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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q



|[X] | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2002 or
|--- | ---------------------------------------------------------------------------------------------------------------------------------------



|[   ] | Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from  to .
|----- | -----------------------------------------------------------------------------------------------------------------------------

Commission File Number: 0-20710

PEOPLESOFT, INC.

(Exact name of registrant as specified in its charter)


|                                                                              |  |                                                
|----------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
Incorporation or organization)       |  | 68-0137069
(I.R.S. Employer Identification No.)
|                                                                              |  |                                                
|4460 Hacienda Drive, Pleasanton, CA
(Address of principal executive officers) |  | 94588
(Zip Code)                               

Registrants telephone number, including area code: (925) 694-3000

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 the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date:

|                              |  |                              
|----------------------------- |  | -----------------------------
|Class                         |  | Outstanding at August 9, 2002
|                              |  |                              
|Common Stock, par value $0.01 |  | 312,183,920                  



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TABLE OF CONTENTS

|                                                                                               |                                                                                                                    |  |      |   | 
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------ |  | ---- | - | 
|                                                                                               |                                                                                                                    |  | PAGE
|                                                                                               |                                                                                                                    |  |     
|                                                                                              
|PART I    FINANCIAL INFORMATION                                                               
|                                                                                              
|ITEM 1  Condensed Consolidated Financial Statements                                           |                                                                                                                    |  |      |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Condensed Consolidated Balance Sheets as of
June 30, 2002 and December 31, 2001                                    |  |      | 2 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2002 and June 30, 2001 |  |      | 3 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2002 and June 30, 2001           |  |      | 4 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Notes to Condensed Consolidated Financial Statements                                                               |  |      | 5 | 
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|ITEM 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations |                                                                                                                    |  | 13   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|ITEM 3  Financial Risk Management                                                             |                                                                                                                    |  | 22   |  
|                                                                                              
|PART II    OTHER INFORMATION                                                                  
|                                                                                              
|ITEM 1  Legal Proceedings                                                                     |                                                                                                                    |  | 33   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|ITEM 2  Changes in Securities and Use of Proceeds                                             |                                                                                                                    |  | 33   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|ITEM 3  Defaults upon Senior Securities                                                       |                                                                                                                    |  | 33   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|ITEM 4  Submission of Matters to a Vote of Security Holders                                   |                                                                                                                    |  | 33   |  
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
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|                                                                                              
|                                                                                              
|ITEM 5  Other Information                                                                     |                                                                                                                    |  | 33   |  
|                                                                                              
|                                                                                              
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|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|ITEM 6  Exhibits and Reports on Form 8-K                                                      |                                                                                                                    |  | 33   |  
|                                                                                              
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|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|SIGNATURES                                                                                     |                                                                                                                    |  | 35   |  



1



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##### 



PART I  CONDENSED CONSOLIDATED
FINANCIAL INFORMATION
ITEM 1  FINANCIAL STATEMENTS

PEOPLESOFT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)

|                                          |                                           |                                            |         |               |           |                   |         |           |           | 
|----------------------------------------- | ----------------------------------------- | ------------------------------------------ | ------- | ------------- | --------- | ----------------- | ------- | --------- | --------- | 
|                                         
|                                          |                                           |                                            |         | June 30, 2002 |           | December 31, 2001
|                                         
|Assets:                                   |                                           |                                            |         |               |           |                   |         |          
|Current assets:                           |                                           |                                            |         |               |           |                   |         |          
|                                          | Cash and cash equivalents                 |                                            | $       | 418,276       |           |                   | $       | 433,700   |          
|                                          | Short-term investments                    |                                            |         | 1,264,360     |           |                   |         | 1,199,046 |          
|                                          | Accounts receivable, net                  |                                            |         | 319,060       |           |                   |         | 375,437   |          
|                                          | Income taxes receivable                   |                                            |         | 7,121         |           |                   |         | 7,288     |          
|                                          | Deferred tax assets                       |                                            |         | 58,665        |           |                   |         | 58,088    |          
|                                          | Other current assets                      |                                            |         | 55,153        |           |                   |         | 59,309    |          
|                                          |                                           |                                           
|                                          |                                           | Total current assets                       |         |               | 2,122,635 |                   |         |           | 2,132,868 | 
|Property and equipment, net               |                                           |                                            | 225,659 |               |           |                   | 214,162 |          
|Investments                               |                                           |                                            | 126,275 |               |           |                   | 40,587  |          
|Deferred tax assets                       |                                           |                                            | 150,126 |               |           |                   | 94,932  |          
|Capitalized software, net                 |                                           |                                            | 47,468  |               |           |                   | 16,213  |          
|Goodwill                                  |                                           |                                            | 53,132  |               |           |                   | 32,203  |          
|Other assets                              |                                           |                                            | 22,941  |               |           |                   | 17,040  |          
|                                          |                                           |                                           
|                                          |                                           | Total assets                               |         | $             | 2,748,236 |                   |         | $         | 2,548,005 | 
|                                          |                                           |                                           
|Liabilities and Stockholders Equity:     |                                           |                                            |         |               |           |                   |         |          
|Current liabilities:                      |                                           |                                            |         |               |           |                   |         |          
|                                          | Accounts payable                          |                                            | $       | 29,630        |           |                   | $       | 37,115    |          
|                                          | Accrued liabilities                       |                                            |         | 141,424       |           |                   |         | 144,646   |          
|                                          | Accrued compensation and related expenses |                                            |         | 160,834       |           |                   |         | 184,237   |          
|                                          | Income taxes payable                      |                                            |         | 17,416        |           |                   |         | 6,236     |          
|                                          | Convertible debt                          |                                            |         | 57,000        |           |                   |         | 57,000    |          
|                                          | Short-term deferred revenues              |                                            |         | 428,842       |           |                   |         | 409,316   |          
|                                          |                                           |                                           
|                                          |                                           | Total current liabilities                  |         |               | 835,146   |                   |         |           | 838,550   | 
|Long-term deferred revenues               |                                           |                                            | 96,541  |               |           |                   | 98,025  |          
|Other liabilities                         |                                           |                                            | 22,236  |               |           |                   | 19,490  |          
|Commitments and contingencies (see notes) |                                           |                                            |         |               |           |                   |         |          
|Stockholders equity:                     |                                           |                                            |         |               |           |                   |         |          
|                                          | Common stock                              |                                            |         | 3,121         |           |                   |         | 3,068     |          
|                                          | Additional paid-in capital                |                                            |         | 1,332,143     |           |                   |         | 1,226,155 |          
|                                          | Retained earnings                         |                                            |         | 497,778       |           |                   |         | 417,214   |          
|                                          | Treasury stock                            |                                            |         | (35,543       | )         |                   |         | (35,414   | )        
|                                          | Accumulated other comprehensive loss      |                                            |         | (3,186        | )         |                   |         | (19,083   | )        
|                                          |                                           |                                           
|                                          |                                           | Total stockholders equity                 |         |               | 1,794,313 |                   |         |           | 1,591,940 | 
|                                          |                                           |                                           
|                                          |                                           | Total liabilities and stockholders equity |         | $             | 2,748,236 |                   |         | $         | 2,548,005 | 
|                                          |                                           |                                           
|                                         

See accompanying notes to unaudited condensed consolidated financial statements.



2



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PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

|                                                    |                                              |                          |         |                    |         |                  |         |         |         |      |         |         |         |   |         |         |           | 
|--------------------------------------------------- | -------------------------------------------- | ------------------------ | ------- | ------------------ | ------- | ---------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | --------- | 
|                                                   
|                                                    |                                              |                          |         | Three Months Ended |         | Six Months Ended
|                                                    |                                              |                          |         | June 30,           |         | June 30,        
|                                                    |                                              |                          |         | 2002               |         | 2001             |         | 2002    |         | 2001
|                                                   
|Revenues:                                           |                                              |                          |         |                    |         |                  |         |         |         |      |         |         |         |   |         |        
|                                                    | License fees                                 |                          | $       | 131,929            |         |                  | $       | 166,305 |         |      | $       | 265,219 |         |   | $       | 319,583 |          
|                                                    | Services                                     |                          |         | 350,283            |         |                  |         | 349,084 |         |      |         | 692,730 |         |   |         | 679,240 |          
|                                                    | Development and other services               |                          |         |                   |         |                  |         | 29,151  |         |      |         | 7,530   |         |   |         | 59,872  |          
|                                                    |                                              |                         
|                                                    |                                              | Total revenues           |         |                    | 482,212 |                  |         |         | 544,540 |      |         |         | 965,479 |   |         |         | 1,058,695 | 
|Costs and expenses:                                 |                                              |                          |         |                    |         |                  |         |         |         |      |         |         |         |   |         |        
|                                                    | Cost of license fees                         |                          |         | 10,182             |         |                  |         | 18,233  |         |      |         | 21,619  |         |   |         | 34,501  |          
|                                                    | Cost of services                             |                          |         | 171,159            |         |                  |         | 195,952 |         |      |         | 335,689 |         |   |         | 380,711 |          
|                                                    | Cost of development and other services       |                          |         |                   |         |                  |         | 26,466  |         |      |         | 6,755   |         |   |         | 54,360  |          
|                                                    | Sales and marketing expense                  |                          |         | 126,162            |         |                  |         | 131,436 |         |      |         | 250,732 |         |   |         | 257,620 |          
|                                                    | Product development expense                  |                          |         | 87,547             |         |                  |         | 73,833  |         |      |         | 169,880 |         |   |         | 152,873 |          
|                                                    | General and administrative expense           |                          |         | 27,396             |         |                  |         | 41,665  |         |      |         | 57,642  |         |   |         | 75,544  |          
|                                                    | Restructuring, acquisition and other charges |                          |         | 8,679              |         |                  |         | (738    | )       |      |         | 11,479  |         |   |         | (738    | )        
|                                                    |                                              |                         
|                                                    |                                              | Total costs and expenses |         |                    | 431,125 |                  |         |         | 486,847 |      |         |         | 853,796 |   |         |         | 954,871   | 
|                                                    |                                              |                         
|Operating income                                    |                                              |                          | 51,087  |                    |         |                  | 57,693  |         |         |      | 111,683 |         |         |   | 103,824 |        
|Other income, net                                   |                                              |                          | 8,478   |                    |         |                  | 13,139  |         |         |      | 15,717  |         |         |   | 22,059  |        
|                                                    |                                              |                         
|Income before provision for income taxes            |                                              |                          | 59,565  |                    |         |                  | 70,832  |         |         |      | 127,400 |         |         |   | 125,883 |        
|Provision for income taxes                          |                                              |                          | 23,545  |                    |         |                  | 23,451  |         |         |      | 46,836  |         |         |   | 42,444  |        
|                                                    |                                              |                         
|Net income                                          |                                              | $                        | 36,020  |                    |         | $                | 47,381  |         |         | $    | 80,564  |         |         | $ | 83,439  |        
|                                                    |                                              |                         
|                                                   
|Basic income per share                              |                                              | $                        | 0.12    |                    |         | $                | 0.16    |         |         | $    | 0.26    |         |         | $ | 0.28    |        
|Shares used in basic income per share computation   |                                              |                          | 310,617 |                    |         |                  | 296,104 |         |         |      | 309,276 |         |         |   | 293,344 |        
|                                                   
|Diluted income per share                            |                                              | $                        | 0.11    |                    |         | $                | 0.15    |         |         | $    | 0.25    |         |         | $ | 0.27    |        
|Shares used in diluted income per share computation |                                              |                          | 318,535 |                    |         |                  | 318,601 |         |         |      | 322,590 |         |         |   | 314,518 |        
|                                                   

See accompanying notes to unaudited condensed consolidated financial statements.



3



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PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                                                  |                            |                                                                              |                                                     |        |                           |         |            |        |          |         |  
|--------------------------------------------------------------------------------- | -------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------------- | ------- | ---------- | ------ | -------- | ------- | -
|                                                                                 
|                                                                                  |                            |                                                                              |                                                     |        | Six Months Ended June 30,
|                                                                                  |                            |                                                                              |                                                     |        | 2002                      |         | 2001      
|                                                                                 
|Operating activities:                                                             |                            |                                                                              |                                                     |        |                           |         |            |       
|Net income                                                                        |                            | $                                                                            | 80,564                                              |        |                           | $       | 83,439     |       
|Adjustments to reconcile net income to net cash
provided by operating activities: |                            |                                                                              |                                                     |        |                           |         |            |       
|                                                                                  |                            | Depreciation and amortization                                                |                                                     |        | 46,335                    |         |            |        | 43,208   |        
|                                                                                  |                            | Provision for doubtful accounts                                              |                                                     |        | 6,140                     |         |            |        | 14,321   |        
|                                                                                  |                            | Tax benefits from exercise of stock options                                  |                                                     |        | 22,496                    |         |            |        | 30,842   |        
|                                                                                  |                            | Benefit from deferred income taxes                                           |                                                     |        | (4,268                    | )       |            |        | (3,601   | )      
|                                                                                  |                            | Gain on sales of investments and disposition of property and
equipment, net  |                                                     |        | (2,881                    | )       |            |        | (2,955   | )      
|                                                                                  |                            | In-process research and development, acquisition and other non-cash charges  |                                                     |        | 11,479                    |         |            |        | (738     | )      
|                                                                                  |                            | Non-cash stock compensation                                                  |                                                     |        | 3,752                     |         |            |        | 1,423    |        
|                                                                                  |                            | Changes in operating assets and liabilities, net of effects of acquisitions: |                                                     |        |                           |         |            |        |          |        
|                                                                                  |                            |                                                                              | Accounts receivable                                 |        |                           | 54,293  |            |        |          | 25,971  |  
|                                                                                  |                            |                                                                              | Accounts payable and accrued liabilities            |        |                           | (10,963 | )          |        |          | 23,077  |  
|                                                                                  |                            |                                                                              | Accrued compensation and related expenses           |        |                           | (22,323 | )          |        |          | 2,071   |  
|                                                                                  |                            |                                                                              | Income taxes receivable, net                        |        |                           | 11,176  |            |        |          | 13,594  |  
|                                                                                  |                            |                                                                              | Deferred revenues                                   |        |                           | 12,755  |            |        |          | (3,342  | )
|                                                                                  |                            |                                                                              | Other current and noncurrent assets and liabilities |        |                           | 5,832   |            |        |          | (18,171 | )
|                                                                                  |                            |                                                                             
|                                                                                  |                            | Net cash provided by operating activities                                    |                                                     |        | 214,387                   |         |            |        | 209,139  |        
|Investing activities:                                                             |                            |                                                                              |                                                     |        |                           |         |            |       
|Purchase of investments                                                           |                            |                                                                              | (4,733,065                                          | )      |                           |         | (3,724,809 | )     
|Proceeds from maturities and sales of investments                                 |                            |                                                                              | 4,581,692                                           |        |                           |         | 3,103,281  |       
|Purchase of property and equipment                                                |                            |                                                                              | (50,859                                             | )      |                           |         | (40,976    | )     
|Acquisitions, net of cash acquired                                                |                            |                                                                              | (117,758                                            | )      |                           |         | (18,038    | )     
|                                                                                  |                            |                                                                             
|                                                                                  |                            | Net cash used in investing activities                                        |                                                     |        | (319,990                  | )       |            |        | (680,542 | )      
|Financing activities:                                                             |                            |                                                                              |                                                     |        |                           |         |            |       
|Proceeds from sale of common stock and exercise of stock options                  |                            |                                                                              | 78,113                                              |        |                           |         | 171,612    |       
|Repurchases of convertible debt, net                                              |                            |                                                                              |                                                    |        |                           |         | (10,542    | )     
|                                                                                  |                            |                                                                             
|                                                                                  |                            | Net cash provided by financing activities                                    |                                                     |        | 78,113                    |         |            |        | 161,070  |        
|Effect of foreign exchange rate changes on cash and cash equivalents              |                            |                                                                              | 12,066                                              |        |                           |         | (4,915     | )     
|                                                                                  |                            |                                                                             
|Net decrease in cash and cash equivalents                                         |                            |                                                                              | (15,424                                             | )      |                           |         | (315,248   | )     
|Cash and cash equivalents at beginning of period                                  |                            |                                                                              | 433,700                                             |        |                           |         | 646,605    |       
|                                                                                  |                            |                                                                             
|Cash and cash equivalents at end of period                                        |                            | $                                                                            | 418,276                                             |        |                           | $       | 331,357    |       
|                                                                                  |                            |                                                                             
|                                                                                 
|Supplemental disclosures:                                                         |                            |                                                                              |                                                     |        |                           |         |            |       
|                                                                                  | Cash paid for interest     |                                                                              | $                                                   | 1,622  |                           |         | $          | 1,734  |         
|                                                                                  | Cash paid for income taxes |                                                                              | $                                                   | 16,548 |                           |         | $          | 10,725 |         
|                                                                                 

See accompanying notes to unaudited condensed consolidated financial statements.



4



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PEOPLESOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

The information for the three and six months ended June 30, 2002 and June
30, 2001, is unaudited, but includes all adjustments that the Companys
management believes to be necessary for the fair presentation of the financial
position, results of operations, and changes in cash flows for the periods
presented. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (U.S.
GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reported periods. Despite managements best effort to make these good faith
estimates and assumptions, actual results may differ. Certain prior period
amounts have been reclassified to conform to the current period presentation.

The accompanying interim condensed consolidated financial statements
should be read in conjunction with the financial statements and related notes
included in the Companys Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2001. Certain information and footnote disclosures
normally included in the Company's annual financial statements prepared in accordance
with U.S. GAAP have been condensed or omitted pursuant to the Securities and
Exchange Commission rules and regulations. Interim results of operations for
the three and six months ended June 30, 2002 are not necessarily indicative of
operating results or performance levels that can be expected for the full
fiscal year.

2. Per Share Data

Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period. Diluted income
per share is computed by dividing net income by the sum of weighted average
number of common shares outstanding and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of the shares
issuable upon the exercise of stock options, convertible subordinated notes and
from withholdings associated with our employee stock purchase plan, using the
treasury stock method.

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

|                         |                                             |                                                                                 |      |        |                    |   |                  |        |         |   |      |        |         |   |      |        |         |  | 
|------------------------ | ------------------------------------------- | ------------------------------------------------------------------------------- | ---- | ------ | ------------------ | - | ---------------- | ------ | ------- | - | ---- | ------ | ------- | - | ---- | ------ | ------- |  | 
|                        
|                         |                                             |                                                                                 |      |        | Three Months Ended |   | Six Months Ended
|                         |                                             |                                                                                 |      |        | June 30,           |   | June 30,        
|                         |                                             |                                                                                 |      |        | 2002               |   | 2001             |        | 2002    |   | 2001
|                        
|Numerator:               |                                             |                                                                                 |      |        |                    |   |                  |        |         |   |      |        |         |   |      |       
|                         | Net income                                  |                                                                                 | $    | 36,020 |                    |   | $                | 47,381 |         |   | $    | 80,564 |         |   | $    | 83,439 |        
|Denominator:             |                                             |                                                                                 |      |        |                    |   |                  |        |         |   |      |        |         |   |      |       
|                         | Denominator
for basic income per share     |                                                                                 |      |        |                    |   |                  |        |         |   |      |        |         |   |      |        |        
|                         |                                             | Weighted average shares outstanding                                             |      |        | 310,617            |   |                  |        | 296,104 |   |      |        | 309,276 |   |      |        | 293,344 | 
|                         | Dilutive effect of common equivalent shares |                                                                                 |      | 7,918  |                    |   |                  | 22,497 |         |   |      | 13,314 |         |   |      | 21,174 |        
|                         |                                             |                                                                                
|                         | Denominator
for diluted income per share   |                                                                                 |      |        |                    |   |                  |        |         |   |      |        |         |   |      |        |        
|                         |                                             | Weighted
average shares outstanding
including dilutive common equivalent shares |      |        | 318,535            |   |                  |        | 318,601 |   |      |        | 322,590 |   |      |        | 314,518 | 
|                        
|Basic income per share   |                                             | $                                                                               | 0.12 |        |                    | $ | 0.16             |        |         | $ | 0.26 |        |         | $ | 0.28 |       
|                        
|Diluted income per share |                                             | $                                                                               | 0.11 |        |                    | $ | 0.15             |        |         | $ | 0.25 |        |         | $ | 0.27 |       
|                        



5



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##### 



The following table sets forth the potential common shares that were
excluded from the net income per share computations because the exercise or
conversion prices were greater than the average market price of the common
shares during the period and were therefore not dilutive (in millions):

|                                   |  |                    |      |                  |  |      |     |      |  |  |      |  |  |  |     | 
|---------------------------------- |  | ------------------ | ---- | ---------------- |  | ---- | --- | ---- |  |  | ---- |  |  |  | --- | 
|                                  
|                                   |  | Three Months Ended |      | Six Months Ended
|                                   |  | June 30,           |      | June 30,        
|                                   |  | 2002               |      | 2001             |  | 2002 |     | 2001
|                                  
|Employee stock options outstanding |  |                    | 41.2 |                  |  |      | 1.1 |      |  |  | 20.7 |  |  |  | 1.9 | 
|Convertible debt                   |  |                    | 1.1  |                  |  |      | 1.1 |      |  |  | 1.1  |  |  |  | 1.1 | 
|                                   |  |                    |     
|Total                              |  |                    | 42.3 |                  |  |      | 2.2 |      |  |  | 21.8 |  |  |  | 3.0 | 
|                                  

The weighted average exercise price of the employee stock options with
exercise prices exceeding the average fair value of the Companys common stock
for the three and six months ended June 30, 2002 and June 30, 2001 was $28.19
and $33.47 per share and $42.06 and $40.06 per share.

3. Financial Instruments

Derivative financial instruments are utilized by the Company to reduce
foreign currency exchange and interest rate risks. The Company does not hold
any derivative financial instruments for trading or speculative purposes.
Derivative transactions are restricted to foreign currency hedges and interest
rate swaps.

Forward Foreign Exchange Contracts

The Company has a foreign exchange hedging program principally designed to
mitigate the potential for future adverse impact due to changes in foreign
currency exchange rates. The program uses forward exchange contracts to hedge
significant balances. The derivatives used in the foreign exchange hedging
program are not designated as cash flow or fair value hedges under Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133), as amended. In general, the forward
exchange contracts have terms of two months or less. These contracts are
recorded on the balance sheet at fair value in Accrued liabilities. Changes
in fair value of the contracts and the amounts being hedged are included in
Other income, net in the accompanying condensed consolidated statements of
operations.

During the three months ended June 30, 2002 and June 30, 2001, the Company
recorded net foreign currency gains of $3.0 million and $1.0 million. During
the six months ended June 30, 2002 and June 30, 2001, the Company recorded net
foreign currency gains of $2.5 million and net foreign currency losses of $0.8
million. At June 30, 2002, the Company had outstanding forward foreign exchange
contracts to exchange Hong Kong dollars ($8.7 million) and Singapore dollars
($5.7 million) for U.S. dollars, and to exchange U.S. dollars for Euros ($3.7
million), South African rand ($2.9 million), British pounds ($1.1 million),
Swiss francs ($0.9 million), Japanese yen ($0.8 million), Canadian dollars
($0.6 million), Swedish krona ($0.4 million) and New Zealand dollars ($0.3
million). At June 30, 2002, each of these contracts matured within 60 days and
had a book value that approximates fair value. Neither the cost nor the fair
value of these forward foreign exchange contracts were material at June 30,
2002. At June 30, 2001, the Company had outstanding forward exchange contracts
to exchange U.S. dollars for Euros ($21.7 million), Canadian dollars ($7.5
million), Australian dollars ($4.5 million), Swiss francs ($3.8 million),
British pounds ($3.5 million), Hong Kong dollars ($1.7 million), New Zealand
dollars ($1.4 million), Japanese yen ($1.4 million), South African rand ($1.3
million) and Singapore dollars ($1.2 million). At June 30, 2001, each of these
contracts matured within 60 days and had a book value that approximates fair
value. Neither the cost nor the fair value of these forward exchange contracts
was material at June 30, 2001.

In addition to hedging existing transaction exposures, the Companys
foreign exchange policy allows for the hedging of anticipated transactions, and
for hedging the exposure resulting from the translation of foreign subsidiary
financial results into U.S. dollars. Such hedges can only be undertaken by the
Company to the extent that the exposures are highly certain, reasonably
estimable and significant in amount. No such hedges have occurred through June
30, 2002.



6



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##### 



Interest Rate Swap Transactions

The Company has entered into interest rate swap transactions to manage its
exposure to interest rate changes on certain facility lease obligations. At
June 30, 2002, the swaps had an aggregate notional amount of $175.0 million and
a fair value of $167.2 million. The swaps mature at various dates in 2003,
consistent with the maturity dates of the facility leases. Under these
agreements, the Company receives a variable rate based on the three month LIBOR
set on the last day of the previous quarter and pays a weighted average fixed
rate of 6.80%. The swaps involve the exchange of variable interest rate
payments for fixed interest rate payments without exchanging the notional
principal amount. These swaps are designated under SFAS 133 as hedges against
changes in amount of future cash flows. Included in Accumulated other
comprehensive loss as of June 30, 2002 is a $4.8 million unrealized loss
(after-tax) related to these interest rate swaps. Derivative losses included in
Accumulated other comprehensive loss in the accompanying condensed
consolidated balance sheets of $5.2 million (after-tax) are estimated to be
reclassified into earnings during the next twelve months based upon a 12 month
forward LIBOR rate.

Concentrations of Credit Risk

The Company does not believe that it has a significant concentration of
credit or operating risk in any one investment, industry or geographic region
within or outside of the United States.

4. Comprehensive Income

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

|                                   |                                                                 |                                                                       |        |                    |      |                  |        |      |       |      |        |        |       |   |        |        |        |  
|---------------------------------- | --------------------------------------------------------------- | --------------------------------------------------------------------- | ------ | ------------------ | ---- | ---------------- | ------ | ---- | ----- | ---- | ------ | ------ | ----- | - | ------ | ------ | ------ | -
|                                  
|                                   |                                                                 |                                                                       |        | Three Months Ended |      | Six Months Ended
|                                   |                                                                 |                                                                       |        | June 30,           |      | June 30,        
|                                   |                                                                 |                                                                       |        | 2002               |      | 2001             |        | 2002 |       | 2001
|                                  
|Net income                         |                                                                 | $                                                                     | 36,020 |                    |      | $                | 47,381 |      |       | $    | 80,564 |        |       | $ | 83,439 |       
|Other comprehensive income (loss): |                                                                 |                                                                       |        |                    |      |                  |        |      |       |      |        |        |       |   |        |       
|                                   | Net change in unrealized gain on
available-for-sale investments |                                                                       |        | 63                 |      |                  |        | 501  |       |      |        | (302   | )     |   |        | (682   | )     
|                                   | Foreign currency translation adjustments                        |                                                                       |        | 16,745             |      |                  |        | (311 | )     |      |        | 14,964 |       |   |        | (8,778 | )     
|                                   | Interest rate swap transactions:                                |                                                                       |        |                    |      |                  |        |      |       |      |        |        |       |   |        |        |       
|                                   |                                                                 | Cumulative effect of accounting change                                |        |                    |     |                  |        |      |      |      |        |        |      |   |        |        | (2,648 | )
|                                   |                                                                 | Net unrealized gain (loss) on cash flow
hedges                        |        |                    | (983 | )                |        |      | 2,766 |      |        |        | (855  | ) |        |        | (2,236 | )
|                                   |                                                                 | Reclassification adjustment for earnings
recognized during the period |        |                    | 818  |                  |        |      | 453   |      |        |        | 2,090 |   |        |        | 612    |  
|                                   |                                                                 |                                                                      
|Comprehensive income               |                                                                 | $                                                                     | 52,663 |                    |      | $                | 50,790 |      |       | $    | 96,461 |        |       | $ | 69,707 |       
|                                  

5. Restructuring Reserves

The following table sets forth the Companys remaining restructuring
reserves as of December 31, 2001 and June 30, 2002, which are included in
Accrued liabilities (in thousands):

|                          |               |   |        |      |       |   |       |      |   |   |       |        |  
|------------------------- | ------------- | - | ------ | ---- | ----- | - | ----- | ---- | - | - | ----- | ------ | -
|                         
|                          |               |   | Leases |      | Other |   | Total
|                         
|Balance December 31, 2001 |               | $ | 3,268  |      |       | $ | 820   |      |   | $ | 4,088 |       
|                          | Cash payments |   |        | (469 | )     |   |       | (820 | ) |   |       | (1,289 | )
|                          |               |  
|Balance June 30, 2002     |               | $ | 2,799  |      |       | $ |      |      |   | $ | 2,799 |       
|                         

The cash payments related to lease obligations are expected to be made
through October 2005.



7



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6. Commitments and Contingencies

Wrongful Termination Litigation

On November 5, 1996, a wrongful termination case was filed in the
California Superior Court for the County of Alameda by a former employee of
PeopleSoft (Yarborough v. PeopleSoft, Inc., Case No. 775405-2). Judgment was
entered in favor of plaintiff and PeopleSoft has satisfied the $5.4 million
verdict. In connection with this case, Plaintiff has appealed the Courts
April 4, 2002 order denying plaintiffs motion seeking $8.1 million in
attorneys fees. The outcome of this appeal is not material to the Companys
condensed consolidated financial statements, and the Company does not
anticipate providing any further updates on this matter.

Other Matters

From time to time in the course of general business activities, the
Company may become involved in legal disputes and proceedings. The Company
does not expect the resolution of any one of these matters to have a material adverse
affect on the financial position or on the results of operations and cash flows
of the Company. However, depending on the amounts involved and the timing of
the resolution of these matters, an unfavorable resolution of some or
all of them could materially affect the Companys future results of
operations or cash flows in a particular period.

7. Segment Information

The Company identified its chief executive officer (CEO) as the chief
operating decision maker. The Companys CEO evaluates revenue performance based
on two segments: North America, which includes operations in the U.S. and
Canada, and International, which includes operations in all other geographic
regions. Financial data for the two segments is presented below. Employee
headcount and operating costs are managed by functional areas, rather than by
revenue segments, and are only reviewed by the CEO on a company-wide basis. In
addition, the Company does not account for or report to the CEO its assets or
capital expenditures by any segment other than the North American and
International segments. The accounting policies for each reportable segment are
the same as those described in the summary of significant accounting policies
included in the Companys Annual Report to Stockholders on Form 10-K for the
year ended December 31, 2001.

The following table presents a summary of operating information by
operating segment (in thousands):

|                         |               |  |                             |         |                           |  |      |         |      |  |   |         |  |  |   |           | 
|------------------------ | ------------- |  | --------------------------- | ------- | ------------------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | --------- | 
|                        
|                         |               |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                         |               |  | 2002                        |         | 2001                      |  | 2002 |         | 2001
|                        
|Revenues:                |               |  |                             |         |                           |  |      |         |      |  |   |         |  |  |   |          
|                         | North America |  | $                           | 369,128 |                           |  | $    | 418,763 |      |  | $ | 739,720 |  |  | $ | 820,404   | 
|                         | International |  |                             | 113,084 |                           |  |      | 125,777 |      |  |   | 225,759 |  |  |   | 238,291   | 
|                         |               | 
|                         | Consolidated  |  | $                           | 482,212 |                           |  | $    | 544,540 |      |  | $ | 965,479 |  |  | $ | 1,058,695 | 
|                        
|Operating income (loss): |               |  |                             |         |                           |  |      |         |      |  |   |         |  |  |   |          
|                         | North America |  | $                           | 54,428  |                           |  | $    | 39,666  |      |  | $ | 84,847  |  |  | $ | 62,109    | 
|                         | International |  |                             | (3,341  | )                         |  |      | 18,027  |      |  |   | 26,836  |  |  |   | 41,715    | 
|                         |               | 
|                         | Consolidated  |  | $                           | 51,087  |                           |  | $    | 57,693  |      |  | $ | 111,683 |  |  | $ | 103,824   | 
|                        

Revenues from the Europe/Middle-East/Africa region represented 14% and 13%
of total revenues for the three and six months ended June 30, 2002 and June 30,
2001. No other international region had revenues equal to or greater than 10%
of total revenues for the three or six months ended June 30, 2002 or June 30,
2001. Revenues originated in each individual foreign country were less than
10% of total revenues for the three and six months ended June 30, 2002 or June
30, 2001.



8



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##### 



8. Business Combinations

During the six months ended June 30, 2002, the Company completed the
acquisition of Momentum Business Applications, Inc. (Momentum) and acquired
technology from Annuncio Software, Inc. (Annuncio). Additionally, the
Company acquired technology from Calico Commerce, Inc., which was not
significant to the Companys financial statements. The Annuncio and Momentum
transactions were accounted for using the purchase method of accounting and,
accordingly, the results of operations subsequent to the acquisition date are
included in the accompanying condensed consolidated financial statements, and
the assumed assets and liabilities were recorded based upon their relative fair
values at the date of acquisition.

Annuncio Software, Inc.

In January 2002, the Company purchased the intellectual property and
certain assets (collectively, all of which constitute a business) of
Annuncio, a privately held company, for $25.0 million in cash. The transaction
was accounted for using the purchase method of accounting. The intellectual
property of Annuncio consisted of marketing automation software solutions for
email and web-based customer interactions.

The Company allocated the excess purchase price over the fair value of the
net tangible liabilities acquired of $0.7 million to the following intangible
assets: $16.6 million to goodwill, $3.2 million to capitalized software, $2.8
million to in-process research and development, $1.5 million to non-compete
agreements, $1.0 million to customer relationships and $0.6 million to other
intangible assets. Amounts allocated to in-process research and development
were expensed as Restructuring, acquisition, and other charges in the
accompanying condensed consolidated statements of operations, because the
purchased research and development had no alternative uses, and had not reached
technological feasibility. The capitalized intangible assets are being
amortized on a straight-line basis over estimated useful lives of one to three
years.

In performing this purchase price allocation, the Company considered,
among other factors, its intention for future use of the acquired assets and
analyses of historical financial performance and estimates of future
performance of Annuncios products. The projected incremental cash flows were
discounted to their present value using discount rates of 14% and 25% for
developed and in-process technology. These discount rates were determined
after consideration of the Companys rate of return on debt capital and equity,
the weighted average return on invested capital and the risk associated with
achieving forecasted sales. Associated risks included achieving anticipated
levels of market acceptance and penetration, successful completion of various
research and development efforts, market growth rates and risks related to the
impact of potential changes in future target markets.

The Companys projections may ultimately prove to be incomplete or
inaccurate, and unanticipated events and circumstances may occur. Therefore,
no assurance can be given that the underlying assumptions used to forecast
revenues and costs to develop such projects will transpire as estimated.

Momentum Business Applications, Inc.

In April 2002, the Company closed its purchase of one hundred percent of
the outstanding Class A Common Stock of Momentum for $90.0 million in cash.
This transaction was accounted for using the purchase method of accounting.

The Company allocated the excess purchase price over the fair value of the
net tangible liabilities acquired of $0.2 million to the following assets and
liabilities: $63.1 million to tax loss carryforwards, $29.5 million to
capitalized software, $8.7 million to in-process research and development and
$11.1 million to deferred tax liabilities. Amounts allocated to in-process
research and development were expensed as Restructuring, acquisition and other
charges in the accompanying condensed consolidated statements of operations,
because the purchased research and development had no alternative uses, and had
not reached technological feasibility. Fourteen in-process research and
development projects were identified. Five projects related to Human Resources
application suites and accounted for 63% of the



9



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##### 



amount allocated to in-process research and development. A portal
applications project accounted for 23% of the amount allocated to in-process
research and development. The capitalized software is being amortized on a
straight-line basis over estimated useful lives of five years.

In performing this purchase price allocation, the Company considered,
among other factors, its intention for future use of the acquired assets,
analyses of historical financial performance and estimates of future
performance of Momentums products, and an analysis of future royalty payments
payable to Momentum. An estimation of the avoided future royalty payments
related to the acquired technology assets was the basis for the valuation
analysis. The projected after-tax royalty savings was discounted to its
present value using discount rates of 12% and 20% for developed and in-process
technology. These discount rates were determined after consideration of the
Companys rate of return on debt capital and equity, the weighted average
return on invested capital and the risk associated with achieving forecasted
sales. Associated risks included achieving anticipated levels of market
acceptance and penetration, successful completion of various research and
development efforts, market growth rates and risks related to the impact of
potential changes in future target markets.

The Companys projections may ultimately prove to be incomplete or
inaccurate, and unanticipated events and circumstances may occur. Therefore,
no assurance can be given that the underlying assumptions used to forecast
revenues and costs to develop such projects will transpire as estimated.

Pro Forma Financial Information

The unaudited financial information in the table below summarizes the
combined results of operations of PeopleSoft and Momentum, on a pro forma
basis, as though the companies had been combined as of January 1, 2001. The
impact of the $8.7 million charge (no tax impact) for in-process research and development associated with
the acquisition of Momentum has been excluded. This pro forma financial
information is presented for informational purposes only and is not necessarily
indicative of the results of operations that would have been achieved had the
acquisition actually taken place on January 1, 2001. The following amounts are
in thousands, except per share amounts.

|                         |  |                             |         |                           |  |      |         |      |  |   |         |  |  |   |         | 
|------------------------ |  | --------------------------- | ------- | ------------------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                        
|                         |  | Three Months Ended June 30, |         | Six Months Ended June 30,
|                         |  | 2002                        |         | 2001                      |  | 2002 |         | 2001
|                        
|Revenues                 |  | $                           | 482,212 |                           |  | $    | 515,389 |      |  | $ | 957,949 |  |  | $ | 998,823 | 
|Net income               |  | $                           | 44,690  |                           |  | $    | 28,030  |      |  | $ | 83,036  |  |  | $ | 45,387  | 
|Basic income per share   |  | $                           | 0.14    |                           |  | $    | 0.09    |      |  | $ | 0.27    |  |  | $ | 0.15    | 
|Diluted income per share |  | $                           | 0.14    |                           |  | $    | 0.09    |      |  | $ | 0.26    |  |  | $ | 0.14    | 
|                        

9. Recently Issued Accounting Standards

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets, (SFAS 142). SFAS
142 requires that goodwill no longer be amortized and that it be assessed for
impairment on an annual basis. The application of the provisions of SFAS 142
resulted in a reduction of goodwill amortization expense of $3.1 million and
$5.2 million for the three and six month periods ended June 30, 2002. During
the three month period ending June 30, 2002, the Company completed the goodwill
impairment test (comparing the fair value of each of the reporting units as of
January 1, 2002 to the carrying value, which includes goodwill) and determined
that the carrying amount of goodwill was not impaired. At June 30, 2002, the
Company had goodwill of $53.1 million.

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, (SFAS 144). SFAS 144 supercedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of, and
elements of APB 30, Reporting the Results of OperationsReporting the Effects
on Disposal of a Segment of a Business and Extraordinary, Unusual or
Infrequently Occurring Events and Transactions. SFAS 144 establishes a
single-accounting model for long-lived assets to be disposed of



10



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##### 



while maintaining many of the provisions relating to impairment testing
and valuation. Upon adoption the Company determined that it did not have any
long-lived assets which were impaired.

In April 2002, Statement of Financial Accounting Standards No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections was issued. This statement provides
guidance on the classification of gains and losses from the extinguishment of
debt and on the accounting for certain specified lease transactions. The
adoption of this statement will not have a material impact on the Companys
consolidated financial position, results of operations or cash flows.

In June 2002, Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities was issued.
This statement provides guidance on the recognition and measurement of
liabilities associated with disposal activities and is effective for the
Company on January 1, 2003. The Company is currently reviewing the provisions
of SFAS 146 to determine the standards impact upon adoption but does not
anticipate that it will be significant.

On January 1, 2002, the Company adopted Financial Accounting Standards
Board Emerging Issues Task Force No. 01-14, Income Statement Characterization
of Reimbursements Received for Out-of-Pocket Expenses Incurred, (EITF
01-14). EITF 01-14 requires companies to characterize reimbursements received
for out-of-pocket expenses incurred as revenue and to reclassify prior period
financial statements to conform to current year presentation for comparative
purposes. The Companys Services revenues now include reimbursable
out-of-pocket expenses and Cost of services expenses include the costs
associated with reimbursable out-of-pocket expenses. Prior to the adoption of
EITF 01-14 the Companys historical financial statements recorded these
expenses as net amounts in Cost of services. The adoption of EITF 01-14 did
not have a significant impact on the services gross margin percentage and had
no effect on net income.

10. Goodwill

The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 are as follows (in thousands):

|                                                 |  |          |        |  
|------------------------------------------------ |  | -------- | ------ | -
|                                                
|                                                 |  | June 30,
|                                                 |  | 2002    
|                                                
|Balance as of January 1, 2002                    |  | $        | 32,203 |  
|Goodwill from the Annuncio acquisition           |  |          | 16,631 |  
|Goodwill from contingent consideration and other |  |          | 4,750  |  
|Foreign currency fluctuation                     |  |          | (452   | )
|                                                 |  |         
|Balance as of June 30, 2002                      |  | $        | 53,132 |  
|                                                



11



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##### 



Summarized below are the effects on net income and net income per share if
the Company had followed the non-amortization provisions of SFAS 142 for all
periods presented (in thousands, except per share amounts):

|                          |                                   |  |                             |        |                           |  |      |        |      |  |   |        |  |  |   |        | 
|------------------------- | --------------------------------- |  | --------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                         
|                          |                                   |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                          |                                   |  | 2002                        |        | 2001                      |  | 2002 |        | 2001
|                         
|Net income:               |                                   |  |                             |        |                           |  |      |        |      |  |   |        |  |  |   |       
|                          | As reported                       |  | $                           | 36,020 |                           |  | $    | 47,381 |      |  | $ | 80,564 |  |  | $ | 83,439 | 
|                          | Add goodwill amortization         |  |                             |       |                           |  |      | 3,105  |      |  |   |       |  |  |   | 5,230  | 
|                          |                                   | 
|                          | Adjusted net income               |  | $                           | 36,020 |                           |  | $    | 50,486 |      |  | $ | 80,564 |  |  | $ | 88,669 | 
|                         
|Basic income per share:   |                                   |  |                             |        |                           |  |      |        |      |  |   |        |  |  |   |       
|                          | As reported                       |  | $                           | 0.12   |                           |  | $    | 0.16   |      |  | $ | 0.26   |  |  | $ | 0.28   | 
|                          | Add goodwill amortization         |  |                             |       |                           |  |      | 0.01   |      |  |   |       |  |  |   | 0.02   | 
|                          |                                   | 
|                          | Adjusted basic income per share   |  | $                           | 0.12   |                           |  | $    | 0.17   |      |  | $ | 0.26   |  |  | $ | 0.30   | 
|                         
|Diluted income per share: |                                   |  |                             |        |                           |  |      |        |      |  |   |        |  |  |   |       
|                          | As reported                       |  | $                           | 0.11   |                           |  | $    | 0.15   |      |  | $ | 0.25   |  |  | $ | 0.27   | 
|                          | Add goodwill amortization         |  |                             |       |                           |  |      | 0.01   |      |  |   |       |  |  |   | 0.01   | 
|                          |                                   | 
|                          | Adjusted diluted income per share |  | $                           | 0.11   |                           |  | $    | 0.16   |      |  | $ | 0.25   |  |  | $ | 0.28   | 
|                         



12



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##### 



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of our expectations regarding future trends
affecting our business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Future results are subject to risks and uncertainties, which could
cause actual results and performance to differ significantly from those
contemplated by the forward-looking statements. For a discussion of factors
that could affect future results, see Factors That May Affect Our Future
Results or The Market Price of Our Stock. Forward-looking statements
contained throughout this Report include, but are not limited to, those
identified with a footnote (1) symbol. We undertake no obligation to update the
information contained in this Item 2.

RESULTS OF OPERATIONS

The following table shows the percentage of period over period growth and
the percentage of total revenues represented by certain line items in our
condensed consolidated statements of operations, for the three and six months
ended June 30, 2002 and June 30, 2001:

|                           |                                              |                          |     |                             |     |                           |    |        |     |                |    |      |     |               |     |     |     |   |    |    |     |  |    |    |     | 
|-------------------------- | -------------------------------------------- | ------------------------ | --- | --------------------------- | --- | ------------------------- | -- | ------ | --- | -------------- | -- | ---- | --- | ------------- | --- | --- | --- | - | -- | -- | --- |  | -- | -- | --- | 
|                          
|                           |                                              |                          |     | Percentage of               |     |                           |    |        |     |                |    |      |     | Percentage of |     |     |     |   |    |    |     | 
|                           |                                              |                          |     | Dollar                      |     | Percentage of             |    | Dollar |     | Percentage of 
|                           |                                              |                          |     | Change                      |     | Total Revenues            |    | Change |     | Total Revenues
|                           |                                              |                          |     |                             |     |                           |    |        |     |               
|                           |                                              |                          |     | Three months ended June 30, |     | Six months ended June 30,
|                           |                                              |                          |     | 2002/2001                   |     | 2002                      |    | 2001   |     | 2002/2001      |    | 2002 |     | 2001         
|                          
|Revenues:                  |                                              |                          |     |                             |     |                           |    |        |     |                |    |      |     |               |     |     |     |   |    |    |     |  |    |   
|                           | License fees                                 |                          |     | (21                         | )%  |                           |    | 27     | %   |                |    | 31   | %   |               |     | (17 | )%  |   |    | 27 | %   |  |    | 30 | %  
|                           | Services                                     |                          |     |                            |     |                           |    | 73     |     |                |    | 64   |     |               |     | 2   |     |   |    | 72 |     |  |    | 64 |    
|                           | Development and other services               |                          |     | (100                        | )   |                           |    |       |     |                |    | 5    |     |               |     | (87 | )   |   |    | 1  |     |  |    | 6  |    
|                           |                                              |                          |     |                             |     |                           |    |        |     |                |    |     
|                           |                                              | Total revenues           |     |                             | (11 | )                         |    |        | 100 |                |    |      | 100 |               |     |     | (9  | ) |    |    | 100 |  |    |    | 100 | 
|                           |                                              |                          |     |                             |     |                           |    |        |     |                |    |     
|Costs and expenses:        |                                              |                          |     |                             |     |                           |    |        |     |                |    |      |     |               |     |     |     |   |    |    |     |  |    |   
|                           | Cost of license fees                         |                          |     | (44                         | )   |                           |    | 2      |     |                |    | 3    |     |               |     | (37 | )   |   |    | 2  |     |  |    | 3  |    
|                           | Cost of services                             |                          |     | (13                         | )   |                           |    | 35     |     |                |    | 36   |     |               |     | (12 | )   |   |    | 35 |     |  |    | 36 |    
|                           | Cost of development and other services       |                          |     | (100                        | )   |                           |    |       |     |                |    | 5    |     |               |     | (87 | )   |   |    |   |     |  |    | 5  |    
|                           | Sales and marketing expense                  |                          |     | (4                          | )   |                           |    | 26     |     |                |    | 24   |     |               |     | (3  | )   |   |    | 26 |     |  |    | 24 |    
|                           | Product development expense                  |                          |     | 19                          |     |                           |    | 18     |     |                |    | 13   |     |               |     | 11  |     |   |    | 18 |     |  |    | 15 |    
|                           | General and administrative expense           |                          |     | (34                         | )   |                           |    | 6      |     |                |    | 8    |     |               |     | (24 | )   |   |    | 6  |     |  |    | 7  |    
|                           | Restructuring, acquisition and other charges |                          | NA  |                             |     | 2                         |    |        |     |               |    |      | NA  |               |     | 1   |     |   |    |   |    
|                           |                                              |                          |     |                             |     |                           |    |        |     |                |    |     
|                           |                                              | Total costs and expenses |     |                             | (11 | )                         |    |        | 89  |                |    |      | 89  |               |     |     | (11 | ) |    |    | 88  |  |    |    | 90  | 
|                           |                                              |                          |     |                             |     |                           |    |        |     |                |    |     
|Operating income           |                                              |                          | (11 | )                           |     |                           | 11 |        |     |                | 11 |      |     |               | 8   |     |     |   | 12 |    |     |  | 10 |   
|                           |                                              |                          |     |                             |     |                           |    |        |     |                |    |     
|Other income, net          |                                              |                          | (35 | )                           |     |                           | 1  |        |     |                | 2  |      |     |               | (29 | )   |     |   | 1  |    |     |  | 2  |   
|                           |                                              |                          |     |                             |     |                           |    |        |     |                |    |     
|Provision for income taxes |                                              |                          |    |                             |     |                           | 5  |        |     |                | 4  |      |     |               | 10  |     |     |   | 5  |    |     |  | 4  |   
|                           |                                              |                          |     |                             |     |                           |    |        |     |                |    |     
|Net income                 |                                              |                          | (24 | )%                          |     |                           | 7  | %      |     |                | 9  | %    |     |               | (3  | )%  |     |   | 8  | %  |     |  | 8  | % 
|                          

Net income decreased $11.4 million or 24% to $36.0 million for the second
quarter of 2002 as compared to $47.4 million for the second quarter of 2001.
Diluted income per share decreased to $0.11 for the second quarter of 2002
compared to $0.15 for the second quarter of 2001. For the six months ended
June 30, 2002, net income decreased $2.8 million or 3% to $80.6 million as
compared to $83.4 million for the six months ended June 30, 2001. For the six
months ended June 30, 2002, diluted income per share decreased to $0.25
compared to $0.27 for the six months ended June 30, 2001.

The results of operations for the six months ended June 30, 2002 includes
a first quarter charge of $1.7 million (after-tax) for in-process research and
development related to the acquisition of technology from Annuncio Software,
Inc. (Annuncio) and a second quarter in-process research and development
charge of $8.7 million (no tax impact) related to the acquisition of Momentum
Business Applications, Inc. (Momentum). Refer to Business Combinations
under Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations.



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The three and six months ended June 30, 2001, includes a $2.6 million (no
tax impact) favorable adjustment to restructuring reserves to reflect current
estimates and a $1.2 million (after-tax) charge for in-process research and
development related to the acquisition of SkillsVillage, both of which occurred
in the second quarter.

Revenues

Our software products are generally licensed to end-user customers under
non-exclusive, perpetual license agreements. Revenue from license fees
decreased by 21% to $131.9 million in the second quarter of 2002 from $166.3
million in the second quarter of 2001. Revenue from license fees decreased by
17% to $265.2 million during the six months ended June 30, 2002 from $319.6
million during the six months ended June 30, 2001. The decrease in license
revenue is primarily due to a global market slowdown in technology spending
during the first half of 2002. Given the continuing global economic slowdown,
license revenue may be slightly lower in the third quarter of 2002 relative to
the second quarter of 2002.(1)

Our services revenue consists primarily of software maintenance fees,
consulting fees, customer training fees and other miscellaneous fees. Revenue
from services increased slightly to $350.3 million in the second quarter of
2002 from $349.1 million in second quarter of 2001. The growth in services
revenue during the second quarter of 2002 as compared to the second quarter of
2001 resulted from an increase in maintenance revenue of $27.0 million offset
by a decrease in consulting revenue of $22.2 million and a decrease in training
revenue of $3.6 million. The increase in maintenance revenue is primarily
attributable to the growth of our installed customer base while the decrease in
consulting and training revenue is primarily attributable to the global market
slowdown in technology spending which also negatively impacted our license
revenues. Revenue from services as a percentage of total revenues was 73% and
64% for the quarters ended June 30, 2002 and 2001. For the six months ended
June 30, 2002, revenue from services increased by 2% to $692.7 million, or 72%
of total revenues from $679.2 million, or 64% of total revenue for the six
months ended June 30, 2001. The change in services revenue during the six
months ended June 30, 2002, compared to the six months ended June 30, 2001,
primarily resulted from an increase in maintenance revenue of $49.0 million
offset by a decrease in consulting revenue of $29.6 million and a decrease in
training revenue of $5.9 million. The increase in maintenance revenue is
primarily attributable to the growth of our installed customer base while the
decrease in consulting and training revenue is primarily attributable to the
global market slowdown in technology spending. The increase in service
revenues as a percentage of total revenues during the three and six months
ended June 30, 2002 is primarily attributable to lower development and other
services revenue and license revenues for the same three and six month periods.
Reductions or slowdowns in our license contracting activity during a given
quarter may adversely impact our future consulting, maintenance and training
service revenues since these revenues typically trail license contracting
activity.(1) Our ability to maintain or increase service revenue in the future
depends on our ability to increase our installed customer base and resubscribe
existing customers to maintenance agreements.(1) Additionally, a continued
slowdown in the global economy may negatively impact services revenue.(1)

On April 9, 2002, we completed the purchase of one hundred percent of the
outstanding Class A Common Stock of Momentum. Refer to Business Combinations
under Item 2  Managements Discussion and Analysis of Financial Condition and
Results of Operations. Subsequent to the first quarter of 2002,
we ceased performing development services for Momentum and
accordingly have not recognized any revenue
from development services after March 31, 2002. Prior to that date and pursuant to the terms of the
development agreement with Momentum, we performed development services on
behalf of Momentum. Momentum paid us one hundred ten percent (110%) of our
fully burdened costs relating to the research and development services we
provided. Revenue from development and other services decreased by 87% to $7.5
million during the six months ended June 30, 2002 from $59.9 million during the
six months ended June 30, 2001. Cost of development and other services
decreased by 87% to $6.8 million during the six months ended June 30, 2002 from
$54.4 million during the six months ended June 30, 2001.



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Costs and Expenses

Our products are based on a combination of internally developed and third
party technology and products. Cost of license fees consists principally of
royalties, technology access fees for certain third-party software products,
amortization of capitalized software costs and product warranty costs. Cost of
license fees decreased to $10.2 million in the second quarter of 2002 from
$18.2 million in the second quarter of 2001, representing 2% and 3% of total
revenues in each of those quarters. Cost of license fees represented 8% of
license fee revenues in the second quarter of 2002 and 11% of license fee
revenues in the second quarter of 2001. The decrease in the cost of license
fees for the second quarter of 2002 over the second quarter of 2001 is
primarily a result of a $9.2 million decrease in royalties to third parties
resulting from decreased license fee revenue on which such royalties
are calculated and a $1.5 million decrease in
product warranty costs resulting from lower warranty claims. These decreases
are partially offset by a $3.1 million increase in capitalized software
amortization related to software obtained through acquisitions subsequent to
June 30, 2001. During the six months ended June 30, 2002 and 2001, cost of
license fees decreased to $21.6 million from $34.5 million, representing 2% and
3% of total revenues and 8% and 11% of license revenues. The decrease in the
cost of license fees for the six months ended June 30, 2002, over the six
months ended June 30, 2001, is primarily a result of an $11.6 million decrease
in royalties to third parties resulting from decreased license fee
revenue on which such royalties are calculated and
a $5.1 million decrease in product warranty costs resulting from lower warranty
claims. These decreases are partially offset by a $4.8 million increase in
capitalized software amortization related to software obtained through
acquisitions subsequent to June 30, 2001. Cost of license fees as a percentage
of license fee revenues may fluctuate in the future due principally to the mix
of royalty-bearing software products licensed in a particular period,
fluctuations in license revenues and changes in the amortization of capitalized
software.(1)

Cost of services consists primarily of employee-related costs and the
related infrastructure costs incurred to provide installation and consulting
services, post-installation support and training. Cost of services decreased
to $171.2 million in the second quarter of 2002 from $196.0 million in the
second quarter of 2001, representing 35% and 36% of total revenues and 49% and
56% of service revenues in each of those quarters. The decrease in cost of
services for the second quarter of 2002 over the second quarter of 2001 is
primarily due to a $12.1 million decrease in incentive
compensation that would have been owed to employees, had there not
been a decrease in consulting and training revenues, a $5.5 million expense decrease
related to the reduction in the utilization of outside consultants and general
expense reductions associated with improved cost management in the professional
services organization. Cost of services decreased to $335.7 million during the
six months ended June 30, 2002 from $380.7 million during the six months ended
June 30, 2001, representing 35% and 36% of total revenues and 48% and 56% of
service revenues in each of those six month periods. The decrease in cost of
services for the six months ended June 30, 2002 over the six months ended June
30, 2001 is primarily due to a $16.9 million decrease in incentive compensation
that would have been owed to employees, had there not been a decrease in consulting revenue and training revenue, a $8.0 million
expense decrease related to the reduction in the utilization of outside
consultants and general expense reductions associated with improved cost
management in the consulting organization. We anticipate that the demand for
services from new and existing customers for installation, consulting, support
and training services may increase our cost of services over the next several
quarters.(1)

Sales and marketing expenses decreased to $126.2 million in the second
quarter of 2002 from $131.4 million in the second quarter of 2001, representing
26% and 24% of total revenues in each of those quarters. The decrease in sales
and marketing expenses is primarily due to an $11.0 million decrease in
marketing programs and advertising and a $6.3 million decrease in sales
commissions related to decreased license fee revenue, partially offset by a
$7.0 million increase in salaries due to sales and marketing headcount
increases. Sales and marketing expense decreased to $250.7 million for the six
months ended June 30, 2002 from $257.6 million for the six months ended June
30, 2001. The decrease for the six months ended June 30, 2002 is primarily
attributable to a $16.2 million decrease in marketing programs and advertising
and a $11.3 million decrease in sales commissions related to decreased license
fee revenue, partially offset by a $15.0 million increase in salaries due to
sales and marketing headcount increases.



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Sales and marketing expenses may increase in future periods as we increase
our sales force and marketing and advertising expenses in support of PeopleSoft
8 to improve our competitive positioning in the marketplace and to promote
brand awareness and global recognition of our products.(1)

Product development expenses consist of costs related to software
developers and outside consultants, and the associated infrastructure costs
required to support software product development initiatives. Product
development expenses increased to $87.5 million in the second quarter of 2002
from $73.8 million in the second quarter of 2001, representing 18% and 13% of
total revenues in each of those quarters. Product development expenses
increased to $169.9 million during the six months ended June 30, 2002 from
$152.9 million for the six months ended June 30, 2001. The increase in product
development expenses is primarily attributable to an increase in internal
development activities as we redeployed developers previously working on
Momentum projects. Our current focus in application development is to extend
our software offerings by delivering enhanced functionality and to develop new
applications in our best of breed, integrated application suites: Human
Resources, Financials, Customer Relationship Management and Supply Chain
Management.(1) As part of this focus, we anticipate investing in additional
global product requirements and industry specific requirements.(1) However, we
cannot give assurance that such development efforts will result in products,
features or functionality or that the market will accept the software products,
features or functionality developed.

General and administrative expenses decreased to $27.4 million during the
second quarter of 2002 from $41.7 million during the second quarter of 2001,
representing 6% and 8% of total revenues. The decrease for the quarter is
primarily attributable to $4.4 million decrease in non-product related
litigation expense, $3.1 million decrease in amortization of goodwill in
connection with the adoption of Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, (SFAS 142) on January 1, 2002,
and general expense reductions associated with improved cost management.
General and administrative expenses decreased to $57.6 million for the six
months ended June 30, 2002 from $75.5 million for the six months ended June 30,
2001, representing 6% and 7% of total revenues. The decrease for the six month
period is primarily attributable to $5.1 million decrease in non-product
related litigation expense, $5.2 million decrease in amortization of goodwill
in connection with the adoption of SFAS 142 on January 1, 2002, and general
expense reductions associated with improved cost management. SFAS 142 requires
that goodwill no longer be amortized but must be assessed for impairment on an
annual basis. During the three month period ended June 30, 2002, we completed
the goodwill impairment test (comparing the fair value of each of the reporting
units as of January 1, 2002 to the carrying value, which includes goodwill) and
determined that the carrying amount of our goodwill was not impaired. See
footnote 9 Recently Issued Accounting Standards in the Notes to Condensed
Consolidated Financial Statements.

Restructuring, Acquisition and Other Charges

Our results of operations for the second quarter of 2002 include a charge
of $8.7 million associated with the write-off of in-process research and
development attributable to the acquisition of Momentum. The second quarter of
2001 includes a charge of $1.9 million related to the write-off of in-process
research and development from the SkillsVillage acquisition and a favorable
adjustment of $2.6 million to restructuring reserves to reflect current
estimates. The restructuring, acquisition and other charges for the six months
ended June 30, 2002 also includes the first quarter charge of $2.8 million
related to the write-off of in-process research and development from the
Annuncio business combination. For additional discussion of the Momentum and
Annuncio transactions see Business Combinations. In the future, if we
consummate business combinations and technology purchases, we may incur
additional in-process research and development charges which may impact our
results of operations.(1)



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Other Income, Net

Other income, net, which primarily includes interest income and interest
expense, decreased to $8.5 million in the second quarter of 2002 from $13.1
million in the second quarter of 2001, and decreased to $15.7 million in the
six months ended June 30, 2002 from $22.1 million during the six months ended
June 30, 2001. The decrease in other income, net, for the three and six month
periods was primarily a result of a decrease in interest income due to lower
interest rates.

Provision for Income Taxes

Our income tax provision was $23.5 million for the second quarters of 2002
and 2001 and increased to $46.8 million in the six months ended June 30, 2002
from $42.4 million for the same period in 2001. The effective tax rate was
34.5% (excluding non-deductible charges, such as in-process research and
development and goodwill amortization) for both of the six months periods ended
June 30, 2002 and June 30, 2001. The net deferred tax assets at June 30, 2002
were $208.8 million. In accordance with Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes, (SFAS 109), the valuation
of the deferred tax assets is based upon an estimate of both the timing and
amount of future taxable income. Future taxable income may be derived from
future operations, subsequent reversals of deferred tax liabilities and other
sources.

Business Combinations

During the six months ended June 30, 2002, we completed the acquisition of
Momentum Business Applications, Inc. (Momentum) and acquired technology from
Annuncio Software, Inc. (Annuncio). Additionally, we acquired technology
from Calico Commerce, Inc., which was not significant to the Companys
financial statements. The Annuncio and Momentum transactions were accounted
for using the purchase method of accounting and, accordingly, the results of
operations subsequent to the acquisition date are included in the accompanying
condensed consolidated statements of operations, and the assumed assets or
liabilities were recorded based upon their relative fair values at the date of
acquisition. As part of our strategy, we anticipate additional acquisition
activity, which may be significant to us on either an individual or an
aggregate basis.(1)

Annuncio Software, Inc.

In January 2002, we purchased the intellectual property and certain assets
(collectively, all of which constitute a business) of Annuncio, a privately
held company, for $25.0 million in cash. The transaction was accounted for
using the purchase method of accounting. The intellectual property of Annuncio
consists of marketing automation software solutions for email and web-based
customer interactions.

We allocated the excess purchase price over the fair value of the net
tangible liabilities acquired of $0.7 million to the following intangible
assets: $16.6 million to goodwill, $3.2 million to capitalized software, $2.8
million to in-process research and development, $1.5 million to non-compete
agreements, $1.0 million to customer relationships and $0.6 million to other
intangible assets. The capitalized intangible assets are being amortized on a
straight-line basis over estimated useful lives of one to three years.

Amounts allocated to in-process research and development were expensed as
Restructuring, acquisition and other charges in the accompanying condensed
consolidated statements of operations, because the purchased research and
development had no alternative uses, and had not reached technological
feasibility. The in-process research and development relates to additional
functionality on Annuncios marketing automation software. At the date of the
acquisition, the Annuncio product under development was approximately 90%
complete and was subsequently completed during the first quarter of 2002 at a
cost of approximately $0.5 million.

In performing this allocation, we considered, among other factors, our
intention for future use of the acquired assets and analyses of historical
financial performance and estimates of future performance of



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Annuncios products. We estimated that we would recognize revenue on the
projects related to the in-process technology from 2002 to 2005. The projected
incremental cash flows were discounted to their present value using discount
rates of 14% and 25% for developed and in-process technology. These discount
rates were determined after consideration of our rate of return on debt capital
and equity, the weighted average return on invested capital and the risk
associated with achieving forecasted sales. Associated risks included
achieving anticipated levels of market acceptance and penetration, successful
completion of various research and development efforts, market growth rates and
risks related to the impact of potential changes in future target markets.

Our projections may ultimately prove to be incomplete or inaccurate, and
unanticipated events and circumstances may occur.(1) Therefore, no assurance
can be given that the underlying assumptions used to forecast revenues and
costs to develop such projects will transpire as estimated.

Momentum Business Applications, Inc.

In April 2002, we closed the transaction to purchase one hundred percent
of the outstanding Class A Common Stock of Momentum for $90.0 million in cash.
This transaction was accounted for using the purchase method of accounting.

We allocated the excess purchase price over the fair value of the net
tangible liabilities acquired of $0.2 million to the following assets and
liabilities: $63.1 million to tax loss carryforwards, $29.5 million to
capitalized software , $8.7 million to in-process research and development and
$11.1 million to deferred tax liabilities. The capitalized software is being
amortized on a straight-line basis over estimated useful lives of five years.

Amounts allocated to in-process research and development were expensed as
Restructuring, acquisition and other charges in the accompanying condensed
consolidated statements of operations, because the purchased research and
development had no alternative uses, and had not reached technological
feasibility. Fourteen in-process research and development projects were
identified. Five projects related to Human Resources application suites and
accounted for 63% of the amount allocated to in-process research and
development. A portal applications project accounted for 23% of the amount
allocated to in-process research and development. At the date of the
acquisition, the Momentum products in-process averaged approximately
45%
complete and were expected to be completed during the fourth quarter of 2002
and the first half of 2003 at a cost of approximately $35.0 million. The
remaining efforts include completion of coding and system and platform testing.

In performing this allocation, we considered, among other factors, our
intention for future use of the acquired assets, analyses of historical
financial performance and estimates of future performance of Momentums
products, and an analysis of future royalty payments payable to Momentum. An
estimation of the avoided future royalty payments related to the acquired
technology assets was the basis for the valuation analysis. We estimated that
we would avoid royalty payments on the projects related to the in-process
technology from 2002 to 2006. The after-tax royalty savings was discounted to
its present value using discount rates of 12% and 20% for developed and
in-process technology. These discount rates were determined after
consideration of our rate of return on debt capital and equity, the weighted
average return on invested capital and the risk associated with achieving
forecasted sales. Associated risks included achieving anticipated levels of
market acceptance and penetration, successful completion of various research
and development efforts, market growth rates and risks related to the impact of
potential changes in future target markets.

Our projections may ultimately prove to be incomplete or inaccurate, and
unanticipated events and circumstances may occur.(1) Therefore, no assurance
can be given that the underlying assumptions used to forecast revenues and
costs to develop such projects will transpire as estimated.



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Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP
requires us to utilize accounting policies and make estimates and assumptions
that affect our reported amounts. We believe policies and estimates related to
revenue recognition, capitalized software, allowance for doubtful accounts,
product and service warranty and deferred income taxes represent our critical
accounting policies and estimates. Future results may differ from these
estimates under different assumptions or conditions.

Revenue Recognition

We derive revenues
from two primary sources: (1) software license
revenues and (2) services revenues, which include maintenance, consulting, and
training. We recognize our revenue in accordance with the Securities and
Exchange Commissions Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, the American Institute of Certified Public Accountants
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended
by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions, and other authoritative accounting guidance.

License Revenue. For software license agreements that do not require
significant modification or customization of the software, we recognize revenue
when persuasive evidence of an agreement exists, delivery of the product has
occurred, the fee is fixed or determinable, and collection is probable. Our
consulting services generally do not involve significant modification or
customization of the licensed software. We use the residual method to
recognize revenue when a license agreement includes one or more elements to be
delivered at a future date and vendor specific evidence of the fair value of
all undelivered elements exists. Under the residual method, the fair value of
the undelivered elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue. If evidence of the fair value of one
or more undelivered elements does not exist, the revenue is deferred and
recognized when delivery of those elements occurs or when fair value can be
established.

If the fee due from the customer is not fixed or determinable, revenue is
recognized as payment becomes due, assuming all other revenue recognition
criteria have been met. We consider arrangements with extended payment terms
not to be fixed or determinable. Revenue arrangements with resellers are
recognized on a sell-through basis, that is, when we receive persuasive
evidence that the reseller has sold the products to an end user customer.

If provided in a license agreement, acceptance provisions generally grant
customers a right of refund or replacement only if the licensed software does
not perform in accordance with its published specifications. We believe the
likelihood of non-acceptance in these situations is remote and generally
recognize revenue when all other criteria of revenue recognition are met. If
such a determination cannot be made, revenue is recognized upon the earlier of
receipt of written acceptance or the acceptance period has lapsed.

Services Revenue. Revenue from maintenance agreements is recognized
ratably over the term of the maintenance agreement, typically one year.
Consulting and training revenues are usually charged on a time and materials
basis and are recognized as the services are performed. Revenues from certain
fixed price contracts are recognized on a percentage of completion basis, which
involves the use of estimates. If we do not have a sufficient basis to measure
the progress towards completion, revenue is recognized when the project is
completed or we receive final acceptance from the customer.

Capitalized Software

We capitalize the development cost of software, other than software
developed for internal use, in accordance with Statement of Financial
Accounting Standards No. 86, Accounting for Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed,  (SFAS 86). Our policy is to
capitalize the costs associated with development of new products. We
capitalize software acquired through technology purchases and business
combinations if the related software under development has reached
technological feasibility or if there are alternative future uses for
the software. As of June 30, 2002, net



19



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capitalized software consisted of $45.7 million related to
software acquired through technology purchases and business
combinations, and $1.8 million related to internally developed software.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts at an amount we estimate to
be sufficient to provide adequate protection against losses resulting from
collecting less than full payment on our receivables. We record an allowance
to reduce specific receivables to the amount that we reasonably believe to be
collectible. We also record an allowance for all other receivables based on
multiple factors including historical experience with bad debts, the general
economic environment and the aging of such receivables. A considerable amount
of judgment is required when we assess the realization of receivables,
including assessing the probability of collection and the current
credit-worthiness of each customer. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, an additional provision for doubtful accounts may be required.

Product and Service Warranty

We provide for estimated cost of product and service warranties based on
specific warranty claims and claim history. If actual warranty
experience differs from our estimates, revisions to the estimated warranty liability would
be required.

Deferred Income Taxes

We account for income taxes in accordance with SFAS 109. We assess the
likelihood that our deferred tax asset will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we establish a
valuation allowance. We consider future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the amount of the valuation
allowance. However, adjustments could be required in the future if we
determine that the amount to be realized is greater or less than the amount we
have recorded.



20



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LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2002, we had $418.3 million in cash and cash equivalents and
$1.3 billion in short-term investments, consisting principally of investments
in interest-bearing demand deposit accounts with various financial
institutions, tax-advantaged money market funds and highly liquid debt
securities of corporations and municipalities. At June 30, 2002, working
capital was $1.3 billion. Given the current interest rate environment, we have
determined that in certain situations it is more advantageous to invest in
longer term debt securities. Long-term investments increased to $126.3 million
at June 30, 2002 from $40.6 million at December 31, 2001. We believe that the
combination of cash and cash equivalents and short-term investment balances and
potential cash flow from operations will be sufficient to satisfy our cash
requirements, including the third quarter debt maturity of $57.0 million and
expected purchases of property and equipment, at least through the next twelve
months.(1)

Cash provided by operating activities was $214.4 million during the six
months ended June 30, 2002 compared to $209.1 million during the six months
ended June 30, 2001. This increase is primarily due to the decrease in
accounts receivable, the increase in deferred revenues and the increase in
income net of the effects of in-process research and technology, partially
offset by the decrease in accounts payable and accrued liabilities and the
decrease in accrued compensation.

Cash used in investing activities was $320.0 million during the six months
ended June 30, 2002 compared to $680.5 million during the six months ended June
30, 2001. Our principal use of cash in investing activities during the six
months ended June 30, 2002 resulted from net purchases of investments,
principally of a short-term duration, of $151.3 million, purchases of property
and equipment of $50.9 million and acquisitions of $117.8 million, net of cash
acquired. Our principal use of cash in investing activities during the six
months ended June 30, 2001 resulted from net purchases of investments of $621.5
million, purchases of property and equipment of $41.0 million and acquisitions
of $18.0 million.

Cash provided by financing activities was $78.1 million during the six
months ended June 30, 2002 compared to $161.1 million during the six months
ended June 30, 2001. The source of cash provided by financing activities during
the six months ended June 30, 2002 was related to proceeds from the exercise of
common stock options by employees and issuance of stock under the employee
stock purchase program. The source of cash provided by financing activities
during the six months ended June 30, 2001 was related to proceeds from the
exercise of common stock options by employees and issuance of stock under the
employee stock purchase program of $171.6 million partially offset by $10.5
million cash used to repurchase convertible subordinated long-term notes.



---

|(1) |  | Forward-Looking Statement
|--- |  | -------------------------



21



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ITEM 3  FINANCIAL RISK MANAGEMENT

Foreign Exchange Risk

Revenue recognized outside the United States was 29% and 27% of total
revenues during the six months ended June 30, 2002 and June 30, 2001. Revenues
generated in the Europe/Middle-East/Africa region were 14% and 13% of total
revenues during the same periods. Revenues from all other geographic regions
were less than 10% of total revenues. International sales are made mostly from
our foreign subsidiaries in their respective countries and are typically
denominated in the local currency of each country. These subsidiaries incur
most of their expenses in local currency as well.

Our international business is subject to risks, including, but not limited
to: unique economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results may be materially adversely
impacted by changes in these or other factors.(1)

Our exposure to foreign exchange rate fluctuations arises in part from
intercompany transactions in which certain costs, incurred in the United States
are charged to our foreign subsidiaries. Intercompany transactions are
typically denominated in the functional currency of the foreign subsidiaries in
order to centralize foreign exchange risk with the parent company in the United
States. We are also exposed to foreign exchange rate fluctuations as the
financial results of our foreign subsidiaries are translated into U.S. dollars
during consolidation. As exchange rates vary, these results, when translated,
may vary from expectations and may adversely impact overall expected
profitability.

We have a foreign exchange hedging program principally designed to
mitigate the potential for future adverse impacts due to changes in foreign
exchange rates. The program uses forward exchange contracts to hedge
significant balances. In general, these forward foreign exchange contracts have
terms of two months or less. Gains and losses on the settled contracts are
included in Other income, net in the accompanying condensed consolidated
statements of operations and are recognized in the current period, consistent
with the period in which the gain or loss of the underlying transaction is
recognized. The foreign currency hedging program is managed in accordance with
a corporate policy approved by our Board of Directors.

In addition to hedging existing transaction exposures, our foreign
exchange management policy allows for the hedging of anticipated transactions,
and exposure resulting from the translation of foreign subsidiary financial
results into U.S. dollars. Such hedges can only be undertaken to the extent
that the exposures are highly certain, reasonably estimable and significant in
amount. No such hedges have occurred through June 30, 2002.

At June 30, 2002, we had the following outstanding forward foreign
exchange contracts to exchange foreign currency for U.S. dollars:

|                  |  |                 |  |               |       |                   |  | 
|----------------- |  | --------------- |  | ------------- | ----- | ----------------- |  | 
|                  |  |                 |  |               |       | Notional Weighted
|Functional        |  |                 |  |               |       | Average Exchange 
|Currency          |  | Notional Amount |  | Rate per US $
|                 
|Hong Kong dollars |  | $   8.7 million |  |               | 7.800 |                  
|Singapore dollars |  | 5.7 million     |  |               | 1.768 |                  
|                  |  |                 |  |               |       |                  
|                  |  | $ 14.4 million  |  |               |       |                  
|                  |  |                 |  |               |       |                  



---

|(1) |  | Forward-Looking Statement
|--- |  | -------------------------



22



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We had the following outstanding forward foreign exchange contracts to
exchange U.S. dollars for foreign currency:

|                    |  |                 |  |               |         |                   |  | 
|------------------- |  | --------------- |  | ------------- | ------- | ----------------- |  | 
|                    |  |                 |  |               |         | Notional Weighted
|Functional          |  |                 |  |               |         | Average Exchange 
|Currency            |  | Notional Amount |  | Rate per US $
|                   
|Euro                |  | $   3.7 million |  |               | 1.016   |                  
|South African rand  |  | 2.9 million     |  |               | 10.260  |                  
|British pounds      |  | 1.1 million     |  |               | 0.657   |                  
|Swiss francs        |  | 0.9 million     |  |               | 1.493   |                  
|Japanese yen        |  | 0.8 million     |  |               | 119.760 |                  
|Canadian dollars    |  | 0.6 million     |  |               | 1.519   |                  
|Swedish krona       |  | 0.4 million     |  |               | 9.247   |                  
|New Zealand dollars |  | 0.3 million     |  |               | 2.062   |                  
|                    |  |                 |  |               |         |                  
|                    |  | $ 10.7 million  |  |               |         |                  
|                    |  |                 |  |               |         |                  

At June 30, 2002, each of these contracts matured within 60 days and had a
book value that approximates fair value. Neither the cost nor the fair value
of these forward foreign exchange contracts was material at June 30, 2002.
During the three months ended June 30, 2002 and 2001, we recorded net foreign
currency gains of $3.0 million and $1.0 million. During the six months ended
June 30, 2002 and 2001, we recorded a net foreign currency gain of $2.5 million
and a net foreign currency loss of $0.8 million.

Interest Rate Risk

Investments in debt securities

Our investments are made in accordance with an investment policy approved
by the Board of Directors. We invest our cash in financial instruments,
consisting principally of investments in interest-bearing demand deposit
accounts with financial institutions, tax-exempt money market funds and highly
liquid debt securities of corporations, and municipalities. These investments
are denominated in U.S. dollars. Cash balances in foreign currencies overseas
represent operating balances that are typically invested in short term time
deposits of the local operating bank.

We classify debt securities based on managements intention on the date of
purchase and reevaluate such designation as of each balance sheet date. Debt
securities which management has the intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost. All other debt
securities are classified as available-for-sale and carried at fair value with
net unrealized gains and losses included in Accumulated other comprehensive
loss, net of tax in the accompanying condensed consolidated balance sheets.
As of June 30, 2002 and 2001, all our investments were classified as
available-for-sale.

Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities, that typically have a shorter duration,
may produce less income than expected if interest rates fall. Due in part to
these factors, our investment income may decrease in the future due to changes
in interest rates.(1)

At June 30, 2002, the average maturity of our investment securities was
less than three months and all investment securities had maturities of less
than eighteen months. The following table presents certain information about
our financial instruments held at June 30, 2002 that are sensitive to changes
in interest rates. Due to our tax rate, it is presently advantageous for us to
invest largely in tax-exempt securities. The average interest rates shown below
reflect a weighted average rate for both taxable and tax-exempt investments. At
June 30, 2002, we invested heavily in tax-exempt investments which reduced our
weighted average interest rate.



---

|(1) |  | Forward-Looking Statement
|--- |  | -------------------------



23



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Below is a presentation of the maturity profile of our investment
securities held at June 30, 2002 (in millions, except interest rates):

|                               |  |                   |         |             |  |           |       |            |  |       |         |  |  |   |         | 
|------------------------------ |  | ----------------- | ------- | ----------- |  | --------- | ----- | ---------- |  | ----- | ------- |  |  | - | ------- | 
|                               |  | Expected Maturity |         |             |  |           |       |            |  |      
|                               |  |                   |         |             |  |           |       |            |  |      
|                               |  |                   |         |             |  |           |       |            |  | Total |         |  |  |  
|                               |  | 1 Year or         |         | More than 1 |  | Principal |       | Total     
|                               |  | less              |         | year        |  | Amount    |       | Fair Value
|                               |  |                  
|Available-for-sale securities  |  | $                 | 1,319.1 |             |  | $         | 125.9 |            |  | $     | 1,445.0 |  |  | $ | 1,445.7 | 
|Weighted average interest rate |  |                   | 1.7     | %           |  |           | 2.0   | %          |  |       |         |  |  |   |         | 

Interest rate swaps

We have entered into interest rate swap transactions to manage our
exposure to interest rate changes on our facility lease obligations. The swaps
involve the exchange of fixed interest rate payments for variable interest rate
payments without exchanging the notional principal amount. At June 30, 2002,
the swaps had an aggregate notional amount of $175.0 million and a fair value
of $167.2 million. The swaps mature at various dates in 2003, consistent with
the maturity dates of the facility leases. Under these agreements, we receive a
variable rate based on the three month LIBOR set on the last day of the
previous quarter and pay a weighted average fixed rate of 6.80%. These swaps
are designated under Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133), as
amended, as hedges against changes in amount of future cash flows. Included in
Accumulated other comprehensive loss as of June 30, 2002 is a $4.8 million
unrealized loss (after-tax) related to these interest rate swaps. Derivative
losses included in Accumulated other comprehensive loss in the accompanying
condensed consolidated balance sheets of $5.2 million
(after-tax) are estimated to be
reclassified into earnings during the next twelve months based upon a 12 month
forward LIBOR rate.

Equity Securities Risk

Convertible subordinated notes

At June 30, 2002, we had an aggregate of $57.0 million in outstanding
convertible subordinated notes, due August 2002. These notes bear interest at a
rate of 4.75% per annum and are convertible into our common stock at the
investors option at any time at a conversion price equal to $50.82 per share.
Based on the traded yield to maturity, the approximate fair market value of the
convertible subordinated notes was $57.1 million and $57.6 million as of June
30, 2002 and December 31, 2001.



24



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FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OR THE MARKET
PRICE OF OUR STOCK

We have identified certain forward-looking statements in the Managements
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Form 10-Q with a footnote (1) symbol. We may also make other
forward-looking statements from time to time, both written and oral.
Forward-looking statements give our expectations about the future and are not
guarantees. Forward-looking statements apply as of the date they are made and
we do not undertake any obligations to update them to reflect changes that
occur after that date. The actual results may differ materially from those
projected in any such forward-looking statements due to a number of factors,
including those set forth below and elsewhere in this Form 10-Q.

We operate in a dynamic and rapidly changing environment that involves
numerous risks and uncertainties. The following section describes some, but not
all, of these risks and uncertainties that we believe may adversely affect our
business, financial condition or results of operations. This section should be
read in conjunction with the unaudited Condensed Consolidated Financial
Statements and Notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations included in this report on Form
10-Q and the audited Consolidated Financial Statements and Notes thereto, and
Managements Discussion and Analysis of Financial Condition and Results of
Operations for the years ended December 31, 2001, 2000 and 1999 contained in
our 2001 Annual Report to Stockholders on Form 10-K.

Continued regional and/or global economic, political and market
conditions may cause decreased demand for our software and related
services which could negatively affect our revenue and operating results and
the market price of our stock.

Our revenue and profitability depend on the overall demand for our
software and related services. Regional and/or global changes in the economy
and financial markets can result in companies reducing spending for
technology products generally and the delay or reconsideration of potential
purchases of our products and related services. As a result, our revenues may decrease and our
operating results could be adversely affected, which may cause our stock price
to fall.

Our quarterly operating results may be difficult to predict and may fluctuate
substantially, which may adversely affect our net income.

Our revenues and results of operations may be difficult to predict and may
fluctuate substantially from quarter to quarter. Our expense levels, operating
costs and hiring plans are based on projections of future revenues. If our
actual revenues fall below expectations, our net income may be adversely
affected. Factors that affect the predictability of actual revenues, include
the following:



| |  | our sales cycle is relatively long and can vary as a result of the complexity of a customers overall business needs;                                                                                                                            
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the complexity and size of license transactions can result in protracted negotiations;                                                                                                                                                           
| 
| |  | a significant number of our license agreements are typically completed within the last few weeks of the quarter and
purchasing decisions may be delayed to future quarters;                                                                      
| 
| |  | the effect of economic downturns and global political conditions may result in decreased product demand, price erosion, and
other factors that may substantially reduce license and service
revenue;                                             
| 
| |  | customers may unexpectedly postpone or cancel anticipated system replacement or new system implementation due to changes in
strategic priorities, project objectives, budgetary constraints, internal purchasing processes or company management;
| 
| |  | changes in our competitors and our own pricing policies and discount plans may affect customer purchasing patterns and
decisions; and                                                                                                           



25



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| |  | the number, timing and significance of our competitors and our own software product enhancements and new software product
announcements may affect purchasing decisions.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may be required to defer recognition of license revenue for a significant
period of time after entering into a license agreement, which could negatively
impact our financial results.

We may have to delay recognizing license or service related revenue for a
significant period of time for a variety of types of transactions, including:



| |  | transactions that include both currently deliverable software products
and software products that are under development or contain other
currently undeliverable elements;    
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | transactions where the customer demands services that include
significant modifications, customizations or complex interfaces that
could delay product delivery or acceptance;
| 
| |  | transactions that involve extraordinary acceptance criteria or
identified product-related performance issues; and                                                             
| 
| |  | transactions that include contingency based payment terms or fees.                                                                                                            

These factors and other specific requirements under U.S. GAAP for software
revenue recognition, require that we have very precise terms in our license
agreements to allow us to recognize revenue when we initially deliver software
or perform services. Although we have a standard form of license agreement
that meets the criteria for current revenue recognition on delivered elements,
we negotiate and revise these terms and conditions in some transactions.
Sometimes we are unable to negotiate terms and conditions that permit revenue
recognition at the time of delivery or even as work on the project is
completed.

If accounting interpretations relating to revenue recognition change, our
reported revenues could decline or we could be forced to make changes in our
business practices.

Over the past several years, the American Institute of Certified Public
Accountants has issued Statement of Position (SOP) 97-2, Software Revenue
Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. In addition, in December
1999, the Securities and Exchange Commission staff issued Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which
explains how the SEC staff believes existing revenue recognition rules should
be applied to or interpreted for transactions not specifically addressed by
existing rules. These standards address software revenue recognition matters
primarily from a conceptual level and do not include specific implementation
guidance. We believe that our revenue has been recognized in compliance with
SOP 97-2, SOP 98-9 and SAB 101.

However, the accounting profession continues to discuss various provisions
of these guidelines with the objective of providing additional guidance on
their application. These discussions and the issuance of new interpretations,
once finalized, could lead to unanticipated reductions in recognized revenue.
They could also drive significant adjustments to our business practices which
could result in increased administrative costs, lengthened sales cycles and
other changes which could adversely affect our results of operations.

Our future revenue is substantially dependent upon our installed customer base
continuing to license additional products, renew maintenance agreements and
purchase additional services.

Our installed customer base has traditionally generated additional
consulting services, maintenance and new license revenue. Maintenance
agreements are generally renewable annually at a customers option and there
are no mandatory payment obligations or obligations to license additional
software. In addition, customers may not necessarily license additional
products or contract for additional services. If our customers fail to renew
their maintenance agreements or license additional products or contract for
additional services, our revenues could decrease.



26



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Increases in services revenues as a percentage of total revenues could decrease
overall margins and adversely affect our operating results.

We realize lower margins on service revenues than on license revenues. In
addition, we may contract with certain third parties to supplement
the services we provide to customers which generally yields lower
gross margins than our service business overall. As a result, if service
revenues increase as a percentage of total revenue or if we increase
our use of third parties to provide such services, our
gross margins will be lower and our operating results may be adversely
affected.

Our margins may be reduced if we need to lower prices or offer other favorable
terms on our products and services to meet competitive pressures in our
industry.

We compete with a variety of software vendors in all of our major product
lines, including vendors of enterprise application software, manufacturing
software applications, CRM applications, human capital management software and
financial management solutions software. In addition, we compete with numerous
small firms that offer products with new or advanced features. Some of our
competitors may have advantages over us due to their significant worldwide
presence, longer operating and product development history, and substantially
greater technical and marketing resources, or exclusive intellectual property
rights. At least one competitor has a larger installed base than we do.

If competitors offer more favorable payment terms, contractual
implementation terms, or product or service warranties, or offer product
functionality which we do not currently provide, we may need to lower prices or
offer other favorable terms in order to compete successfully. Any such changes
would be likely to reduce margins and may adversely affect operating results.

If we fail to compete effectively and introduce new products and service
offerings, our results of operations and financial condition
of the business will
suffer.

The market for our software products is intensely competitive and is
characterized by rapid technological change, evolving industry standards,
changes in customer requirements and frequent new product introductions and
enhancements. The competitive environment demands that we constantly improve
our existing products and create new products. Our future success will depend
in part upon our ability to:



| |  | enhance and expand our core applications;                                                                                                       
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | successfully integrate third-party products;                                                                                                    
| 
| |  | enter new markets;                                                                                                                              
| 
| |  | improve our existing products and develop new ones to keep pace with
technological developments, including developments related to the
internet;
| 
| |  | satisfy increasingly sophisticated customer requirements; and                                                                                   
| 
| |  | maintain market acceptance.                                                                                                                     

If we are unable to meet these challenges, our results of operations and
our financial condition will be adversely affected. Our failure to drive or adapt to new and changing industry
standards or third party interfaces could adversely affect sales of our
products and services.

Market acceptance of new platforms and operating environments may require us to
undergo the expense of developing and maintaining compatible product lines.

Our software products can be licensed for use with a variety of popular
industry standard relational database management system platforms. There may
be future or existing relational database platforms that achieve popularity in
the marketplace which may or may not be architecturally compatible with our
software product design. In addition, the effort and expense of developing,
testing and maintaining



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software product lines will increase as more hardware platforms and
operating systems achieve market acceptance within our target markets.
Moreover, future or existing user interfaces that achieve popularity within the
business application marketplace may or may not be architecturally compatible
with our current software product design. If we are unable to achieve market
acceptance of new user interfaces that we support, or adapt to popular new user
interfaces that we do not support, our sales and revenues may be adversely
affected.

Developing and maintaining consistent software product performance
characteristics across all of these combinations could place a significant
strain on our resources and software product release schedules which could
adversely affect revenue and results of operations. If we are not able to
maintain software performance across accepted platforms and operating
environments, our license and service revenues could be adversely
affected.

As our international business grows, we will become increasingly subject to
currency risks and other costs and contingencies that could adversely affect
our results.

We continue to invest in the expansion of our international operations.
The global reach of our business could cause us to be subject to unexpected,
uncontrollable and rapidly changing economic and political conditions that
could adversely affect our results of operations. The following factors, among
others, present risks that could have an adverse impact on our business:



| |  | conducting business in currencies other than United States dollars subjects us to currency controls and fluctuations in
currency exchange rates;                                                                                                                           
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | inability to hedge the currency risk in some transactions because of uncertainty or the inability to reasonably estimate our
foreign exchange exposure;                                                                                                                    
| 
| |  | increased cost and development time required to adapt our products to local markets;                                                                                                                                                                                       
| 
| |  | lack of experience in a particular geographic market;                                                                                                                                                                                                                      
| 
| |  | legal, regulatory, social, political, labor or economic uncertainties in a specific country or region, including loss or
modification of exemptions for taxes and tariffs, import and export license requirements, trade restrictions, war, terrorism
and civil unrest; and
| 
| |  | higher operating costs due to
local laws or regulation.                                                                                                                                                                                                                    

Our future success depends on our ability to continue to retain and attract
qualified employees.

We believe that our
future success depends upon our ability to
continue to train, retain, effectively manage and attract highly skilled
technical, managerial, sales and marketing personnel. If our efforts in these
areas are not successful, our costs may increase, development and sales efforts
may be hindered and our customer service may be degraded. Although we invest
significant resources in recruiting and retaining employees, there is intense
competition for personnel in the software industry. From time to time, we
experience difficulties in locating enough highly qualified candidates in
desired geographic locations, or with required industry-specific expertise.
Industry-wide use of non-compete or similar agreements by our competitors may
decrease the pool of available sales and technical personnel.

The loss of key personnel could have an adverse effect on our operations and
stock price.

We believe that there are certain key employees within the organization,
primarily in the senior management team, who are necessary for us to meet our
objectives. Due to the competitive employment nature of the software industry,
there is a risk that we will not be able to retain these key employees. The
loss of one or more key employees could adversely affect our continued growth.
In addition, uncertainty created by turnover of key employees could result in
reduced confidence in our financial performance which could cause fluctuations
in our stock price and result in further turnover of our employees.



28



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We may be required to undertake a costly redesign of our products if
third-party software development tools become an industry standard.

Our software products include a suite of proprietary software development
tools, known as PeopleTools, which are fundamental to the effective use of our
software products. While no industry standard exists for software development
tools, several companies have focused on providing software development tools
and each of them is attempting to establish its own as the accepted industry
standard. If a software product other than PeopleTools were to emerge as a
clearly established and widely accepted industry standard, we may not be able
to adapt PeopleTools appropriately or rapidly enough to satisfy market demand.
In addition, we could be forced to abandon or modify PeopleTools or to redesign
our software products to accommodate the new industry standard. This would be
expensive and time consuming and may adversely affect results of operations and
the financial condition of the business.

A decline in customers ability or willingness to migrate software applications
to an internet architecture could adversely affect continued market acceptance
and sales of PeopleSoft 8 and future internet-based products.

With PeopleSoft 8, use of a web browser as the user interface replaces the
traditional desktop access through networked Microsoft
Windows®-based personal
computers. Dependable access to software applications via the internet or an
intranet involves numerous risks, including security, availability and
reliability. There is a risk that some customers will not be willing or able to
implement internet-based applications. If they do not, revenues may be reduced
and operating results may be adversely affected.

As our software offerings increase in scope and complexity, detection and
correction of errors may become more difficult, may increase costs, may slow
the introduction of new products and may result in more costly performance and
warranty claims.

Our software programs, like all software programs generally, may contain a
number of undetected errors despite internal and third party testing.
Increased complexity of the software and more sophisticated expectations of
customers may result in higher costs to correct such errors and delay the
introduction of new products or enhancements in the marketplace.

Product software errors could subject us to product liability, performance
and/or warranty claims. Although our agreements contain provisions designed to
limit our exposure to potential liability claims, these provisions could be
invalidated by unfavorable judicial decisions or by federal, state, local or
foreign laws or regulations. If a claim against us were to be successful, we
might be required to incur significant expense and pay substantial damages.
Even if we were to prevail, the accompanying publicity could adversely impact
the demand for our products.

If we lose access to critical third-party software or technology, our costs
could increase and the introduction of new products and product enhancements
could be delayed, potentially hurting our competitive position.

We license software and technology from third parties, including some
competitors, and incorporate it into our own software products, some of which
is critical to the operation of our software. If any of the third-party
software vendors were to change product offerings, increase prices or terminate
our licenses, we might need to seek alternative vendors and incur additional
internal or external development costs to ensure continued performance of our
products. Such alternatives may not be available on attractive terms, or may
not be as widely accepted or as effective as the software provided by our
existing vendors. If the cost of licensing or maintaining these third-party
software products or other technology significantly increases, our gross margin
levels could significantly decrease. In addition, interruption in
functionality of our products could adversely affect future sales of licenses
and services.

Disruption of our relationships with third-party systems integrators could
adversely affect revenues and results of operations.



29



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We build and maintain strong working relationships with businesses that we
believe play an important role in the successful marketing and deployment of
our software application products. Our current and potential customers often
rely on third-party system integrators to develop, deploy and manage
applications. We believe that our relationships with these companies enhance
our marketing and sales efforts. However, if these systems integrators are unable
to recruit and adequately train a sufficient number of consulting personnel to
support the successful implementation of our software products, we may lose
customers. Moreover, our relationships with these companies are not exclusive,
and they are free to start, or in some cases increase, the marketing of
competitive business application software, or to otherwise discontinue their
relationships with us. In addition, integrators
who generate consulting fees from customers by providing implementation
services may be less likely to recommend our software if our products are more
difficult or costly to install than competitors similar product
offerings. Disruption of our relationships with these companies could
adversely affect sales, revenues and results of operations.

We may be unable to achieve the benefits we anticipate from joint software
development or marketing arrangements with our business partners.

We enter into various development or joint business arrangements to
develop new software products or extensions to our existing software products.
We may distribute ourselves or jointly sell with our business partners an
integrated software product and pay a royalty to the business partner based on
end-user license fees under these joint business arrangements. While we intend
to develop business applications that are integrated with our software
products, these software products may in fact not be integrated or brought to
market or the market may reject the integrated enterprise solution. As a
result, we may not achieve the revenues that we anticipated at the time we
entered into the joint business arrangement.

Future acquisitions may present risks, and we may be unable to achieve the
financial and strategic goals intended at the time of any acquisition.

From time to time, we may acquire or invest in companies, products or
technologies, and may enter into joint ventures and strategic alliances with other
companies. The risks we commonly encounter in such transactions include:



| |  | we may have difficulty assimilating the operations and personnel of the acquired company;                                                                                                        
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | we may have difficulty effectively integrating the acquired technologies or products with our current products and
technologies;                                                                 
| 
| |  | our ongoing business may be disrupted by transition and integration issues;                                                                                                                      
| 
| |  | we may not be able to retain key technical and managerial personnel from the acquired business;                                                                                                  
| 
| |  | we may be unable to achieve the financial and strategic goals for the acquired and combined businesses;                                                                                          
| 
| |  | we may have difficulty in maintaining controls, procedures and policies during the transition and integration;                                                                                   
| 
| |  | our relationships with partner companies or third-party providers of technology or products could be adversely affected;                                                                         
| 
| |  | our relationships with employees and customers could be impaired;                                                                                                                                
| 
| |  | our due diligence process may fail to identify significant issues with product quality, product architecture, legal and
financial contingencies, and product development, among other things; and
| 
| |  | we may be required to sustain significant exit charges if products acquired in business combinations are unsuccessful.                                                                           



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

We consider certain aspects of our internal operations, and our software
and documentation to be proprietary, and we primarily rely on a combination of
contract, patent, copyright, trademark and trade secret laws and other measures
to protect our proprietary rights. Pending patent applications may not result
in issued patents and, even if issued, the patents may not provide any
meaningful protection or competitive advantage. We also rely on contractual
restrictions in our agreements with customers, employees and others to protect
our intellectual property rights. However, there can be no assurances that
these agreements will not be breached, that we have adequate remedies for any
breach or that our trade secrets will not otherwise become known. Moreover,
the laws of some countries do not protect proprietary intellectual property
rights as effectively as do the laws of the United States. Protecting and
defending our intellectual property rights could be costly regardless of venue.

Through an escrow
arrangement, we have granted some of our customers a
contingent future right to use our source code solely for internal maintenance
services. If our source code is accessed through the escrow, the likelihood of
misappropriation or other misuse of our intellectual property may increase.

Our competitors may independently develop technology that is substantially
equivalent or superior to our technology. Third parties may assert
infringement claims against us more aggressively in the future, especially in
light of recent developments in patent law expanding the scope of patents on
software. These assertions could result in costly and time-consuming
litigation, including damage awards or present the need to enter into royalty
arrangements which would decrease margins and could adversely affect the results
of operations.

Potential terrorist activity may interfere with our ability to conduct
business.

Potential terrorist attacks on United States interests similar to those of
September 11, 2001, present a threat to communication systems, information
technology and security, damage to buildings and their contents and injury to
or death of key employees. We continue to take steps to increase security and
add protections against terrorist threats. This may require adjustment or
change of business practices which could involve significant capital
expenditure and result in loss of focus and distraction of management and
development and sales employees. Moreover, an actual or perceived increase in
risk of travel due to further terrorist activity may reduce our ability to
demonstrate products and meet with prospective customers, which may adversely
affect our ability to close sales and meet projected forecasts. Although built
to state of the art structural standards, our data center near our Pleasanton
headquarters could be vulnerable to attack using large explosives or
sophisticated or unorthodox weapons. Significant structural damage to the data
center could cause a disruption of our information systems and loss of
financial data and certain customer data, which could adversely impact results
of operations and business financial conditions.

Our stock price has been and may remain volatile.

The trading price of our common stock has in the past and may in the
future be subject to wide fluctuations in response to factors such as the
following:



| |  | revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment
community;                             
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | announcements of technological innovations by us or our competitors;                                                                                               
| 
| |  | acquisitions of new products or significant customers by us or our competitors;                                                                                    
| 
| |  | developments with respect to our patents, copyrights or other proprietary rights of or our competitors;                                                            
| 
| |  | changes in recommendations or financial estimates by securities analysts;                                                                                          
| 
| |  | rumors or dissemination of false and/or misleading information, particularly through internet chat rooms, instant messaging
and by other rapid dissemination means;
| 
| |  | changes in management;                                                                                                                                             



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| |  | conditions and trends in the software industry;                                         
|- |  | ----------------------------------------------------------------------------------------
| 
| |  | announcement of acquisitions or other significant transactions by us or our competitors;
| 
| |  | adoption of new accounting
standards affecting the software industry and;               
| 
| |  | general market conditions.                                                              

In addition, fluctuations in the price of our common stock may expose us
to the risk of securities class action lawsuits. Defending against such
lawsuits could result in substantial costs and divert managements attention
and resources. Furthermore, any settlement or adverse determination of these
lawsuits could subject us to significant liabilities.

If requirements relating to accounting treatment for employee stock options are
changed, we may be forced to change our business practices.

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

It may become increasingly expensive to obtain and maintain liability
insurance.

We contract for insurance to cover a variety of potential risks and
liabilities. In the current market, insurance coverage is becoming
more restrictive and when insurance coverage is
offered, the deductible for which we are responsible is larger. In
light of these circumstances, it may become more difficult to
maintain insurance coverage at historical levels, or if such coverage
is available, the cost to obtain or maintain it may increase
substantially. This may result in our being forced to bear the burden
of an increased portion of risks for which we have traditionally been
covered by insurance, which could negatively impact the Company's
results of operations.

We have adopted anti-takeover defenses that could make it difficult for another
company to acquire control of PeopleSoft or limit the price investors might be
willing to pay for our stock.

Certain provisions of our Certificate of Incorporation and Bylaws could
delay the removal of incumbent directors and could make a merger, tender offer
or proxy contest involving us more difficult, even if such events would be
beneficial to the interests of the stockholders. These provisions include
adoption of a Preferred Shares Rights Agreement, commonly known as a poison
pill and giving our board the ability to issue preferred stock and determine
the rights and designations of the preferred stock at any time without
stockholder approval. The rights of the holders of our common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. In addition, the
staggered terms of our Board of Directors could have the effect of delaying or
deferring a change in control.

The above factors and certain provisions of the Delaware General
Corporation Law may have the effect of deterring hostile takeovers or otherwise
delaying or preventing changes in the control or management of PeopleSoft,
including transactions in which our stockholders might otherwise receive a
premium over the fair market value of PeopleSofts common stock.



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PART II  OTHER INFORMATION

Item 1. Legal Proceedings

Wrongful Termination Litigation

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On November 5, 1996, a wrongful termination case was filed in the
California Superior Court for the County of Alameda by a former
employee of PeopleSoft (Yarborough v. PeopleSoft, Inc., Case No.
775405-2). Judgment was entered in favor of plaintiff and PeopleSoft
has satisfied the $5.4 million verdict. In connection with this case,
Plaintiff has appealed the Courts April 4, 2002 order denying
plaintiffs motion seeking $8.1 million in attorneys fees. The
outcome of this appeal is not material to the Companys condensed
consolidated financial statements, and the Company does not anticipate
providing any further updates on this matter.

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

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



| | (a) |  | The Company held its Annual Meeting of Stockholders on
May 29, 2002.                                                                                                                                                                                                                                                                                                                                                               
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Pursuant to the election of the four directors listed
under Item 4(c)(i), Mr. A. George Skip Battle, Mr. Craig A.
Conway, Mr. Frank J. Fanzilli Jr. and Mr. Cyril J. Yansouni were
each elected as Class II directors for a term of two years. Mr.
David A. Duffield, Mr. Aneel Bhusri, and Mr. Steven D. Goldby were
elected at the prior years annual meeting for a term of two years
and still continue as Class I directors.
|
| | (c) |  | The Companys stockholders voted on the following
matters:                                                                                                                                                                                                                                                                                                                                                                         



| | (i) |  | Election of four directors. All directors proposed
by management were elected.
| | --- |  | ------------------------------------------------------------------------------

|                        |  |                 |             |           |  |  |            | 
|----------------------- |  | --------------- | ----------- | --------- |  |  | ---------- | 
|                       
|                        |  | Number of votes |             | Authority
|Name of Nominee         |  | For             |             | Withheld 
|                       
|A. George Skip Battle |  |                 | 255,332,563 |           |  |  | 6,481,589  | 
|Craig A. Conway         |  |                 | 215,388,469 |           |  |  | 46,425,683 | 
|Frank J. Fanzilli Jr.   |  |                 | 254,291,082 |           |  |  | 7,523,070  | 
|Cyril J. Yansouni       |  |                 | 255,333,178 |           |  |  | 6,480,974  | 

Item 5. Other Information

None

Item 6. Exhibits and Reports on
Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| | 99.1 |  | Certification by the Chief Executive
Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### 





| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| | (i)  |  | The Company filed a current report on Form 8-K
on April 9, 2002, and reported that the purchase of the
outstanding Class A Common Stock of Momentum Business
Applications, Inc. had been completed.                                                                                                                                          
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | The Company filed a current report on Form 8-K
on June 6, 2002 and reported that it terminated its
relationship with Arthur Andersen LLP as its independent
public accountants and it had engaged the services of KPMG
LLP, effective as of June 5, 2002, as its independent public
accountants for the fiscal year ending December 31, 2002.



34



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##### 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: August 12, 2002

| |                                                                                                                                            |                      
| | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------
| | PEOPLESOFT, INC.                                                                                                                          
|
| | By:                                                                                                                                        | /S/   KEVIN T. PARKER
| |                                                                                                                                           
| | Kevin T. Parker
Executive Vice President,
Finance and Administration, Chief Financial Officer
(Principal Financial and Accounting Officer)



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INDEX TO EXHIBITS

|               |  |                                                                                                                                                                                      
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                          
|               |  |                                                                                                                                                                                      
|99.1           |  | Certification by the Chief Executive Officer and the Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002



36