the first quarter of fiscal 2006 to the same period in the prior year.

Our revenues in EMEA for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 were favorably impacted by the strengthening of certain foreign currencies against the U.S. dollar, primarily the Euro and the British Pound. The increase in revenues due to strengthening foreign currencies in EMEA was $5.4 million for the first quarter of fiscal 2006, when translated on a constant currency basis which resulted in a decline in EMEA revenues of 7.4 percent when comparing the first quarter of fiscal 2006 to the same period in the prior year. This decline was primarily attributable to unusually strong license revenues in the first quarter of fiscal 2005 compared to the first quarter of fiscal 2006.

Our revenues in APAC for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 were favorably impacted by the strengthening of certain foreign currencies against the U.S. dollar, particularly the Yen. The increase in revenues due to strengthening foreign currencies in APAC was $1.4 million. In constant currencies, APAC experienced an increase of 5.5 percent in total revenues when comparing the first quarter of fiscal 2006 to the same period in the prior year. Excluding the impact of foreign currencies, the overall increase in APAC revenue was due to a 13.6 percent increase in service revenues, which was fairly consistent across the region, and a 5.1 percent increase in license revenues primarily attributed to Japan and China.

Cost of License Fees. Cost of license fees, as referenced in the table above, includes:

Cost of license fees were 6.2 percent and 8.1 percent of license revenues for the first quarter of fiscal 2006 and 2005, respectively. The decline in the cost of license fees as a percentage of license revenues for the first quarter of fiscal 2006 and fiscal 2005 was due to a $1.1 decline in royalties paid to third parties and a $1.0 million decline in charges associated with amortization and impairment of acquired intangibles. The decline in royalties was due to product mix which resulted in less per copy royalty fees. Amortization of acquired intangibles declined due to certain intangibles becoming fully amortized in the first half of fiscal 2005. Future amortization expense is currently expected to total approximately $6.7 million which includes $3.5 million for the remaining nine months of fiscal 2006 and $3.2 million for fiscal 2007. We periodically review the estimated remaining useful lives of our intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods. Management believes that cost of license fees is likely to increase slightly in absolute dollars in fiscal 2006 due to expansion of the compliance program and new royalty agreements that began amortizing in the first quarter of fiscal 2006.

Cost of Services. Cost of services, consists primarily of salaries and benefits for consulting, education, and product support personnel; cost of third party delivered education and consulting revenues; and infrastructure expenses in information technology and real estate facilities for the operation of the services organization. Cost of services represented 33.2 percent and 34.4 percent of services revenues for the first quarter of fiscal 2006 and fiscal 2005, respectively. Cost of services as a percentage of services revenues has declined primarily due to a larger mix of higher margin support revenues versus lower margin consulting and education revenues.

The increase in cost of services in absolute dollars was due to compensation expenses and a negative impact of foreign exchange rates. The increase in compensation expense of approximately $6.0 million for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was due to a combination of increased employee headcount of approximately twenty three people and use of contract labor in order to deliver the increased service revenues. Strengthening foreign currencies against the U.S. dollar also contributed to a 2.2 percent increase in expenses.

Sales and marketing expenses include salaries, benefits, sales commissions, travel, information technology and facility costs for our sales and marketing personnel. These expenses also include programs aimed at increasing revenues, such as advertising, public relations, trade shows and user conferences. The increase in expenses from the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 was primarily compensation expense related to an increase in sales and marketing headcount of 109 people. Strengthening foreign currencies against the U.S. dollar also contributed to a 2.0 percent increase in expenses.

Research and development expenses consist primarily of salaries and benefits for software engineers, contract development fees, costs of computer equipment used in software development, information technology and facilities expenses. All costs incurred in the research and development of software products and enhancements to existing products have been expensed as incurred. Research and development expenses as a percentage of total revenues increased to 14.4 percent from 13.3 percent for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005. Research and development expenses increased $5.5 million from the first fiscal quarter of 2006 compared to the first fiscal quarter of 2005 primarily due to increasing product development personnel (approximately one hundred and fifty people) and associated expenses with the development of several new products and product versions scheduled for release in the remainder of fiscal 2006. Management believes the increase in personnel expenses is also due in part to transitional costs from moving certain aspects of the research and development organization offshore.

We have entered into product development agreements with third parties to develop ports and integration tools to co-develop products. We have one significant agreement with a third party that provides us with partial reimbursement for research and development and marketing expenses associated with a product of mutual

interest. The funding we receive is intended to offset certain of our research and development costs and is non-refundable. Such amounts are recorded as a reduction in our operating expenses. During the first quarter of fiscal 2006, we received approximately $2.6 million of third party reimbursement, which was used to offset approximately $2.4 million of research and development expenses and $0.2 million of marketing expense. During the first quarter of fiscal 2005, we received approximately $2.7 million of third party reimbursement, which was used to offset approximately $2.4 million of research and development expenses and $0.3 million of marketing expenses. Based on the arrangement currently in place, we expect to receive approximately $9.7 million of such funding in fiscal 2006.

General and administrative expenses include costs for our human resources, finance, legal, information technology, facilities and general management functions, as well as bad debt expense. General and administrative expenses increased $4.9 million for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 due primarily to increases of approximately $1.1 million in third-party accounting expenses related to the compliance with the regulations of the Sarbanes-Oxley Act of 2002, $2.9 million related to legal expenses on intellectual property matters and $1.4 million related to an increase in compensation and related personnel expenses.

Facilities Consolidation. During fiscal 2002, we approved a plan to consolidate certain facilities in regions including the United States, Canada and Germany. A facilities consolidation charge of $20.0 million was recorded using management’s best estimates and was based upon the remaining future lease commitments and brokerage fees for vacant facilities from the date of facility consolidation, net of estimated future sublease income. In fiscal 2005, an additional $0.5 million was accrued due to a reassessment of original estimates of costs of abandoning the leased facilities compared to the actual results and future estimates.

During fiscal 2005, due to a decline in employee and contractor hiring and headcount we identified the opportunity to reduce our facilities requirements. We approved a plan to consolidate six sites in the United States and Canada. A facilities consolidation charge of $7.7 million was recorded and was comprised of $6.9 million related to future lease commitments and $0.8 million of leasehold improvement write-offs. The $6.9 million of future lease commitments was calculated based on management’s estimates and the present value of the remaining future lease commitments for vacant facilities, net of present value of the estimated future sublease income.

The estimated costs of abandoning the leased facilities identified above, including estimated costs to sublease, were based on market information and trend analyses, including information obtained from third-party real estate industry sources. As of April 30, 2005, $11.4 million of lease termination costs, net of anticipated sublease income, remains accrued and is expected to be fully utilized by fiscal 2012. As of April 30, 2005, $3.1 million is classified as short term and the remaining $8.3 million is classified in other long term obligations. If actual circumstances prove to be materially different than the amounts management has estimated, our total charges for these vacant facilities could be significantly higher. If we were unable to receive any of our estimated but uncommitted sublease income in the future, the additional charge would be approximately $3.6 million. Adjustments to the facilities consolidation charge will be made in future periods, if necessary, based upon then current actual events and circumstances. We do not expect the future payments to have a significant impact on our liquidity due to our strong cash position ($1.6 billion of cash, cash equivalents and short term investments at April 30, 2005).

The following table provides a summary of the accrued facilities consolidation (in thousands):

During fiscal 2005, we entered into a four year revolving credit facility with Keybank National Association, as administrative agent, and various other lenders (the “Credit Agreement”) and borrowed $215.0 million under the Credit Agreement in order to, among other things, pay off and terminate the long term debt related to a land lease of $211.7 million.

The Credit Agreement accrues interest based on the London Interbank Offering Rate (“LIBOR”) or a prime-based rate, plus a margin based on our leverage ratio, determined quarterly. The effective annual interest rate was approximately 4.3 percent as of April 30, 2005. Interest payments are made in cash at intervals ranging from thirty days to twelve months, as elected by BEA. In connection with the Credit Agreement, we must maintain certain covenants, including liquidity, leverage ratios as well as minimum cash balance requirements. As of April 30, 2005, we were in compliance with all financial covenants.

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

Interest expense is correlated with the convertible debt and the long term debt related to the land lease which was paid off and replaced in the third quarter of fiscal 2005 with the $215.0 million of notes payable. The increase in interest expense correlates with a higher interest rate for the notes payable due to rising interest rates.

Foreign exchange loss increased due to our hedging positions and movements in exchange rates.

Interest income and other increased $4.3 million for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 primarily due to improved yields and an increase in our cash, cash equivalents and short-term investment balances.

We have provided for income tax expense of $14.6 million and $10.9 million for the first quarter of fiscal 2006 and fiscal 2005, respectively. Our effective income tax rate was 30 percent for both the first quarter of

fiscal 2006 and fiscal 2005. Our effective tax rate for the first quarter of fiscal 2006 and fiscal 2005 differed from the U.S. federal statutory rate of 35 percent primarily due to the benefit of low taxed foreign earnings.

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

The following table sets forth the components of deferred revenues (in thousands):

Deferred revenues are predominantly comprised of deferred customer support revenues. Deferred revenues also include deferred license and consulting revenues. Deferred customer support revenues are generally recognized ratably over the term of the contract. License and consulting deferred revenues generally are deferred due to revenue recognition requirements. The decline in total deferred revenues of $4.8 million was driven by a $7.4 million decline in deferred services revenues, which was primarily comprised of deferred customer support revenue. Deferred customer support revenue declined due to amortization of the installed base, which grew approximately $69.9 million in the fourth quarter of fiscal 2005, offset by customer support contracts sold in the first quarter of fiscal 2006. Management believes the fluctuation in deferred revenues tend to be seasonal due to relatively higher fourth quarter license sales, which are generally sold with customer support, and the fact that a relatively higher proportion of customer support renewals occur in the fourth quarter. Deferred revenues will fluctuate in the future, as a function of the timing and terms of particular transactions and will not necessarily correlate with revenue growth in any given quarter and fluctuations in deferred revenues are not an indicator of future license revenue.

Our primary source of cash is receipts from our revenues. The primary uses of cash are payroll (salaries, bonuses, commissions and benefits) and general operating expenses (facilities, marketing, legal, travel, etc.). Another source of cash is proceeds from the exercise of employee options and another use of cash is our stock repurchase program.

As of April 30, 2005, cash, cash equivalents (excluding all restricted cash) and short-term investments totaled $1,626.0 million versus $1,559.2 million at April 30, 2004.

In the first quarter of fiscal 2006, net cash provided by operating activities declined $5.2 million when compared to the first quarter of fiscal 2005. The decline in operating cash flows was driven by the following factors:

Cash provided by (used in) investing activities fluctuated by $80.0 million when comparing cash flows from investing activities for the first quarter of fiscal 2006 and the first quarter of fiscal 2005. The change is primarily due to the fact that we purchased $85.7 million less of available-for-sale short-term investments in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005. This was offset by a $4.1 million increase in purchases of property and equipment.

Cash (used in) provided by financing activities fluctuated by $68.6 million. The increase in cash outflow was due to the repurchase of $60.0 million worth of treasury stock in the first quarter of fiscal 2006 offset by a $8.6 million decline in proceeds from employee stock purchases.

The $550.0 million 4% Convertible Subordinated Notes due December 15, 2006 may be settled in cash or stock, depending upon future prices of our common stock. If our stock price does not exceed $34.65 during the period from December 15, 2004 to December 15, 2006, then we would be required to repay the notes in cash on the maturity date of December 15, 2006.

The long term debt facility entered into in October 2004 of $215.0 million matures in October 2008. Interest on this debt is calculated based on the London Interbank Offering Rate (“LIBOR”) or a prime-based rate, plus a margin based on our leverage ratio, determined quarterly. The effective annual interest rate was approximately 4.3 percent as of April 30, 2005. Interest payments are made in cash at intervals ranging from thirty days to twelve months, as elected by us. In connection with the long-term debt, we must maintain certain covenants, including liquidity, leverage and profitability ratios. As of April 30, 2005, we are in compliance with all such financial covenants.

At April 30, 2005, we had a cumulative loss for U.S. tax reporting purposes and currently we are not making significant cash tax payments in the U.S. Should we fully utilize the U.S. tax loss carryforwards, our cash tax payments in the U.S. would increase as a result and, accordingly, would decrease net cash provided by operating activities.

We own land in San Jose, California which is intended for the construction of corporate facilities. Currently, development of the San Jose land has been suspended; however, if and when we decide to develop the San Jose land, the development will require significant cash and/or financing resources.

Restricted cash represents collateral for our letters of credit. Short term restricted cash correlates with letters of credit that expire within one year.

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

The above table excludes obligations related to accounts payable, accrued liabilities incurred in the ordinary course of business, and any future rate variable interest obligations associated with contractual obligations shown above.

We do not have significant commitments under lines of credit, standby lines of credit, guarantees, standby repurchase obligations or other such arrangements.

In September 2001, March 2003, May 2004 and March 2005 the Board of Directors approved stock repurchases that in aggregate equaled $600.0 million of our common stock under a share repurchase program (the “Share Repurchase Program”). In the first three months of fiscal 2006, 7.4 million shares were purchased at a total cost of approximately $60.0 million leaving approximately $255.4 million of the approval limit available for share repurchases under the Share Repurchase Program. In fiscal 2006, we anticipate repurchases will continue to be made opportunistically. Repurchases are a function of market opportunities based on certain price and volume parameters.

Our principal source of liquidity is our cash, cash equivalents and short-term investments, as well as the cash flow that we generate from our operations. Our liquidity could be negatively impacted by any trends that result in a reduction in demand for our products or services. We believe that our existing cash, cash equivalents, short-term investments and cash generated from operations, if any, will be sufficient to satisfy our currently anticipated cash requirements through April 30, 2006. However, we may make acquisitions or license products and technologies complementary to our business and may need to raise additional capital through future debt or equity financing to the extent necessary to fund any such acquisitions or licenses. There can be no assurance that additional financing will be available, at all, or on terms favorable to us.

We do not use off-balance-sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance-sheet arrangements such as research and development arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance-sheet risks from unconsolidated entities. As of April 30, 2005, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

We have entered into operating leases for most U.S. and international sales and support offices and certain equipment in the normal course of business. These arrangements are often referred to as a form of off-balance sheet financing. As of April 30, 2005, we leased facilities and certain equipment under non-cancelable operating leases expiring between 2005 and 2014. Future minimum lease payments under our operating leases as of April 30, 2005 are detailed previously in the minimum contractual obligations table above.

The Company has secured notes receivable from one executive totaling approximately $0.6 million as of April 30, 2005 and from two executives totaling approximately $0.9 million as of January 31, 2005. BEA received $0.3 million in March 2005 to pay off one of the outstanding notes receivable balances. These notes originated prior to June 30, 2002 and are secured by deeds of trust on real property. The remaining note bear interest of 7 percent per annum and is due and payable on April 3, 2006 or upon the termination of employment with us. The note may be repaid at anytime prior to the due date.

We occasionally sell software products or services to companies that have board members or executive officers that are also on our Board of Directors. The total revenues recognized by us from such customers in the three months ended April 30, 2005 and 2004 were insignificant.

We operate in a rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks and uncertainties, which may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the following risk factors in evaluating an investment in our common stock.

Significant unanticipated fluctuations in our actual or anticipated quarterly revenues and operating results have in the past, and may in the future, prevent us from meeting securities analysts’ or investors’ expectations and have in the past, and may in the future, result in a decline in our stock price.

Our revenues have fluctuated in the past and are likely to fluctuate significantly in the future. For example, in the quarters ended April 30, 2002, April 30, 2003, April 30, 2004 and April 30, 2005, our revenues declined as compared to the previous fiscal quarter, and in the quarters ended October 31, 2001, January 31, 2002, April 30, 2002 and July 31, 2002 our revenues declined as compared to the same quarterly periods in the prior fiscal year. If our revenues, operating results, earnings or future projections are below the levels expected by investors or securities analysts, our stock price is likely to decline. Moreover, even if our total revenues meet investors’ and securities analysts’ expectations, if a component of our total revenues does not meet these expectations, our stock price may decline. For example, in our quarter ended April 30, 2004, our reported license revenue was several million dollars lower than the level expected by securities analysts. Our stock price declined by approximately 22.5 percent at the close of trading on the NASDAQ National Market on the day following our announcement of our quarterly financial results providing this information. Our stock price is also subject to the substantial volatility generally associated with Internet, software and technology stocks and may also be affected by broader market trends unrelated to our performance, such as the substantial declines in the prices of many such stocks that began in March 2000 through 2003, as well as market declines related to terrorist activities and military actions.

We expect to experience significant fluctuations in our future revenues and operating results as a result of many factors, including:

Our quarterly revenues and operating results are difficult to forecast because of the timing, size and composition of our customer orders.

A substantial portion of our revenues has been derived from large orders, as major customers deployed our products. License revenue contribution from transactions with license revenue greater than $1 million has ranged

from approximately 20% to 40% of total license fees over the past eight quarters. In addition, in the quarters ended July 31, 2004, October 31, 2004, January 31, 2005 and April 30, 2005 there were 18, 13, 15 and 18 product orders signed, respectively, each with a value of greater than $1 million. Increases in the dollar size of some individual license transactions increases the risk of fluctuation in future quarterly results because the unexpected loss of a small number of larger orders can create a significant revenue shortfall. For example, we believe this reliance on larger transactions adversely impacted our quarter ended April 30, 2004, where our reported license revenue was several million dollars lower than the level expected by securities analysts. If we cannot generate a sufficient number of large customer orders, turn a sufficient number of development orders into orders for large deployments or if customers delay or cancel such orders in a particular quarter, it may have a material adverse effect on our revenues and, more significantly on a percentage basis, our net income or loss in that quarter. Moreover, we typically receive and fulfill most of our orders within the quarter, and a substantial portion of our orders, particularly our larger transactions, are typically received in the last month of each fiscal quarter, with a concentration of such orders in the final week of the quarter. As a result, even though we may have substantial backlog at the end of a prior quarter and positive business indicators, such as sales “pipeline” reports, about customer demand during a quarter, we may not learn of revenue shortfalls until very late in the fiscal quarter, and possibly not until the final day or days of the fiscal quarter. Not only could this significantly adversely affect our revenues, such shortfalls would substantially adversely affect our earnings because they may occur after it is too late to adjust expenses for that quarter. Moreover, because we have previously implemented significant cost cutting measures, incremental additional cost cutting measures would be particularly difficult to achieve. The risk of delayed or cancelled orders is also particularly relevant with respect to our increased dependence on large customer orders, which are more likely to be cancelled, delayed or reduced and also have a greater financial impact on our operating results. Moreover, ongoing adverse economic conditions worldwide, particularly those related to the technology industry and the economic and political uncertainties arising out of the ongoing U.S. military activity in Iraq, recent and possible future terrorist activities, other potential military and security actions in the Middle East, and instability in markets such as the Korean peninsula and other parts of Asia, have increased the likelihood that customers will unexpectedly delay, cancel or reduce orders, resulting in revenue shortfalls. Any revenue shortfall below our expectations could have an immediate and significant adverse effect on our results of operations.

If we do not effectively compete with new and existing competitors, our revenues and operating margins will decline.

The market for application server and integration software, and related software infrastructure products and services, is highly competitive. Our competitors are diverse and offer a variety of solutions directed at various segments of this marketplace. These competitors include IBM, which also offers operating system software and hardware as discussed below, and Oracle, which can bundle its competing product with their database and other software offerings at a discounted price. In addition, certain application vendors, enterprise application integration vendors and other companies are developing or offering application server, enterprise application integration and portal software products and related services that may compete with products that we offer. Further, software development tool vendors typically emphasize the broad versatility of their tool sets and, in some cases, offer complementary software that supports these tools and performs basic application server and integration functions. These tool vendors offer products that may compete with some of the features of our own product offerings. Finally, internal development groups within prospective customers’ organizations may develop software and hardware systems that may substitute for those we offer. A number of our competitors and potential competitors have longer operating histories, substantially greater financial, technical, marketing and other resources, greater name recognition and a larger installed base of customers than us.

Some of our competitors are also hardware vendors who bundle their own application server, integration software and tool products, or similar products, with their computer systems and database vendors that advocate client/server networks driven by the database server. IBM is the primary hardware vendor that we compete with which offers a line of application server, integration, and related software infrastructure solutions for their customers. Sun Microsystems is another hardware vendor which offers a line of application server and related

software infrastructure solutions. IBM’s sale of application server and integration functionality along with its proprietary hardware systems requires us to compete with IBM, particularly with regard to its installed customer base, where IBM has certain inherent advantages due to its much greater financial, technical, marketing and other resources, greater name recognition and the integration of its enterprise application server and integration functionality with its proprietary hardware and database systems. These inherent advantages allow IBM to bundle, at a discounted price, application server and integration solutions with computer hardware, software and related service sales. In addition, IBM Global Services, a division of IBM and a large provider of consulting and information technology services, can influence their service customers’ choice of software products in favor of IBM’s. In addition, these advantages allow IBM to promote their competing products by selling at a discount their mainframe operating system software to their numerous mainframe hardware customers who purchase on a bundled basis IBM application server and integration software. Due to these factors, if we do not sufficiently differentiate our products based on functionality, reliability, ease of development, interoperability with non-IBM systems, performance, total cost of ownership and return on investment and establish our products as more effective solutions to customers’ technological and economic needs, our business, operating results, and financial condition will suffer.

In addition to its current products which include some application server functionality, Microsoft has announced that it intends to continue to enhance the application server and integration functionalities in its .NET technologies. Microsoft’s .NET technologies use a proprietary programming environment that competes with the Java-based environment of our products. A widespread acceptance of Microsoft’s .NET technologies, particularly among the large and mid-sized enterprises from which most of our revenues are generated, could curtail the use of Java and therefore adversely impact the sales of our products. The .NET technologies and the bundling of competing functionality in versions of Windows can require us to compete in certain areas with Microsoft, which has certain inherent advantages due to its much greater financial, technical, marketing and other resources, its greater name recognition, very large developer community, its substantial installed base and the integration of its broad product line and features into a Web Services environment. We need to differentiate our products from Microsoft’s based on scalability, functionality, interoperability with non-Microsoft platforms, performance, total cost of ownership, return on investment, ease of development and reliability, and need to establish our products as more effective solutions to customers’ technological and economic needs. We may not be able to successfully or sufficiently differentiate our products from those offered by Microsoft, and Microsoft’s continued efforts in the application server, integration and Web Services markets, as well as their ongoing efforts to enhance and expand the .NET technology program, could materially adversely affect our business, operating results and financial condition.

In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of their current and prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could materially adversely affect our ability to sell additional software licenses and maintenance, consulting and support services on terms favorable to us. Further, competitive pressures could require us to reduce the price of our products and related services, which could materially adversely affect our business, operating results and financial condition. We may not be able to compete successfully against current and future competitors and any failure to do so would have a material adverse effect upon our business, operating results and financial condition.

The lengthy sales cycle for our products makes our revenues susceptible to substantial fluctuations.

Many of our customers use our products to implement large, sophisticated applications that are critical to their business, and their purchases are often part of their implementation of a distributed or Web-based computing environment. Customers evaluating our software products face complex decisions regarding alternative approaches to the integration of enterprise applications, competitive product offerings, rapidly changing software technologies and standards and limited internal resources due to other information systems requirements. For these and other reasons, the sales cycle for our products is lengthy and is subject to delays or

cancellation over which we have little or no control. We have recently experienced an increase in the number of million and multimillion dollar license transactions. For example, in the quarters ended July 31, 2004, October 31, 2004, January 31, 2005 and April 30, 2005, there were 18, 13, 15 and 18 product orders signed, respectively, each with a value at greater than $1 million. Some of our transactions are significantly larger than $1 million, such as in our quarter ended July 31, 2003, when we had a single transaction with a value of over $10 million. In some cases, the larger size of the transactions has resulted in more extended customer evaluation and procurement processes, which in turn have lengthened the overall sales cycle for our products. The recent economic downturn in our key markets has also contributed to increasing the length of our sales cycle, and there is a risk that this could continue or worsen. Finally, the introduction of WebLogic Platform 8.1 products has contributed to a longer sales cycle due to the fact that it offers a more comprehensive solution that may require more detailed customer evaluations. Delays or failures to complete large orders and sales in a particular quarter could significantly reduce revenue that quarter, as well as subsequent quarters over which revenue for the sale would likely be recognized.

If our WebLogic Platform 8.1, WebLogic Communications Platform, BEA AquaLogic and other recently introduced products do not achieve significant market acceptance, or market acceptance is delayed, our revenues will be substantially adversely affected.

In July 2003, we introduced our WebLogic Platform 8.1 group of products, a major new product release which includes WebLogic Server 8.1, WebLogic Workshop 8.1, WebLogic Integration 8.1 and WebLogic Portal 8.1. More recently, in February 2005 we released the first product of our WebLogic Communications Platform. In June 2005, we introduced the BEA AquaLogic group of products. We have invested substantial resources to develop and market these products, and anticipate that this will continue. If these products and our other products currently in development do not achieve substantial market acceptance among new and existing customers, due to factors such as any technological problems, competition, pricing, sales execution or market shifts, it will have a material adverse effect on our revenues and other operating results. For example, we believe the rate of acceptance of, and customer transition to, WebLogic Platform 8.1 were contributing factors to our reported license revenue for our quarter ended April 30, 2004 being several million dollars lower than the level expected by securities analysts. Moreover, because the WebLogic Platform 8.1 products, and other new products offer broader solutions and other improvements over our prior products, potential customers may take additional time to evaluate their purchases, which can delay customer acceptance of our WebLogic Platform 8.1 products. If these delays continue or worsen, it will adversely affect our revenues and other operating results.

Our international operations expose us to greater management, collections, currency, export licensing, intellectual property, tax, regulatory and other risks.

Revenues from markets outside of the Americas accounted 49.7% and 52.3% of our total revenues for the quarters years ended April 30, 2005 and 2004, respectively. We sell our products and services through a network of branches and subsidiaries located in 36 countries worldwide. In addition, we also market our products through distributors. We believe that our success depends upon continued expansion of our international operations. Our international business is subject to a number of risks, including greater difficulties in maintaining and enforcing U.S. accounting and public reporting standards, greater difficulties in staffing and managing foreign operations with personnel sufficiently experienced in U.S. accounting and public reporting standards, unexpected changes in regulatory practices and tariffs, longer collection cycles, seasonality, potential changes in export licensing and tax laws, and greater difficulty in protecting intellectual property rights. Also, the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies in markets where we do business can significantly impact our revenues. For example, a strengthening of the U.S. dollar could have an unexpected adverse impact on our international revenue. This is particularly relevant with regards to our sales generated in the EMEA region where the U.S. dollar has recently been exceptionally weak relative to European currencies. The EMEA region accounted for 35 percent of our revenue in our quarter ended April 30, 2005, and if the value of the U.S. dollar relative to the European currencies were to significantly increase, it would have an unexpected adverse impact on our revenues, profits and other operating results. Also, we are periodically subject to tax audits by government

agencies in foreign jurisdictions. To date, the outcomes of these audits have not had a material impact on us. It is possible, however, that future audits could result in significant assessments against us or our employees for transfer taxes, payroll taxes, income taxes, or other taxes as well as related employee and other claims which could adversely effect our operating results. General economic and political conditions in these foreign markets, including the military action in the Middle East and geopolitical instabilities on the Korean peninsula and other parts of Asia may also impact our international revenues, as such conditions may cause decreases in demand or impact our ability to collect payment from our customers. There can be no assurances that these factors and other factors will not have a material adverse effect on our future international revenues and consequently on our business and consolidated financial condition and results of operations.

Our revenues are derived primarily from a single group of similar and related products and related services, and a decline in demand or prices for these products or services could substantially adversely affect our operating results.

We currently derive the majority of our license and service revenues from BEA WebLogic Server products, BEA Tuxedo and from related products and services. We expect these products and services to continue to account for the majority of our revenues in the immediate future. As a result, factors adversely affecting the pricing of or demand for BEA WebLogic Server products, BEA Tuxedo or related services, such as a continued or worsened general economic slowdown, future terrorist activities or military actions, any decline in overall market demand, competition, product performance or technological change, could have a material adverse effect on our business and consolidated results of operations and financial condition. In particular, with regard to BEA Tuxedo, we have recently experienced a decline in the percentage of our license revenue generated by BEA Tuxedo, as well as a decline in the absolute dollar amount of revenue generated by BEA Tuxedo. If this trend were to continue or worsen, it would have an adverse impact on our revenue, profit and other operating results.

Changes in accounting regulations and related interpretations and policies, particularly those related to revenue recognition, could cause us to defer recognition of revenue or recognize lower revenue and profits.

Although we use standardized license agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we must often negotiate and revise terms and conditions of these standardized agreements, particularly in larger license transactions. Negotiation of mutually acceptable terms and conditions can extend the sales cycle and, in certain situations, may require us to defer recognition of revenue on the license. While we believe that we are in compliance with Statement of Position 97-2, Software Revenue Recognition, as amended, the American Institute of Certified Public Accountants continues to issue implementation guidelines for these standards and the accounting profession continues to discuss a wide range of potential interpretations. Additional implementation guidelines, and changes in interpretations of such guidelines, could lead to unanticipated changes in our current revenue accounting practices that could cause us to defer the recognition of revenue to future periods or to recognize lower revenue and profits.

Moreover, policies, guidelines and interpretations related to revenue recognition, accounting for acquisitions, income taxes, facilities consolidation charges, allowances for doubtful accounts and other financial reporting matters require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. To the extent that management’s judgment is incorrect, it could result in an adverse impact on the Company’s financial statements. Some of these matters are also among topics currently under re-examination by accounting standard setters and regulators. These standard setters and regulators could promulgate interpretations and guidance that could result in material and potentially adverse changes to our accounting policies.

FASB has adopted Financial Accounting Standards Board Statement No. 123R (“FAS 123R”), Share-Based Payment, replaces FAS 123 which eliminates the ability to account for compensation transactions using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and generally requires that such transactions be accounted for using the fair value based method. Accordingly, we will be required to

expense stock options granted in fiscal periods commencing February 1, 2006. When we record an expense for our stock-based compensation plans using the fair value method, we will have significant compensation charges. For example, for the quarters ended April 30, 2005 and April 30, 2004, had we accounted for stock-based compensation plans under Financial Accounting Standards Board (“FASB”) Statement No. 123, as amended by FASB Statement No. 148, diluted earnings per share would have been reduced by $0.06 and $0.08 per share, respectively.

The implementation of recently adopted accounting regulations requiring us to expense stock options will make it substantially more likely that we will experience net losses.

We first reported significant net income under generally accepted accounting principles for the quarter ended July 31, 2000. However, despite this, we subsequently reported a net loss for the quarter ended October 31, 2001. This was due in part to the asset impairment charges of $80.1 million related to prior acquisitions. When we are required by FASB 123R to expense stock option grants for fiscal periods commencing February 1, 2006, we will have significant accounting charges which will make it substantially more likely we could experience net losses. Moreover, these new accounting changes will make it much more likely that we will experience additional net losses due to such factors as any on-going expenses associated with our prior acquisitions, the possibility of future impairment charges and the possibility of future charges related to any future facilities consolidation or work force reductions.

If we are required to remit significant payroll taxes, it will have an adverse impact on our future financial results.

When our employees exercise certain stock options, we are subject to employer payroll taxes on the difference between the price of our common stock on the date of exercise and the exercise price. These payroll taxes are determined by the tax rates in effect in the employee’s taxing jurisdiction and are treated as an expense in the period in which the exercise occurs. During a particular period, these payroll taxes could be material, in particular if an increase in our stock price causes a significant number of employees to exercise their options. However, because we are unable to predict our stock price, the number of exercises, or the country of exercise during any particular period, we cannot predict the amount, if any, of employer payroll tax expense that will be recorded in a future period or the impact on our future financial results. Stock price increases make it more likely that option holders will exercise their options and, accordingly, that we would incur higher payroll taxes.

Failure to maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.

We have evaluated and will continue to evaluate our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires an annual management assessment of the design and effectiveness of our internal controls over financial reporting and a report by our Independent Registered Public Accounting Firm addressing this assessment. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

Any failure to maintain on-going sales through distribution channels could result in lower revenues.

To date, we have sold our products principally through our direct sales force, as well as through indirect sales channels, such as computer hardware companies, packaged application software developers, independent

software vendors (“ISVs”), systems integrators (“SIs”) and independent consultants, independent software tool vendors and distributors. Our ability to achieve revenue growth in the future will depend in large part on our success in maintaining existing relationships and further establishing and expanding relationships with distributors, ISVs, original equipment manufacturers (“OEMs”) and SIs. In particular, we have an ongoing initiative to further establish and expand relationships with our distributors through these sales channels, especially ISVs and SIs. A significant part of this initiative is to recruit and train a large number of consultants employed by SIs and induce these SIs to more broadly use our products in their consulting practices, as well as to embed our technology in products that our ISV customers offer. We intend to continue this initiative and to seek distribution arrangements with additional ISVs to embed our WebLogic Server and other products in their products. It is possible that we will not be able to successfully expand our distribution channels, secure agreements with additional SIs and ISVs on commercially reasonable terms or at all, and otherwise adequately continue to develop and maintain our relationships with indirect sales channels. Moreover, even if we succeed in these endeavors, it still may not increase our revenues. In particular, we need to carefully monitor the development and scope of our indirect sales channels and create appropriate pricing, sales force compensation and other distribution parameters to help ensure these indirect channels do not conflict with or curtail our direct sales. If we invest resources in these types of expansion and our overall revenues do not correspondingly increase, our business, results of operations and financial condition will be materially and adversely affected. In addition, we already rely on formal and informal relationships with a number of consulting and systems integration firms to enhance our sales, support, service and marketing efforts, particularly with respect to implementation and support of our products as well as lead generation and assistance in the sales process. We will need to expand our relationships with third parties in order to support license revenue growth. Many such firms have similar, and often more established, relationships with our principal competitors. It is possible that these and other third parties will not provide the level and quality of service required to meet the needs of our customers, or that we will not be able to maintain an effective, long-term relationship with these third parties.

The ongoing U.S. military activity in Iraq and any terrorist activities could adversely affect our revenues and operations.

The U.S. military activity in Iraq, terrorist activities and related military and security operations have in the past disrupted economic activity throughout the United States and much of the world. This significantly adversely impacted our operations and our ability to generate revenues in the past and may also again in the future. An unfavorable course of events in the future related to the ongoing U.S. military activity in Iraq; any other military or security operations, particularly with regard to the Middle East; any future terrorist activities; or the geopolitical tension on the Korean peninsula could have a similar or worse effect on our operating results, particularly if such attacks or operations occur in the last month or weeks of our fiscal quarter or are significant enough to further weaken the U.S. or global economy. In particular, such activities and operations could result in reductions in information technology spending, order deferrals, and reductions or cancellations of customer orders for our products and services.

If the markets for application servers, application platform, application integration and related application infrastructure software and Web services declines or do not grow as quickly as we expect, our revenues will be harmed.

We sell our products and services in the application server, application platform, application integration and related application infrastructure markets. These markets are characterized by continuing technological developments, evolving industry standards and changing customer requirements. Our success is dependent in large part on acceptance of our products by large customers with substantial legacy mainframe systems, customers establishing or building out their presence on the Web for commerce, and developers of Web-based commerce applications. Our future financial performance will depend in large part on the continued growth in the use of the Web to run software applications and continued growth in the number of companies extending their mainframe-based, mission-critical applications to an enterprise-wide distributed computing environment and to the Internet through the use of application server and integration technology. The markets for application

server, application platform, and integration technology web services, and related services may not grow and could decline. Even if they do grow, they may grow more slowly than we anticipate, particularly in view of the recent economic downturn affecting the technology sector in the United States, Asia and Europe. If these markets fail to grow, grow more slowly than we currently anticipate, or decline, our business, results of operations and financial condition will be adversely affected.

Unanticipated changes in our effective tax rates or exposure to additional income tax liabilities could affect our profitability.

BEA is a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. The Company’s provision for income taxes is based on jurisdictional mix of earnings, statutory rates, and enacted tax rules, including transfer pricing. Significant judgment is required in determining the Company’s provision for income taxes and in evaluating its tax positions on a worldwide basis. It is possible that these positions may be challenged which may have a significant impact on the Company’s effective tax rate.

If we lose key personnel or cannot hire enough qualified personnel, it will adversely affect our ability to manage our business, develop new products and increase revenue.

We believe our future success will depend upon our ability to attract and retain highly skilled personnel, including our Chairman, Chief Executive Officer and President, Alfred S. Chuang, other key members of management and other key technical employees. Competition for these types of employees is intense, and it is possible that we will not be able to retain our key employees and that we will not be successful in attracting, assimilating and retaining qualified candidates in the future. In addition, as we seek to expand our global organization, the hiring of qualified sales, technical and support personnel has been, and will continue to be, difficult due to the limited number of qualified professionals. Failure to attract, assimilate and retain key personnel, and to promptly replace key members of management who have resigned, would have a material adverse effect on our business, results of operations and financial condition.

Third parties could assert that our software products and services infringe their intellectual property rights, which could expose us to increased costs and litigation.

We have been and continue to be subject to legal proceedings and claims that arise in the ordinary course of our business, including claims currently being asserted that our products infringe certain patent rights, such as the claims alleged by Software AG and Software AG, Inc. See Item 1 in Part II entitled “Legal Proceedings” for a discussion of the resolution of the Software AG and Software AG, Inc. matters. It is possible that third parties, including competitors, technology partners, and other technology companies, could successfully claim that our current or future products, whether developed internally or acquired, infringe their rights, including their trade secret, copyright and patent rights. These types of claims, with or without merit, can cause costly litigation that absorbs significant management time, as well as impede our sales efforts due to any uncertainty as to the outcome, all of which could materially adversely affect our business, operating results and financial condition. These types of claims, with or without merit, could also cause us to pay substantial damages or settlement amounts, cease offering of any subject technology or products altogether, require us to enter into royalty or license agreements, compel us to license software under unfavorable terms, and damage our ability to sell products due to any uncertainty generated as to intellectual property ownership. If required, we may not be able to obtain such royalty or license agreements, or obtain them on terms acceptable to us, which could have a material adverse effect upon our business, operating results and financial condition, particularly if we are unable to ship key products.

The market price for our common stock may be affected by a number of factors, including developments in the Internet, changes in the software or technology industry, general market and economic conditions, further terrorist activities, military actions in Iraq and the Middle East in general, geopolitical instability on the Korean

peninsula and other parts of Asia, and other factors, including factors unrelated to our operating performance or our competitors’ operating performance. In addition, BEA and many other companies in the Internet, technology and emerging growth sectors have experienced wide fluctuations in their stock prices, including recent rapid rises and declines that often have not been directly related to the operating performance of such companies. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, may materially adversely affect the market price of our common stock. Our fluctuating stock price also carries other risks, including the increased risk of shareholder litigation. For example, following the drop of our stock price in May 2004, BEA and a number of our officers and directors were named in class and derivative lawsuits. Although these lawsuits were dismissed, any similar suits in the future could divert management’s attention from our business and have an adverse effect on our financial results and operations.

Because the technological, market and industry conditions in our business can change very rapidly, if we do not successfully adapt our products to these changes, our revenue and profits will be harmed.

The market for our products and services is highly fragmented, competitive with alternative computing architectures, and characterized by continuing technological developments, evolving and competing industry standards, and changing customer requirements. The introduction of products embodying new technologies, the emergence of new industry standards, or changes in customer requirements could result in a decline in the markets for our existing products or render them obsolete and unmarketable. As a result, our success depends upon our ability to timely and effectively enhance existing products (such as our WebLogic Server products and Web Services features), respond to changing customer requirements, and develop and introduce in a timely manner new products and initiatives (such as our BEA AquaLogic, WebLogic Platform 8.1, WebLogic Communications Platform, WebLogic Integration 8.1, WebLogic Workshop 8.1, WebLogic Liquid Data 8.1 and WebLogic Portal 8.1 products and our solutions frameworks initiatives) that keep pace with technological and market developments and emerging industry standards. In addition, the widespread continued adoption of Java technologies and standards is critical to driving sales of our products because they operate in a Java-based environment. The widespread acceptance of Microsoft’s .NET technologies, which competes with Java-based environments and technologies, could curtail the use of Java. A decline in the ability or willingness of Sun Microsystems, Inc., the creator and licensor of a substantial portion of the basic technologies and standards comprising Java, to devote resources to promote and facilitate the adoption and further development of Java technologies and standards, as well as to make these Java technologies and standards available on sufficiently favorable terms, could also curtail the use of Java by the software industry, including us. If the rate of adoption of Java technologies and standards were to slow or decline, and we were unable to successfully adapt our products to other technologies and standards, it would adversely affect the sales of our products and services. It is possible that our products will not adequately address the changing needs of the marketplace and that we will not be successful in developing and marketing enhancements to our existing products or products incorporating new technology on a timely basis. Failure to develop and introduce new products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, or lack of customer acceptance of our products, will materially and adversely affect our business, results of operations and financial condition. In addition, our success is increasingly dependent on our strategic partners’ ability to successfully develop and integrate their software with the BEA products with which it interoperates or is bundled, integrated or marketed. If their software performs poorly, contains errors or defects or is otherwise unreliable, or does not provide the features and benefits expected or required, it could lower the demand for our solutions and our products and services, result in negative publicity or loss of our reputation, and adversely affect our revenues and other operating results.

If our products contain software defects, it could harm our revenues and expose us to litigation.

The software products we offer are internally complex and, despite extensive testing and quality control, may contain errors or defects, especially when we first introduce them. We may need to issue corrective releases of our software products to fix any defects or errors. Any defects or errors could also cause damage to our reputation and result in loss of revenues, product returns or order cancellations, or lack of market acceptance of

our products. Accordingly, any defects or errors could have a material and adverse effect on our business, results of operations and financial condition. These risks are all particularly acute with regard to major new product releases, such as WebLogic Platform 8.1 which was introduced in July 2003, our WebLogic Communication Platform which was introduced in February 2005 and our BEA AquaLogic products which were introduced in June 2005.

Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. Although we have not experienced any product liability claims to date, sale and support of our products entails the risk of such claims, which could be substantial in light of our customers’ use of such products in mission-critical applications. If a claimant brings a product liability claim against us, it could have a material adverse effect on our business, results of operations and financial condition. Our products interoperate with many parts of complicated computer systems, such as mainframes, servers, personal computers, application software, databases, operating systems and data transformation software. Failure of any one of these parts could cause all or large parts of computer systems to fail. In such circumstances, it may be difficult to determine which part failed, and it is likely that customers will bring a lawsuit against several suppliers. Even if our software is not at fault, we could suffer material expense and material diversion of management time in defending any such lawsuits.

If we cannot successfully integrate our past and future acquisitions, our revenues may decline and expenses may increase.

From our inception in January 1995, we have made a substantial number of strategic acquisitions. In connection with acquisitions completed prior to April 30, 2005, we recorded approximately $402.4 million as intangible assets and goodwill of which approximately $333.3 million has been amortized or written off as of April 30, 2005. In the third quarter of fiscal 2002, we recorded asset impairment charges totaling $80.1 million against certain acquired intangible assets and goodwill. If future events cause additional impairment of any intangible assets acquired in our past or future acquisitions, we may have to record additional charges relating to such assets sooner than we expect which would cause our profits to decline. In addition, integration of acquired companies, divisions and products involves the assimilation of potentially conflicting operations and products (including the maintenance of effective internal controls for the combined company), which diverts the attention of our management team and may have a material adverse effect on our operating results in future quarters. It is possible that we may not achieve any of the intended financial or strategic benefits of these transactions. While we intend to make additional acquisitions in the future, there may not be suitable companies, divisions or products available for acquisition. Our acquisitions entail numerous risks, including the risk that we will not successfully assimilate the acquired operations and products, retain key employees of the acquired operations, or execute successfully the product development strategy driving the acquisition. There are also risks relating to the diversion of our management’s attention, and difficulties and uncertainties in our ability to maintain the key business relationships that we or the acquired entities have established. In addition, we may have product liability or intellectual property liability associated with the sale of the acquired company’s products. Acquisitions also expose us to the risk of claims by terminated employees, from shareholders of the acquired companies or other third parties related to the transaction. Finally, if we undertake future acquisitions, we may issue dilutive securities, assume or incur additional debt obligations, incur large one-time expenses, utilize substantial portions of our cash, and acquire intangible assets that would result in significant future amortization expense. Any of these events could have a material adverse effect on our business, operating results and financial condition.

On June 29, 2001, the FASB pronounced under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”) that purchased goodwill should not be amortized, but rather, should be periodically reviewed for impairment. Such impairment could be caused by internal factors as well as external factors beyond our control. The FASB has further determined that at the time goodwill is considered impaired, an amount equal to the impairment loss should be charged as an operating expense in the statement of operations. The timing of such an impairment (if any) of goodwill acquired in past and future

transactions is uncertain and difficult to predict. Our results of operations in periods following any such impairment could be materially adversely affected. We are required to determine whether goodwill and any assets acquired in past acquisitions have been impaired in accordance with FAS 142 and, if so, charge such impairment as an expense. In the quarter ended October 31, 2001, we took an asset impairment charge of $80.1 million related to past acquisitions. We have remaining net goodwill and net acquired intangible assets of approximately $69.1 million at April 30, 2005, so if we are required to take such additional impairment charges, the amounts could have a material adverse effect on our results of operations.

The seasonality of our sales typically significantly adversely affects our revenues in our first fiscal quarter.

Our first quarter revenues, particularly our license revenues, are typically lower than revenues in the immediately preceding fourth quarter. We believe this is because our commission plans and other sales incentives are structured for annual performance and contain bonus provisions based on annual quotas that typically are triggered in the later quarters in a year. In addition, most of our customers begin a new fiscal year on January 1 and it is common for capital expenditures to be lower in an organization’s first quarter than in its fourth quarter. We anticipate that the negative impact of seasonality on our first quarter will continue. Moreover, because of this seasonality, even if we have a very strong fourth quarter in a particular year, the initial quarters in the next year could nevertheless still be weak on a year-over-year comparative basis, as well as on a sequential basis. This risk remains even if the amount of our deferred revenue and backlog is substantial at the close of the immediately preceding fourth quarter. This seasonality may harm our revenues and other operating results in our first quarter and possibly subsequent quarters as well, particularly if it is worse than we expect.

If we fail to adequately protect our intellectual property rights, competitors may use our technology and trademarks, which could weaken our competitive position, reduce our revenues and increase our costs.

Our success depends upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. It is possible that other companies could successfully challenge the validity or scope of our patents and that our patents may not provide a competitive advantage to us. As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees, distributors and corporate partners and into license agreements with respect to our software, documentation and other proprietary information. Despite these precautions, third parties could copy or otherwise obtain and use our products or technology without authorization, or develop similar technology independently. In particular, we have, in the past, provided certain hardware OEMs with access to our source code, and any unauthorized publication or proliferation of our source code could materially adversely affect our business, operating results and financial condition. It is difficult for us to police unauthorized use of our products, and although we are unable to determine the extent to which piracy of our software products exists, software piracy is a persistent problem. Effective protection of intellectual property rights is unavailable or limited in certain foreign countries. The protection of our proprietary rights may not be adequate and our competitors could independently develop similar technology, duplicate our products, or design around patents and other intellectual property rights that we hold.

We have experienced substantial growth since our inception in 1995 that has placed a strain on our administrative and operational infrastructure. Overall, we have increased the number of our employees from 120 employees in three offices in the United States at January 31, 1996 to approximately 3,468 employees in 76 offices in 36 countries at April 30, 2005. Our ability to manage our staff and growth effectively requires us to continue to improve our operational, financial, disclosure and management controls, reporting systems and procedures, and information technology infrastructure, particularly in light of the enactment of the Sarbanes-Oxley Act of 2002 and related regulations. In this regard, we are continuing to update our management information systems to integrate financial and other reporting among our multiple domestic and foreign offices.

In addition, we may continue to increase our staff worldwide and continue to improve the financial reporting and controls for our global operations. We are also continuing to develop and roll out information technology initiatives. It is possible that we will not be able to successfully implement improvements to our management information, control systems, reporting systems and information technology infrastructure in an efficient or timely manner and that, during the course of this implementation, we could discover deficiencies in existing systems and controls, as well as past errors resulting there from. If we are unable to manage growth effectively, our business, results of operations and financial condition will be materially adversely affected.

We could incur substantial charges to our consolidated statement of operations if we were to commit to a plan to sell and take related actions with regard to the 40-acre parcel of land in San Jose, California that is recorded on our balance sheet.

We purchased a 40-acre parcel of land adjacent to our current corporate headquarters in San Jose (the “San Jose land”) to construct additional corporate offices and research and development facilities; however, we have suspended our construction initiatives. The San Jose land is treated as a held and used asset. If management were to commit to a plan to sell the San Jose land, the plan was put in motion and the sale of the San Jose land was probable, the San Jose land may then meet the criteria to be treated as a “held for sale” asset and, if the San Jose land’s fair market value at that time was less than the carrying value of $306.6 million, we would have to write-down the carrying value of the San Jose land, which could result in substantial charges to our consolidated statement of operations of up to the carrying value of $306.6 million. We will assess the San Jose land for impairment under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets (“FAS 144”), at least annually or whenever events or circumstances indicate that the value of the San Jose land may be permanently impaired. In accordance with FAS 144, if we determine that one or more impairment indicators are present, indicating the carrying amount may not be recoverable, the carrying amount of the asset would be compared to net future undiscounted cash flows that the asset, or the relevant asset grouping, is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to generate, the fair value would be compared to the carrying value of the asset. If the fair value is less than the carrying value, an impairment loss would be recognized. The impairment loss would be the excess of the carrying amount of the asset over its fair value. To date, no impairment losses on the land have been recorded under FAS 144, however there can be no assurance that we will not be required to record a substantial impairment charge related to the San Jose land of up to $306.6 million if events or circumstances change and we determine that the value of the San Jose land is impaired under FAS 144.

We have a high debt balance and large interest obligations, which constrict our liquidity and could result in substantial future expenses and substantial cash outflows.

At April 30, 2005, we had approximately $550 million of convertible notes outstanding and long term debt of $215.0 million. As a result of this indebtedness, we have substantial principal and interest payment obligations. The degree to which we are leveraged could significantly harm our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.

We will require substantial amounts of cash to fund scheduled payments of principal and interest on the convertible notes, the notes payable, and other indebtedness, future capital expenditures, payments on our operating leases and any increased working capital requirements. To the extent our stock price does not exceed $34.65 per share between December 2004 and December 2006, for a requisite number of trading days to permit us to effectively force the conversion of the notes, we will be required to pay $550 million to repay the convertible notes in December 2006. If we are unable to meet our cash requirements out of cash flow from operations, there can be no assurance that we will be able to obtain alternative financing. In the absence of such financing, our ability to respond to changing business and economic conditions, to make future acquisitions, to absorb adverse operating results or to fund capital expenditures or increased working capital requirements would

be significantly reduced. If we do not generate sufficient cash flow from operations to repay the convertible notes and the notes payable at maturity, we could attempt to refinance these debt obligations, however, no assurance can be given that such a refinancing would be available on terms acceptable to us, if at all. Any failure by us to satisfy our obligations with respect to these debt obligations at maturity (with respect to payments of principal) or prior thereto (with respect to payments of interest or required repurchases) would constitute a default.

We have adopted a preferred stock rights plan which has anti-takeover effects.

We have implemented a preferred stock rights plan. The plan has the anti-takeover effect of causing substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors. The existence of the plan could limit the price that certain investors might be willing to pay in the future for shares of our common stock and could discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable.

Our revenues originating outside the Americas (U.S., Canada, Mexico and Latin America) were 49.7 percent and 52.3 percent of total revenues for the three months ended April 30, 2005 and April 30, 2004, respectively. International revenues from each individual country outside of the United States were less than 10 percent of total revenues in the three months ended April 30, 2005, and April 30, 2004 with the exception of United Kingdom with $30.1 million or 10.7 percent of the total revenues in the three months ended April 30, 2005 and $36.7 million or 14.0 percent of the total revenues in the three months ended April 30, 2004. International sales were made mostly from our foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. Fluctuations in the Euro, British Pound and Yen would have the most impact on our future results of operations. These subsidiaries also incur most of their expenses in the local currency. Accordingly, foreign subsidiaries use the local currency as their functional currency.

Our international operations are subject to risks typical of an international business, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, export license restrictions, other regulations and restrictions, and foreign exchange volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.

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

We use foreign currency forward contracts to hedge the gains and losses generated by the remeasurement of certain assets and liabilities denominated in foreign currencies other than their functional currency. A forward foreign exchange contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. The foreign currency gains and losses due to exchange rate fluctuations are partially offset by gains and losses on the forward contracts. At April 30, 2005, our transaction exposures amounted to $179.5 million and were offset by foreign currency forward contracts with a net notional amount of $162.6 million. Based on exposures at April 30 2005, a 10 percent movement against our portfolio of transaction exposures and hedge contracts would result in a gain or loss of approximately $1.7 million. We do not use foreign currency contracts for speculative or trading purposes. All outstanding forward contracts are marked-to-market on a monthly basis with gains and losses included in interest and other, net. Net losses resulting from foreign currency transactions were approximately $1.2 million, $0.3 million for the first quarter of fiscal 2006 and 2005, respectively.

Our outstanding forward contracts as of April 30, 2005 are presented in the table below and are recorded on the balance sheet as part of accrued liabilities. All forward contracts amounts are representative of the expected payments to be made under these instruments. All of these forward contracts mature within 19 days or less as of April 30, 2005.

We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, interest-bearing demand deposit accounts with financial institutions, money market funds and highly liquid debt securities of corporations, municipalities and the U.S. Government. These investments are denominated in U.S. dollars. Cash balances in foreign currencies overseas are operating balances and are primarily invested in interest-bearing bank accounts and money market funds at the local operating banks.

We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (“FAS 115”). All of the cash equivalents, short-term investments and short-term and long-term restricted cash are treated as “available-for-sale” under FAS 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. However, we reduce our interest rate risk by investing our cash in instruments with remaining time to maturity of less than two years. As of April 30, 2005, the average holding period until maturity of our cash equivalents, short and long-term restricted cash and short-term investments was approximately 158 days. This reflects the auction rate securities (ARS) based on their reset feature. Rates on these securities typically reset every 7, 28 or 35 days.

We are exposed to changes in short-term interest rates through the notes payable of $215.0 million, which bear a variable short-term interest rate based on the London Interbank Offering Rate (“LIBOR”). The effective annual interest rate on this debt was approximately 4.3 percent as of April 30, 2005. The annual interest expense on this debt will fluctuate from time to time depending on changes in LIBOR and changes in our financial position as specified in the loan agreement. A 1.0 percent (100 basis point) increase in LIBOR will generate an increase in annual interest expense of approximately $2.2 million. We are also exposed to changes in short-term interest rates through our invested balances of cash equivalents, restricted cash and short-term investments, the yields on which will fluctuate with changes in short-term interest rates. A 1.0 percent (100 basis point) decrease in short-term interest rates would result in an annual reduction of interest income of approximately $11.5 million. The annual interest rate on our $550 million convertible notes is fixed at 4.0 percent through the maturity date in December 2006.

As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures and our internal controls and procedures for financial reporting. This controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Rules adopted by the Securities and Exchange Commission (“SEC”) require that in this section of the Quarterly Report on Form 10-Q, we present the conclusions of the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) about the effectiveness of our disclosure controls and internal controls based on and as of the date of the controls evaluation.

Included as exhibits to this Quarterly Report on Form 10-Q, there are “Certifications” of the Chief Executive Officer and the Chief Financial Officer. The first form of Certification is required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Quarterly Report contains the information concerning the controls evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s

rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

Our management, including our Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

The evaluation of our disclosure controls and our internal controls by our Chief Executive Officer and our Chief Financial Officer included a review of the controls’ objectives and design, the controls’ implementation by us and the effect of the controls on the information generated for use in this Quarterly Report on Form 10-Q. In accordance with SEC requirements, our Chief Executive Officer and our Chief Financial Officer note that, since the date of the controls evaluation to the date of this Quarterly Report, there have been no significant changes in our internal controls or in other factors that could significantly affect our internal controls.

Based upon the controls evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls are effective to ensure that material information relating to the company is made known to management, including our Chief Executive Officer and our Chief Financial Officer, particularly during the period when our periodic reports are being prepared, and that our internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.

In 2003, Software AG and its domestic subsidiary filed a complaint against us in the United States District Court for the District of Delaware alleging that certain of our products, including WebLogic Server, WebLogic Integration and WebLogic Workshop infringe U.S. Patent No. 5,329,619 held by Software AG and its domestic subsidiary (the “Software AG Action”). Software AG sought monetary damages and an injunction against infringement. In 2003, we counterclaimed against Software AG requesting a declaratory judgment of noninfringement, invalidity and inequitable conduct by Software AG.

On November 29, 2004, we filed a complaint against Software AG and Software AG, Inc. in the United States District Court for the Eastern District of Virginia alleging that certain products of Software AG and Software AG, Inc. infringe US. Patent Nos. 6,115,744 and 5,619,710 held by us (the “BEA Action”). Software AG has counterclaimed, seeking a declaratory judgment that our patents are invalid and not infringed.

The following table summarizes our stock repurchase activity including broker commissions for the three months ended April 30, 2005

Pursuant to the requirement 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.

BEA SYSTEMS, INC.

(Registrant)

/s/ MARK P. DENTINGER

Mark P. Dentinger

Chief Financial Officer and Principal Accounting Officer


		Page No.
PART I. FINANCIAL INFORMATION

ITEM 1.	Condensed Consolidated Financial Statements (Unaudited):

	Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended April 30, 2005 and 2004	3

	Condensed Consolidated Balance Sheets as of April 30, 2005 and January 31, 2005	4

	Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2005 and 2004	5

	Notes to Condensed Consolidated Financial Statements	6

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

ITEM 3.	Quantitative and Qualitative Disclosure about Market Risks	45

ITEM 4.	Controls and Procedures	47

PART II. OTHER INFORMATION

ITEM 1.	Legal Proceedings	49

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49

ITEM 5.	Other Information	49

ITEM 6.	Exhibits	50

Signatures		51


	Three months ended April 30,
	2005			2004
Revenues:
License fees	$	116,055		$	120,152
Services		165,668			142,483

Total revenues		281,723			262,635

Cost of revenues:
Cost of license fees		7,213			9,699
Cost of services		55,007			48,981

Total cost of revenues		62,220			58,680

Gross profit		219,503			203,955
Operating expenses:
Sales and marketing		104,061			100,611
Research and development		40,486			34,942
General and administrative		26,468			21,615
Facilities consolidation					7,665

Total operating expenses		171,015			164,833

Income from operations		48,488			39,122
Interest and other, net:
Interest expense		(7,583	)		(7,285	)
Interest income		8,995			4,673
Other, net		(1,189	)		(319	)

Total interest and other, net		223			(2,931	)

Income before provision for income taxes		48,711			36,191
Provision for income taxes		14,613			10,857

Net income		34,098			25,334
Other comprehensive income:
Foreign currency translation adjustments		(681	)		301
Unrealized gain (loss) on available-for-sale investments, net of income taxes		(34	)		(1,576	)

Comprehensive income	$	33,383		$	24,059

Net income per share:
Basic	$	0.09		$	0.06

Diluted	$	0.08		$	0.06

Number of shares used in per share calculations:
Basic		395,180			409,660

Diluted		402,570			425,840


	April 30, 2005 (unaudited)			January 31, 2005 *(audited)**
ASSETS
Current assets:
Cash and cash equivalents	$	808,148		$	777,754
Restricted cash		1,633			1,648
Short-term investments		818,097			830,063
Accounts receivable, net		220,188			258,655
Other current assets		46,406			44,077

Total current assets		1,894,472			1,912,197
Property and equipment, net		348,285			347,571
Goodwill, net		62,410			62,410
Acquired intangible assets, net		6,688			8,895
Long-term restricted cash		3,130			4,130
Other long-term assets		13,658			13,191

Total assets	$	2,328,643		$	2,348,394

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,641		$	21,165
Accrued facilities consolidation charges		3,076			3,176
Accrued payroll and related liabilities		59,343			64,671
Accrued income taxes		54,408			52,013
Other accrued liabilities		77,359			78,397
Deferred revenues		307,498			312,310
Current portion of notes payable		426			459

Total current liabilities		526,751			532,191
Deferred tax liabilities		2,452			2,842
Notes payable and other long-term obligations		229,356			230,194
Convertible subordinated notes		550,000			550,000
Commitments and contingencies
Stockholders’ equity:
Common stock		392			398
Additional paid-in capital		1,216,773			1,201,726
Treasury stock, at cost		(344,543	)		(284,551	)
Retained earnings		146,153			112,055
Deferred compensation		(10,388	)		(8,874	)
Accumulated other comprehensive income		11,697			12,413

Total stockholders’ equity		1,020,084			1,033,167

Total liabilities and stockholders’ equity	$	2,328,643		$	2,348,394


	Three months ended April 30,
	2005			2004
Operating activities:
Net income	$	34,098		$	25,334
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		6,339			6,739
Amortization of deferred compensation		2,266			1,571
Amortization and impairment charges related to acquired intangible assets		2,207			3,228
Tax benefit from exercise of stock options		7,809			6,300
Facilities consolidation		—			6,859
Changes in operating assets and liabilities		21,010			28,742
Other		3,171			3,352

Net cash provided by operating activities		76,900			82,125

Investing activities:
Purchases of property and equipment		(6,750	)		(2,690	)
Payments for acquisitions, net of cash acquired		—			(200	)
Purchases of available-for-sale short-term investments		(263,230	)		(348,884	)
Proceeds from maturities of available-for-sale short-term investments		45,147			49,793
Proceeds from sales of available-for-sale short-term investments		227,464			226,002
Other		1,319			(47	)

Net cash provided by (used in) investing activities		3,950			(76,026	)

Financing activities:
Net proceeds received for employee stock purchases		10,748			19,389
Purchases of treasury stock		(59,999	)		—

Net cash (used in) provided by financing activities		(49,251	)		19,389

Net increase in cash and cash equivalents		31,599			25,488
Effect of exchange rate changes on cash and cash equivalents		(1,205	)		(1,277	)
Cash and cash equivalents at beginning of period		777,754			683,729

Cash and cash equivalents at end of period	$	808,148		$	707,940


	Employee stock options		Employee stock purchase plan
	Three months ended April 30		Three months ended April 30
	2005	2004	2005	2004
Expected life (in years)	5	4.0	.05 to 2.0	.05 to 2.0
Risk-free interest rate	4.35%	4.08%	2.97-3.63%	1.22-2.18%
Expected volatility	43%	63%	37%	54%


* Note:		The condensed consolidated balance sheet at January 31, 2005 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.


	Balances at
	April 30, 2005		January 31, 2005
License fees	$	11,923	$	9,370
Services		295,575		302,940

Total deferred revenues	$	307,498	$	312,310


	April 30, 2005			January 31, 2005
Land	$	306,623		$	306,623
Computer hardware and software		91,238			86,908
Furniture and equipment		35,920			34,953
Leasehold improvements		44,310			42,960
Furniture and equipment under capital leases		3,164			3,164

		481,255			474,608
Accumulated depreciation and amortization		(132,970	)		(127,037	)

	$	348,285		$	347,571


	April 30 2005			January 31, 2005
Gross carrying amount of goodwill	$	195,758		$	195,758
Accumulated amortization of goodwill		(133,348	)		(133,348	)

Net carrying amount of goodwill	$	62,410		$	62,410


	April 30, 2005
	Gross carrying amount		Accumulated amortization			Net carrying amount
Purchased technology	$	124,711	$	(120,545	)	$	4,166
Non-compete agreements		29,346		(27,104	)		2,242
Patents and trademarks		13,275		(13,275	)		—
Other intangible assets (distribution rights, purchased software, customer base)		33,809		(33,529	)		280

Total	$	201,141	$	(194,453	)	$	6,688


	April 30, 2005		April 30, 2004
Purchased technology	$	1,627	$	3,028
Non-compete agreements		475		200
Patents and trademarks		—		—
Other intangible assets (distribution rights, purchased software, customer base)		105		—

Total	$	2,207	$	3,228


	Future amortization
Nine months ending January 31 2006	$	3,503
Fiscal year ending January 31, 2007		3,185

Total	$	6,688


	Facilities consolidation
Accrued at January 31, 2004		9,847
Charges accrued during fiscal 2005 included in operating expenses		8,174
Write-off of unamortized leasehold improvements during fiscal 2005		(760	)
Cash payments during fiscal 2005		(5,029	)

Accrued at January 31, 2005	$	12,232
Cash payments during the three months ended April 30, 2005		(870	)

Accrued at April 30, 2005	$	11,362


	April 30, 2005		January 31, 2005
Current portion of notes payable and other obligations	$	426	$	459

Other long-term obligations	$	12,944	$	13,696
Capital lease		1,412		1,498
Land lease		—		—
Credit facility		215,000		215,000

Notes payable and other long-term obligations	$	229,356	$	230,194
Convertible subordinated notes	$	550,000	$	550,000


	Capital leases			Other obligations
Three months ended April 30,
2006	$	158		$	842
2007		211			3,366
2008		211			2,486
2009		211			2,223
2010		211			1,714
Thereafter		946			2,568

Total minimum lease payments and total other obligations		1,948			13,199

Amounts representing interest on capital lease		(365	)
Present value of minimum lease payments		1,583

Less: capital lease obligation, current (reflected in other obligations)		(171	)

Capital lease obligation, long term (reflected in other long-term obligations)	$	1,412


	Three months ended April 30, 2005		Percentage of total revenues		Three months ended April 30, 2004		Percentage of total revenues
Americas	$	141,724	50.3	%	$	125,377	47.7	%
European, Middle East and Africa region (“EMEA”)		98,204	34.9	%		98,916	37.7	%
Asia/Pacific region (“APAC”)		41,795	14.8	%		38,342	14.6	%

Total revenues	$	281,723	100.0	%	$	262,635	100.0	%


	Three months ended April 30,
	2005		2004
Revenues:
License fees	41.2	%	45.7	%
Services	58.8	%	54.3	%

Total revenues	100.0	%	100.0	%
Cost of revenues:
Cost of license fees (1)	6.2	%	8.1	%
Cost of services (1)	33.2	%	34.4	%

Total cost of revenues	22.1	%	22.3	%

Gross margin	77.9	%	77.7	%
Operating expenses:
Sales and marketing	36.9	%	38.4	%
Research and development	14.4	%	13.3	%
General and administrative	9.4	%	8.2	%
Facilities consolidation	—		2.9	%

Total operating expenses	60.7	%	62.8	%

Income from operations	17.2	%	14.9	%
Interest and other, net	0.1	%	(1.1	)%

Income before provision for income taxes	17.3	%	13.8	%
Provision for income taxes	5.2	%	4.1	%

Net income	12.1	%	9.7	%


	Three months ended April 30,				Percentage change
	2005		2004		Percentage change
Total revenues	$	281,723	$	262,635	7.3	%


	Three months ended April 30,				Percentage change
	2005		2004		Percentage change
Total license fees	$	116,055	$	120,152	(3.4	%)


	Three months ended April 30				Percentage change
	2005		2004		Percentage change
Sales and marketing expenses	$	104,061	$	100,611	3.4	%


	Facilities consolidation
Accrued at January 31, 2004	$	9,847
Charges accrued during fiscal 2005 included in operating expenses		8,174
Write-off of unamortized leasehold improvements during fiscal 2005		(760	)
Cash payments during fiscal 2005		(5,029	)

Accrued at January 31, 2005	$	12,232
Cash payments during the three months ended April 30, 2005		(870	)

Accrued at April 30, 2005	$	11,362


Minimum contractual obligations	Total payments due		Remainder of fiscal 2006		Fiscal 2007 and 2008		Fiscal 2009 and 2010		Fiscal 2011 and thereafter
Convertible notes (principal only)	$	550,000	$	—	$	550,000	$	—	$	—
Interest related to convertible notes		35,700		16,450		19,250		—		—
Other obligations		1,499		291		1,102		62		44
Notes payable		215,000		—		—		215,000		—
Operating leases		159,500		34,445		63,554		32,556		28,945
Capital lease		1,750		142		378		378		852

Total contractual obligations	$	963,449	$	51,328	$	634,284	$	247,996	$	29,841


	Local currency contract amount		Contract amount		Fair market value at April 30, 2005 (USD)
	(in thousands)		(in thousands)		(in thousands)
Contract to Buy US $
Australian dollars	9,200	AUD	7,105	USD	(32	)
Euros	89,140	EUR	115,812	USD	(408	)
Japanese yen	2,351,000	JPY	22,312	USD	(360	)
Korean won	18,280,000	KRW	17,796	USD	(20	)
New Zealand dollars	—	NZD	237	USD	(237	)
Singapore dollars	14,700	SGD	8,966	USD	(10	)

					(1,067	)

Contract to Sell US $
Brazilian real	9,100	BRL	3,444	USD	44
Canadian dollar	7,000	CAD	5,716	USD	(70	)
British pounds	6,000	GBP	11,363	USD	(66	)
Danish kroner	3,700	DKK	646	USD	2
Israeli shekel	22,900	ILS	5,222	USD	(1	)
Norwegian kroner	5,000	NOK	794	USD	(9	)
Swedish krona	9,500	SEK	1,453	USD	(93	)
Swiss franc	3,600	CHK	3,054	USD	(26	)

					(219	)

Contract to Buy Euro €
British pounds	9,000	GBP	12,991	EUR	(223	)
Israeli shekel	23,600	ILS	4,121	EUR	(76	)

					(299	)

Contract to Sell Euro €
Danish kroner	3,600	DKK	484	EUR	8
Swedish krona	14,500	SEK	1,582	EUR	38
Swiss franc	100	CHF	70	EUR	(5	)

					41

Contract to Sell AUD $
New Zealand dollars		NZD	42	AUD	33
Singapore dollars		SGD	67	AUD	52

					85

Total					(1,459	)


Period	(a) Total number of shares purchased (in thousands)	(b) Average price paid per share		(c) Total number of shares purchased as part of publicly announced plans or programs (in thousands)	(d) Maximum Dollar Value of Shares that May Yet Be Purchased Under the Share Repurchase Program¹
Month #1 February 1-28, 2005	—		—	—	$	115.4 million
Month #2 March 1-31, 2005	5,832 shares	$	8.23 per share	5,832 shares	$	267.4 million
Month #3 April 1-30, 2005	1,525 shares	$	7.89 per share	1,525 shares	$	255.4 million

Total	7,357 shares		—	7,357 shares	$	255.4 million


Exhibit number		Description

3.1		Form of Registrant’s Amended and Restated Certificate of Incorporation (1).

3.2		Registrant’s Amended and Restated Bylaws (2).

10.1		Restricted Stock Purchase Award Agreement between Registrant and Mark P. Dentinger dated as of March 2, 2005*

10.2		Performance Unit Award Agreement between Registrant and Thomas M. Ashburn dated as of April 14, 2005*

10.3		Performance Unit Award Agreement between Registrant and Mark T. Carges dated as of April 14, 2005*

10.4		Performance Unit Award Agreement between Registrant and Alfred S. Chuang dated as of April 14, 2005*

10.5		Performance Unit Award Agreement between Registrant and Mark P. Dentinger dated as of April 14, 2005*

10.6		Performance Unit Award Agreement between Registrant and William M. Klein dated as of April 14, 2005*

10.7		Performance Unit Award Agreement between Registrant and Wai M. Wong dated as of April 14, 2005*

10.8		Performance Unit Award Agreement between Registrant and Jeanne K. Wu dated as of April 14, 2005*

31.1		Certification of Alfred S. Chuang, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Mark P. Dentinger, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Alfred S. Chuang, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Mark P. Dentinger, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.