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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 March 31, 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 May 7, 2002
|Common Stock, par value $0.01 |  | 310,539,143               



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TABLE OF CONTENTS

|                                 |  |                                                                                       |  |                                                                                                              |  |      |  | 
|-------------------------------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---- |  | 
|                                 |  |                                                                                       |  |                                                                                                              |  | PAGE | 
|                                 |  |                                                                                       |  |                                                                                                              |  |      | 
|PART I     FINANCIAL INFORMATION
|                                
|                                
|                                
|                                
|ITEM 1                          |  | Financial Statements                                                                  |  |                                                                                                              |  |     
|                                
|                                
|                                
|                                
|                                 |  |                                                                                       |  | Condensed Consolidated Balance Sheets as of
March 31, 2002 and December 31, 2001                             |  | 2   
|                                
|                                
|                                
|                                
|                                 |  |                                                                                       |  | Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2002 and March 31, 2001 |  | 3   
|                                
|                                
|                                
|                                
|                                 |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2002 and March 31, 2001 |  | 4   
|                                
|                                
|                                
|                                
|                                 |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                         |  | 5   
|                                
|                                
|                                
|                                
|ITEM 2                          |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations |  | 11                                                                                                          
|                                
|                                
|                                
|                                
|ITEM 3                          |  | Financial Risk Management                                                             |  | 18                                                                                                          
|                                
|                                
|                                
|                                
|PART II     OTHER INFORMATION   
|                                
|                                
|                                
|                                
|ITEM 1                          |  | Legal Proceedings                                                                     |  | 30                                                                                                          
|                                
|                                
|                                
|                                
|ITEM 2                          |  | Changes in Securities and Use of Proceeds                                             |  | 30                                                                                                          
|                                
|                                
|                                
|                                
|ITEM 3                          |  | Defaults upon Senior Securities                                                       |  | 30                                                                                                          
|                                
|                                
|                                
|                                
|ITEM 4                          |  | Submission of Matters to a Vote of Security Holders                                   |  | 30                                                                                                          
|                                
|                                
|                                
|                                
|ITEM 5                          |  | Other Information                                                                     |  | 30                                                                                                          
|                                
|                                
|                                
|                                
|ITEM 6                          |  | Exhibits and Reports on Form 8-K                                                      |  | 30                                                                                                          
|                                
|                                
|                                
|                                
|SIGNATURES                       |  | 32                                                                                   



1



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PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS


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

|                                                    |                                           |                                                |         |                |           |                   |         |           |           |  
|--------------------------------------------------- | ----------------------------------------- | ---------------------------------------------- | ------- | -------------- | --------- | ----------------- | ------- | --------- | --------- | -
|                                                   
|                                                    |                                           |                                                |         | March 31, 2002 |           | December 31, 2001
|                                                    |                                           |                                                |         | (Unaudited)    |           |                   |         |          
|                                                   
|Assets:                                             |                                           |                                                |         |                |           |                   |         |          
|Current assets:                                     |                                           |                                                |         |                |           |                   |         |          
|                                                    | Cash and cash equivalents                 |                                                | $       | 478,164        |           |                   | $       | 433,700   |          
|                                                    | Short-term investments                    |                                                |         | 1,302,108      |           |                   |         | 1,199,046 |          
|                                                    | Accounts receivable, net                  |                                                |         | 313,082        |           |                   |         | 375,437   |          
|                                                    | Income taxes receivable                   |                                                |         | 7,584          |           |                   |         | 7,288     |          
|                                                    | Deferred tax assets                       |                                                |         | 57,986         |           |                   |         | 58,088    |          
|                                                    | Other current assets                      |                                                |         | 59,271         |           |                   |         | 59,309    |          
|                                                    |                                           |                                               
|                                                    |                                           | Total current assets                           |         |                | 2,218,195 |                   |         |           | 2,132,868 |  
|Property and equipment, at cost                     |                                           |                                                | 535,057 |                |           |                   | 515,475 |          
|                                                    |                                           | Less accumulated depreciation and amortization |         |                | (317,907  | )                 |         |           | (301,313  | )
|                                                    |                                           |                                               
|                                                    |                                           |                                                | 217,150 |                |           |                   | 214,162 |          
|Investments                                         |                                           |                                                | 42,539  |                |           |                   | 40,587  |          
|Non-current deferred tax assets                     |                                           |                                                | 95,061  |                |           |                   | 94,932  |          
|Capitalized software, less accumulated amortization |                                           |                                                | 21,635  |                |           |                   | 16,213  |          
|Goodwill, less accumulated amortization             |                                           |                                                | 48,806  |                |           |                   | 32,203  |          
|Other assets                                        |                                           |                                                | 23,542  |                |           |                   | 17,040  |          
|                                                    |                                           |                                               
|                                                    |                                           | Total assets                                   |         | $              | 2,666,928 |                   |         | $         | 2,548,005 |  
|                                                    |                                           |                                               
|Liabilities and Stockholders Equity:               |                                           |                                                |         |                |           |                   |         |          
|Current liabilities:                                |                                           |                                                |         |                |           |                   |         |          
|                                                    | Accounts payable                          |                                                | $       | 37,440         |           |                   | $       | 37,115    |          
|                                                    | Accrued liabilities                       |                                                |         | 146,826        |           |                   |         | 144,646   |          
|                                                    | Accrued compensation and related expenses |                                                |         | 151,725        |           |                   |         | 184,237   |          
|                                                    | Income taxes payable                      |                                                |         | 11,654         |           |                   |         | 6,236     |          
|                                                    | Short-term convertible debt               |                                                |         | 57,000         |           |                   |         | 57,000    |          
|                                                    | Deferred revenues                         |                                                |         | 421,198        |           |                   |         | 409,316   |          
|                                                    |                                           |                                               
|                                                    |                                           | Total current liabilities                      |         |                | 825,843   |                   |         |           | 838,550   |  
|Long-term deferred revenues                         |                                           |                                                | 102,979 |                |           |                   | 98,025  |          
|Other liabilities                                   |                                           |                                                | 22,552  |                |           |                   | 19,490  |          
|Commitments and contingencies (see notes)           |                                           |                                                |         |                |           |                   |         |          
|Stockholders equity:                               |                                           |                                                |         |                |           |                   |         |          
|                                                    | Common stock                              |                                                |         | 3,112          |           |                   |         | 3,068     |          
|                                                    | Additional paid-in capital                |                                                |         | 1,305,962      |           |                   |         | 1,226,155 |          
|                                                    | Retained earnings                         |                                                |         | 461,758        |           |                   |         | 417,214   |          
|                                                    | Treasury stock                            |                                                |         | (35,449        | )         |                   |         | (35,414   | )        
|                                                    | Accumulated other comprehensive loss      |                                                |         | (19,829        | )         |                   |         | (19,083   | )        
|                                                    |                                           |                                               
|                                                    |                                           | Total stockholders equity                     |         |                | 1,715,554 |                   |         |           | 1,591,940 |  
|                                                    |                                           |                                               
|                                                    |                                           | Total liabilities and stockholders equity     |         | $              | 2,666,928 |                   |         | $         | 2,548,005 |  
|                                                    |                                           |                                               
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   

See accompanying notes to condensed consolidated financial statements.



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

|                                                    |                                          |                          |         |                              |         |   |         |         |         | 
|--------------------------------------------------- | ---------------------------------------- | ------------------------ | ------- | ---------------------------- | ------- | - | ------- | ------- | ------- | 
|                                                   
|                                                    |                                          |                          |         | Three Months Ended March 31, |        
|                                                    |                                          |                          |         | 2002                         |         |   | 2001    |        
|                                                   
|Revenues:                                           |                                          |                          |         |                              |         |   |         |        
|                                                    | License fees                             |                          | $       | 133,290                      |         |   | $       | 153,278 |        
|                                                    | Services                                 |                          |         | 342,447                      |         |   |         | 330,156 |        
|                                                    | Development and other services           |                          |         | 7,530                        |         |   |         | 30,721  |        
|                                                    |                                          |                         
|                                                    |                                          | Total revenues           |         |                              | 483,267 |   |         |         | 514,155 | 
|Costs and Expenses:                                 |                                          |                          |         |                              |         |   |         |        
|                                                    | Cost of license fees                     |                          |         | 11,437                       |         |   |         | 16,268  |        
|                                                    | Cost of services                         |                          |         | 164,530                      |         |   |         | 184,759 |        
|                                                    | Cost of development and other services   |                          |         | 6,755                        |         |   |         | 27,894  |        
|                                                    | Sales and marketing expense              |                          |         | 124,570                      |         |   |         | 126,184 |        
|                                                    | Product development expense              |                          |         | 82,333                       |         |   |         | 79,040  |        
|                                                    | General and administrative expense       |                          |         | 30,246                       |         |   |         | 33,879  |        
|                                                    | Restructuring, merger and other charges  |                          |         | 2,800                        |         |   |         |        |        
|                                                    |                                          |                         
|                                                    |                                          | Total costs and expenses |         |                              | 422,671 |   |         |         | 468,024 | 
|                                                    |                                          |                         
|Operating income                                    |                                          |                          | 60,596  |                              |         |   | 46,131  |        
|Other income, net                                   |                                          |                          | 7,239   |                              |         |   | 8,920   |        
|                                                    |                                          |                         
|                                                    | Income before provision for income taxes |                          |         | 67,835                       |         |   |         | 55,051  |        
|Provision for income taxes                          |                                          |                          | 23,291  |                              |         |   | 18,993  |        
|                                                    |                                          |                         
|Net income                                          |                                          | $                        | 44,544  |                              |         | $ | 36,058  |        
|                                                    |                                          |                         
|                                                   
|                                                   
|                                                   
|                                                   
|                                                   
|Basic income per share                              |                                          | $                        | 0.14    |                              |         | $ | 0.12    |        
|Shares used in basic income per share computation   |                                          |                          | 307,990 |                              |         |   | 290,187 |        
|Diluted income per share                            |                                          | $                        | 0.14    |                              |         | $ | 0.11    |        
|Shares used in diluted income per share computation |                                          |                          | 325,865 |                              |         |   | 315,011 |        
|                                                   

See accompanying notes to condensed consolidated financial statements.



3



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

|                                                                                  |                            |                                                                              |                                                     |       |                              |         |            |       |          |         |  
|--------------------------------------------------------------------------------- | -------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------- | ----- | ---------------------------- | ------- | ---------- | ----- | -------- | ------- | -
|                                                                                 
|                                                                                  |                            |                                                                              |                                                     |       | Three Months Ended March 31, |        
|                                                                                  |                            |                                                                              |                                                     |       | 2002                         |         |            | 2001  |         
|                                                                                 
|Operating Activities:                                                             |                            |                                                                              |                                                     |       |                              |         |            |      
|Net income                                                                        |                            | $                                                                            | 44,544                                              |       |                              | $       | 36,058     |      
|Adjustments to reconcile net income to net cash
provided by operating activities: |                            |                                                                              |                                                     |       |                              |         |            |      
|                                                                                  |                            | Depreciation and amortization                                                |                                                     |       | 22,231                       |         |            |       | 19,735   |        
|                                                                                  |                            | Provision for doubtful accounts                                              |                                                     |       | 2,037                        |         |            |       | 9,396    |        
|                                                                                  |                            | Benefit from deferred income taxes                                           |                                                     |       | (643                         | )       |            |       | (5,003   | )      
|                                                                                  |                            | Gain on sales of investments and disposition of property and
equipment, net  |                                                     |       | (1,373                       | )       |            |       | (1,835   | )      
|                                                                                  |                            | In-process research and development, acquisition and other non-cash charges  |                                                     |       | 2,800                        |         |            |       |         |        
|                                                                                  |                            | Non-cash stock compensation                                                  |                                                     |       | 1,569                        |         |            |       | 705      |        
|                                                                                  |                            | Changes in operating assets and liabilities, net of effects of acquisitions: |                                                     |       |                              |         |            |       |          |        
|                                                                                  |                            |                                                                              | Accounts receivable                                 |       |                              | 60,382  |            |       |          | 2,186   |  
|                                                                                  |                            |                                                                              | Accounts payable and accrued liabilities            |       |                              | 3,885   |            |       |          | 15,256  |  
|                                                                                  |                            |                                                                              | Accrued compensation and related expenses           |       |                              | (33,420 | )          |       |          | (21,388 | )
|                                                                                  |                            |                                                                              | Income taxes receivable, net                        |       |                              | 5,258   |            |       |          | 13,315  |  
|                                                                                  |                            |                                                                              | Tax benefits from exercise of stock options         |       |                              | 14,515  |            |       |          | 2,801   |  
|                                                                                  |                            |                                                                              | Deferred revenues                                   |       |                              | 17,057  |            |       |          | (7,465  | )
|                                                                                  |                            |                                                                              | Other current and noncurrent assets and liabilities |       |                              | 1,976   |            |       |          | (6,912  | )
|                                                                                  |                            |                                                                             
|                                                                                  |                            | Net cash provided by operating activities                                    |                                                     |       | 140,818                      |         |            |       | 56,849   |        
|Investing Activities:                                                             |                            |                                                                              |                                                     |       |                              |         |            |      
|Purchase of available-for-sale investments                                        |                            |                                                                              | (2,373,033                                          | )     |                              |         | (1,669,407 | )    
|Proceeds from maturities and sales of available-for-sale investments              |                            |                                                                              | 2,267,094                                           |       |                              |         | 1,299,505  |      
|Purchase of property and equipment                                                |                            |                                                                              | (22,418                                             | )     |                              |         | (20,371    | )    
|Acquisitions, net of cash acquired                                                |                            |                                                                              | (29,999                                             | )     |                              |         | (296       | )    
|                                                                                  |                            |                                                                             
|                                                                                  |                            | Net cash used in investing activities                                        |                                                     |       | (158,356                     | )       |            |       | (390,569 | )      
|Financing Activities:                                                             |                            |                                                                              |                                                     |       |                              |         |            |      
|Net proceeds from sale of common stock and exercise of stock options              |                            |                                                                              | 63,732                                              |       |                              |         | 40,309     |      
|Repurchases of convertible debt, net                                              |                            |                                                                              |                                                    |       |                              |         | (10,542    | )    
|                                                                                  |                            |                                                                             
|                                                                                  |                            | Net cash provided by financing activities                                    |                                                     |       | 63,732                       |         |            |       | 29,767   |        
|Effect of foreign exchange rate changes on cash and cash equivalents              |                            |                                                                              | (1,730                                              | )     |                              |         | (5,574     | )    
|                                                                                  |                            |                                                                             
|Net increase (decrease) in cash and cash equivalents                              |                            |                                                                              | 44,464                                              |       |                              |         | (309,527   | )    
|Cash and cash equivalents at beginning of period                                  |                            |                                                                              | 433,700                                             |       |                              |         | 646,605    |      
|                                                                                  |                            |                                                                             
|Cash and cash equivalents at end of period                                        |                            | $                                                                            | 487,164                                             |       |                              | $       | 337,078    |      
|                                                                                  |                            |                                                                             
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Supplemental disclosures:                                                         |                            |                                                                              |                                                     |       |                              |         |            |      
|                                                                                  | Cash paid for interest     |                                                                              | $                                                   | 1,560 |                              |         | $          | 1,774 |         
|                                                                                  | Cash paid for income taxes |                                                                              | $                                                   | 4,473 |                              |         | $          | 5,349 |         
|                                                                                 

See accompanying notes to condensed consolidated financial statements.



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

1. Basis of Presentation

The information for the three months ended March 31, 2002 and March 31,
2001, is unaudited, but includes all adjustments (consisting only of normal,
recurring 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 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 establish 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 annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to the Securities and Exchange Commission
rules and regulations. Interim results of operations for the three months ended
March 31, 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, warrants, 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 March 31, |        
|                         |                                                                                                                                       |   | 2002                         |         |  | 2001 |     
|                        
|Numerator:               |                                                                                                                                       |   |                              |         |  |      |      |        
|                         | Net income                                                                                                                            |   | $                            | 44,544  |  |      | $    | 36,058  | 
|                         |                                                                                                                                       |  
|Denominator:             |                                                                                                                                       |   |                              |         |  |      |      |        
|                         | Denominator for basic income per share -
weighted average shares outstanding                                                          |   |                              | 307,990 |  |      |      | 290,187 | 
|                         | Employee stock options and other                                                                                                      |   |                              | 17,875  |  |      |      | 24,824  | 
|                         |                                                                                                                                       |  
|                         | Denominator for diluted income per share -
Adjusted weighted average shares outstanding
assuming exercise of common equivalent shares |   |                              | 325,865 |  |      |      | 315,011 | 
|                         |                                                                                                                                       |  
|                        
|Basic income per share   |                                                                                                                                       | $ | 0.14                         |         |  | $    | 0.12 |        
|Diluted income per share |                                                                                                                                       | $ | 0.14                         |         |  | $    | 0.11 |        
|                        



5



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Approximately 12.3 million shares of weighted average common stock
equivalents at prices ranging from $34.91 to $49.23 were excluded from the
computation of diluted earnings per share for the three months ended March 31,
2002 because the options exercise prices were greater than the average market
price of the common shares during the period and were therefore not dilutive.
Approximately 1.2 million shares of weighted average common stock equivalents
at prices ranging from $37.19 to $46.50 were excluded from the computation of
diluted earnings per share for the three months ended March 31, 2001 because
the options exercise prices were greater than the average market price of the
common shares during the period and were therefore not dilutive.

3. Financial Instruments

Derivative financial instruments are utilized by the Company to reduce
foreign currency exchange and interest rate risks. The Company has established
policies and procedures for risk assessment and the approval, reporting and
monitoring of derivative financial instruments. 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 on intercompany balances due
to changes in foreign currency exchange rates. The program uses forward
exchange contracts to hedge significant intercompany balances. The Company uses
two foreign exchange banks for substantially all of these contracts. 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 three months or less. These contracts are recorded on
the balance sheet at fair value. Changes in fair value of the contracts and
the intercompany balances being hedged are included in Other income, net in
the accompanying consolidated statements of operations. To the extent these
contracts do not completely hedge the intercompany balances, the net impact is
recognized in Other income, net.

During the three months ended March 31, 2002 and March 31, 2001 the
Company recorded net losses of $0.5 million and $1.8 million from these settled
contracts and underlying foreign currency exposures. At March 31, 2002, the
Company had outstanding forward foreign exchange contracts to exchange Hong
Kong dollars ($6.2 million), Singapore dollars ($5.4 million), Australian
dollars ($0.4 million), Chilean pesos ($0.3 million) and Canadian dollars ($0.2
million) for U.S. dollars, and to exchange U.S. dollars for Euros ($2.3
million), South African rand ($2.2 million), British pounds ($1.0 million) and
Swiss francs ($0.7 million). At March 31, 2002, each of these contracts matures
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 March 31, 2002. At March 31, 2001, the Company had outstanding
forward exchange contracts to exchange Euros ($2.0 million), Singapore dollars
($1.2 million), Chilean pesos ($0.5 million), Japanese yen ($0.3 million), and
Hong Kong dollars ($1.4 million) for U.S. dollars and to exchange U.S. dollars
for Swiss francs ($0.7 million), South African rand ($0.7 million), Australian
dollars ($0.5 million) and British pounds ($3.6 million). At March 31, 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 March 31, 2001.

The foreign exchange hedging program is managed in accordance with a
corporate policy approved by the Companys Board of Directors. In addition to
hedging existing transaction exposures, the Companys foreign exchange
management 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 to the
extent that the exposures are highly certain, reasonably estimable and
significant in amount. No such hedges have occurred through March 31, 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 facility lease obligations. The swaps
involve the exchange of fixed interest rate payments for variable interest rate
payments without exchanging the notional principal amount. The swaps have an
aggregate notional amount of $175.0 million and 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%. These swaps are designated under SFAS 133 as hedges against
changes in amount of future cash flows. As of March 31, 2002, the Company has
recorded in Accumulated other comprehensive loss a $4.6 million unrealized
loss in connection with these interest rate swaps. Derivative losses included
in Accumulated other comprehensive loss in the accompanying consolidated
balance sheets of $6.6 million 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 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 March 31, |      
|                                   |                                                                 |                                                                        |        | 2002                         |       |   | 2001   |       
|                                  
|Net income                         |                                                                 | $                                                                      | 44,544 |                              |       | $ | 36,058 |       
|Other comprehensive income (loss): |                                                                 |                                                                        |        |                              |       |   |        |       
|                                   | Net change in unrealized gain on available-for-sale
investments |                                                                        |        | (365                         | )     |   |        | (1,183 | )     
|                                   | Foreign currency translation                                    |                                                                        |        | (1,781                       | )     |   |        | (8,467 | )     
|                                   | Interest rate swap transactions:                                |                                                                        |        |                              |       |   |        |        |       
|                                   |                                                                 | Cumulative effect of accounting change                                 |        |                              |      |   |        |        | (2,648 | )
|                                   |                                                                 | Net unrealized gain (loss) on cash flow hedges                         |        |                              | 128   |   |        |        | (5,002 | )
|                                   |                                                                 | Reclassification adjustment for earnings
recognized during the quarter |        |                              | 1,272 |   |        |        | 159    |  
|                                   |                                                                 |                                                                       
|Comprehensive income               |                                                                 | $                                                                      | 43,798 |                              |       | $ | 18,917 |       
|                                   |                                                                 |                                                                       
|                                  

5. Restructuring and Exit Charges

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

|                          |               |   |        |      |   |       |     |   |       |   |       |      |  
|------------------------- | ------------- | - | ------ | ---- | - | ----- | --- | - | ----- | - | ----- | ---- | -
|                         
|                          |               |   | Leases |      |   | Other |     |   | Total |  
|                         
|Balance December 31, 2001 |               | $ | 3,268  |      |   | $     | 820 |   |       | $ | 4,088 |     
|                          | Cash payments |   |        | (247 | ) |       |     |  |       |   |       | (247 | )
|                          |               |  
|Balance March 31, 2002    |               | $ | 3,021  |      |   | $     | 820 |   |       | $ | 3,841 |     
|                          |               |  
|                         

6. Commitments and Contingencies

Vantive Securities Class Actions

On March 15, 2002, the Ninth Circuit Court of Appeal affirmed the March
21, 2000 ruling of the United States District Court for the Northern District
of California granting PeopleSofts motion to dismiss with prejudice a series
of securities class action lawsuits filed against The Vantive Corporation (a
company



7



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PeopleSoft acquired and merged with in December 1999) beginning on July 6,
1999. The Plaintiffs have ninety (90) days following the entry of the Ninth
Circuit Courts order of dismissal to petition for review by the U.S. Supreme
Court.

Wrongful Termination Litigation

On November 5, 1996, a case was filed in the California Superior Court for
the County of Alameda (Yarborough v. PeopleSoft, Inc.,Case No. 775405-2) by a
former employee of PeopleSoft whose employment was terminated in November 1995.
The complaint alleged causes of action for wrongful discharge, retaliation,
age discrimination and harassment. PeopleSoft filed a cross complaint based
upon plaintiffs violation of Penal Code section 632 and the wrongful taking of
proprietary information from PeopleSoft. Following a jury trial, the Court
entered judgment on a verdict in favor of the plaintiff in the amount of $5.4
million. The judgment has been satisfied by PeopleSoft. On April 4, 2002, the
Court denied a motion filed by the plaintiff, after the entry of the judgment,
seeking $8.1 million in attorneys fees. Plaintiff has sixty (60) days from
April 4, 2002, to appeal the Courts order denying the motion for fees.

Other Matters

From time to time in the course of general business activities, PeopleSoft
becomes involved in legal disputes and proceedings. We do not expect the
resolution of these matters to have a material adverse affect on the financial
position or on the results of operations and cash flows of PeopleSoft.
However, depending on the amount and the timing, an unfavorable resolution of
some or all of these matters could materially affect PeopleSoft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 and
certain quarter-end balance sheet information by operating segment (in
thousands):

|                                      |               |  |                              |           |  |      |   |           | 
|------------------------------------- | ------------- |  | ---------------------------- | --------- |  | ---- | - | --------- | 
|                                     
|                                      |               |  | Three Months Ended March 31, |          
|                                      |               |  | 2002                         |           |  | 2001 |  
|                                     
|Revenues from unaffiliated customers: |               |  |                              |           |  |      |   |          
|                                      | North America |  | $                            | 370,592   |  |      | $ | 401,641   | 
|                                      | International |  |                              | 112,675   |  |      |   | 112,514   | 
|                                      |               | 
|                                      | Consolidated  |  | $                            | 483,267   |  |      | $ | 514,155   | 
|                                      |               | 
|Operating income:                     |               |  |                              |           |  |      |   |          
|                                      | North America |  | $                            | 30,419    |  |      | $ | 22,443    | 
|                                      | International |  |                              | 30,177    |  |      |   | 23,688    | 
|                                      |               | 
|                                      | Consolidated  |  | $                            | 60,596    |  |      | $ | 46,131    | 
|                                      |               | 
|Identifiable assets:                  |               |  |                              |           |  |      |   |          
|                                      | North America |  | $                            | 2,319,711 |  |      | $ | 1,746,206 | 
|                                      | International |  |                              | 347,217   |  |      |   | 277,326   | 
|                                      |               | 
|                                      | Consolidated  |  | $                            | 2,666,928 |  |      | $ | 2,023,532 | 
|                                      |               | 
|                                     
|                                     
|                                     
|                                     
|                                     



8



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Revenues from the Europe-Middle-East-Africa region represented 14% and 13%
of total revenues during the quarters ended March 31, 2002 and March 31, 2001.
No other international region had revenues equal to or greater than 10% of
total revenues for the three months ended March 31, 2002 or March 31, 2001.
Revenues originated in each individual foreign country were less than 10% of
total revenues for the three months ended March 31, 2002 and March 31, 2001.

8. Business Combinations

During the quarter ended March 31, 2002, the Company completed an
acquisition of certain assets of Annuncio Software, Inc. (Annuncio),
discussed below, and entered into a transaction to acquire technology from
Calico Commerce, Inc., which was not significant to the Companys financial
statements. The Annuncio acquisition was accounted for using the purchase
method of accounting and, accordingly, the results of operations subsequent to
the acquisition date are included in the accompanying consolidated statements,
and the assumed assets or liabilities were recorded based upon their relative
fair values at the date of acquisition. Pro forma results of operations have
not been presented for these acquisitions because the effects of these
acquisitions were not significant to the Company on either an individual or an
aggregate basis.

Annuncio Software, Inc.

In January 2002, the Company
purchased the intellectual property and certain assets
of Annuncio through a business combination accounted for using the purchase
method of accounting. The intellectual property of Annuncio, a privately held
company, consists of marketing automation software solutions for email and web
customer interaction. The purchase price consisted of a $25.0 million cash
payment.

The Company allocated the excess purchase price over the fair value of the
net tangible liabilities acquired to the following intangible assets: $16.6
million to goodwill, $3.2 million to completed products and technology, $3.1
million to other intangible assets and $2.8 million to in-process research and
development. As of the acquisition date, the technological feasibility of the
in-process technology had not been established and had no alternative future
use and therefore, the Company expensed the $2.8 million in accordance with accounting
principles generally accepted in the United States of America. The capitalized
intangible assets are being amortized based on estimated useful lives of one to
three years.

In performing this allocation, the Company considered, among other
factors, its intentions 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 back
to their present value using discount rates of 14% and 25% for developed and
in-process technology, respectively. 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.

9. Recently Adopted 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 but must 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 $4.3 million in
the first quarter of 2002. At March 31, 2002, the Company had goodwill, net of
accumulated amortization, of $48.8 million.



9



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##### 



The Company does not anticipate that an impairment charge, if any, arising
from our goodwill assessment in 2002 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. Subsequent Event

The Company exercised its option to purchase one hundred percent of the
outstanding Class A Common Stock of Momentum for $90.0 million in cash. The
transaction closed on April 9, 2002 and will be accounted for using the
purchase method of accounting. Under the purchase method of accounting, the
purchase price is allocated to the net assets acquired based on their fair
values, including in-process research and development. Any portion of the
purchase price allocated to in-process research and development will be charged
to expense during the second quarter of 2002. The valuation to determine the
fair value of the net assets acquired has not been completed. However, the
Company does not anticipate that the amount allocated to in-process research
and development will be a significant portion of the purchase price.



10



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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 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 months ended
March 31, 2002 and March 31, 2001:

|                           |                                         |                          |     |               |     |   |                |    |     |      |   |    |     | 
|-------------------------- | --------------------------------------- | ------------------------ | --- | ------------- | --- | - | -------------- | -- | --- | ---- | - | -- | --- | 
|                          
|                           |                                         |                          |     | Percentage of |     |   |                |    |     |      |   |    |    
|                           |                                         |                          |     | Dollar        |     |   |                |    |     |      |   |    |    
|                           |                                         |                          |     | Change        |     |   |                |    |     |      |   |    |    
|                           |                                         |                          |     | Quarter Over  |     |   | Percentage of  |   
|                           |                                         |                          |     | Quarter       |     |   | Total Revenues |   
|                           |                                         |                          |     |              
|                           |                                         |                          |     | 2002/2001     |     |   | 2002           |    |     | 2001 |  
|                          
|Revenues:                  |                                         |                          |     |               |     |   |                |    |     |      |   |   
|                           | License fees                            |                          |     | (13           | )%  |   |                | 27 | %   |      |   | 30 | %  
|                           | Services                                |                          |     | 4             |     |   |                | 71 |     |      |   | 64 |    
|                           | Development and other services          |                          |     | (75           | )   |   |                | 2  |     |      |   | 6  |    
|                           |                                         |                          |     |               |     |  
|                           |                                         | Total revenues           |     |               | (6  | ) |                |    | 100 |      |   |    | 100 | 
|Costs and Expenses:        |                                         |                          |     |               |     |   |                |    |     |      |   |   
|                           | Cost of license fees                    |                          |     | (30           | )   |   |                | 2  |     |      |   | 3  |    
|                           | Cost of services                        |                          |     | (11           | )   |   |                | 34 |     |      |   | 36 |    
|                           | Cost of development and other services  |                          |     | (76           | )   |   |                | 1  |     |      |   | 5  |    
|                           | Sales and marketing expense             |                          |     | (1            | )   |   |                | 26 |     |      |   | 25 |    
|                           | Product development expense             |                          |     | 4             |     |   |                | 17 |     |      |   | 15 |    
|                           | General and administrative expense      |                          |     | (11           | )   |   |                | 6  |     |      |   | 7  |    
|                           | Restructuring, merger and other charges |                          |     | na            |     |   |                | 1  |     |      |   |   |    
|                           |                                         |                          |     |               |     |  
|                           |                                         | Total costs and expenses |     |               | (10 | ) |                |    | 87  |      |   |    | 91  | 
|Operating income           |                                         |                          | 31  |               |     |   | 13             |    |     |      | 9 |   
|                           |                                         |                          |     |               |     |  
|Other income, net          |                                         |                          | (19 | )             |     |   | 1              |    |     |      | 2 |   
|                           |                                         |                          |     |               |     |  
|Provision for income taxes |                                         |                          | 23  | %             |     |   | 5              | %  |     |      | 4 | % 
|                           |                                         |                          |     |               |     |  
|                          
|                          
|                          
|                          
|                          

Net income increased $8.5 million or 24% to $44.5 million for the three
months ended March 31, 2002 as compared to $36.1 million for the three months
ended March 31, 2001. The results of operations for the three months ended
March 31, 2002, includes a $1.7 million (after tax) charge for in-process
research and development related to the acquisition of certain assets of
Annuncio Software, Inc (Annuncio). Diluted income per share increased to
$0.14 for the three months ended March 31, 2002 compared to $0.11 for the three
months ended March 31, 2001.

Revenues

Our software products are generally licensed to end-user customers under
non-exclusive, non-transferable, perpetual license agreements. Revenue from
license fees decreased by 13% to $133.3 million in the first quarter of 2002
from $153.3 million in the first quarter of 2001 primarily due to a global
market slowdown in technology spending during the first quarter of 2002. Given
the continuing global economic slowdown



11



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##### 



and uncertain recovery, license revenue may be flat in the second quarter of
2002 relative to the first quarter of 2002. (1)

Our services revenue consists primarily of software maintenance and
support fees, consulting fees, customer training fees and other miscellaneous
fees. Revenue from services increased by 4% to $342.4 million in the first
quarter of 2002 from $330.2 million in the first quarter of 2001. The growth in
services revenue during the first quarter of 2002 as compared to the first
quarter of 2001 resulted from an increase in maintenance revenue of $22.0
million partially offset by a decrease in consulting revenue of $7.4 million
and a decrease in training revenue of $2.3 million. The increase in
maintenance revenue from the first quarter of 2001 is primarily due to the
growth of our installed customer base. The decrease in consulting and training
revenue is primarily a result of the global market slowdown in technology
spending during the first quarter of 2002. Revenue from services as a
percentage of total revenues was 71% and 64% for the quarters ended March 31,
2002 and March 31, 2001, respectively. The increase in service revenues as a
percentage of total revenues is primarily attributable to lower development and
license revenues for the quarter ended March 31, 2002. Reductions or slowdowns
in our license contracting activity during a given quarter may adversely impact
our future consulting, training and maintenance service revenues since these
revenues typically follow 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)

Pursuant to the terms of the development agreement with Momentum Business
Applications, Inc. (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 we provided to them.
Revenue from development and other services decreased by 75% to $7.5 million in
the first quarter of 2002 from $30.7 million in the first quarter of 2001.
Cost of development and other services decreased by 76% to $6.8 million in the
first quarter of 2002 from $27.9 million in the first quarter of 2001. As of
March 31, 2002, most of the initial development projects undertaken by Momentum
were completed. On April 9, 2002, we completed the transaction to purchase one
hundred percent of the outstanding Class A Common Stock of Momentum. Refer to
Subsequent Event under Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operations. As a result of the
transaction, we do not anticipate any revenue from development services nor any
associated cost of development services from Momentum subsequent to the close
of the transaction.(1)

Revenues by Segment

We are organized by geographic areas, in two operating segments: North
America, which includes operations in the U.S. and Canada, and International,
which includes operations in all other regions. Revenues from the North America
segment decreased by 8% to $370.6 million in the first quarter of 2002 from
$401.6 million in the first quarter of 2001. Revenues from the North America
segment as a percentage of total revenues decreased to 77% in the first quarter
of 2002 from 78% in the first quarter of 2001. Revenues from the International
segment increased to $112.7 million in the first quarter of 2002 from $112.5
million in the first quarter of 2001. Revenues from the International segment
as a percentage of total revenues increased to 23% in the first quarter of 2002
from 22% in the first quarter of 2001. Revenues from the
Europe-Middle-East-Africa region represented 14% and 13% of total revenues
during the first quarter of 2002 and the first quarter of 2001.



---

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



12



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##### 



Costs and Expenses

Our products are based on a combination of internally developed technology
and application products, as well as third-party products and technology. 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 $11.4
million in the first quarter of 2002 from $16.3 million in the first quarter of
2001, representing 2% and 3% of total revenues in each of those quarters. Cost
of license fees represented 9% of license fee revenues in the first quarter of
2002 and 11% of license fee revenues in the first quarter of 2001. The decrease
in cost of license fees in the first quarter of 2002 is primarily attributable
to a $3.7 million decrease in product warranty costs and a $2.3 million
decrease in royalties resulting from decreased license fee revenue, partially
offset by a $1.7 million increase in capitalized software amortization related
to software obtained through acquisitions after March 31, 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) On April 9, 2002, we completed the
transaction to purchase one hundred percent of the outstanding Class A Common
Stock of Momentum. Refer to Subsequent Event under Item 2  Managements
Discussion and Analysis of Financial Condition and Results of Operations. We
anticipate that a substantial majority of the purchase price for Momentum will
be allocated to capitalized software, which we expect to amortize over a period
of five years as cost of license fees. Amortization expense
associated with the Momentum transaction may result in an increase in the cost
of license fees during 2002.(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
$164.5 million in the first quarter of 2002 from $184.8 million in the first
quarter of 2001, representing 34% and 36% of total revenues and 48% and 56% of
service revenues in each of those quarters. The decrease in cost of services is
primarily the result of a $4.0 million decrease in bonuses associated with the
decrease in consulting and training revenues in the first quarter of 2002, a
$3.1 million expense decrease related to the reduction in the utilization of
outside consultants and expense reductions associated with improved cost
management in the professional services 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 $124.6 million in the first
quarter of 2002 from $126.2 million in the first quarter of 2001, representing
26% and 25% of total revenues in each of those quarters. The decrease in sales
and marketing expenses is primarily the result of a $7.9 million decrease in
commissions and bonuses related to the decrease in license fees and a $5.1
million decrease in program marketing and advertising during the first quarter
of 2002, partially offset by an increase in headcount. 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 our staff of
software developers and outside consultants, and the associated infrastructure
costs required to support software product development initiatives. Product
development expenses increased to $82.3 million in the first quarter of 2002
from $79.0 million in the first quarter of 2001, representing 17% and 15% of
total revenues in each of those quarters. The $3.3 million increase is
primarily due to an increase in product development expenses offset by a
decline in development services conducted on the behalf of Momentum and expense
reductions related to continued cost management in the product development
organization. Our current focus in application development is to extend our
software offerings by delivering enhanced functionality and to develop a number
of 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)



---

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



13



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##### 



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. On April 9, 2002,
we completed the transaction to purchase one hundred percent of the outstanding
Class A Common Stock of Momentum. Refer to Subsequent Event under Item 2 
Managements Discussion and Analysis of Financial Condition and Results of
Operations. Subsequent to the close of the transaction we will no longer
conduct product development on Momentums behalf. As a result, we expect that
the dollar amount invested in software product development expenses will
continue to moderately increase during 2002.(1)

General and administrative expenses decreased to $30.2 million in the
first quarter of 2002 from $33.9 million in the first quarter of 2001,
representing 6% and 7% of total revenues in each of those quarters. The
decrease is primarily attributable to a $2.1 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. SFAS 142 requires that goodwill no longer be
amortized but must be assessed for impairment on an annual basis. We do not
anticipate that an impairment charge, if any, arising from the assessment in
2002 will be significant. (1)

Restructuring, Merger and Other Charges

Acquired in-process research and development charges of $2.8 million in
the first quarter of 2002 are attributable to the acquisition of certain assets
of Annuncio. For additional discussion of the Annuncio transaction see
Business Combinations. If we consummate business combinations and technology
purchases during the remainder of 2002, we may incur in-process research and
development charges which will impact results of operations.(1)

Other Income, Net

Other income, net, which includes interest income, interest expense and
other, decreased to $7.2 million in the first quarter of 2002 from $8.9 million
in the first quarter of 2001. The decrease was primarily a result of a decrease
in interest income due to lower interest rates.

Provision for Income Taxes

Our income tax provision increased to $23.3 million in the first quarter
of 2002 from $19.0 million in the first quarter of 2001. The effective tax
rate for the first quarters of 2002 and 2001 was 34.5%. The net deferred tax
assets at March 31, 2002 were $153.0 million. The valuation of these net
deferred tax assets is based on historical tax positions and expectations about
future taxable income.

Business Combinations

During the quarter ended March 31, 2002, we completed an acquisition of
certain assets of Annuncio, discussed below, and entered into a transaction to
acquire technology from Calico Commerce, Inc., which was not significant to our
financial statements. The Annuncio acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of operations
subsequent to the acquisition date are included in the accompanying
consolidated statements of operations, and the assumed assets or liabilities
were recorded based upon their relative fair values at the date of acquisition.
Pro forma results of operations have not been presented for these acquisitions
because the effects of these acquisitions were not significant to us on either
an individual or an aggregate basis. As part of our growth strategy, we
anticipate additional acquisition activity, which may be significant to us on
either an individual or an aggregate basis.(1)



---

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



14



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Annuncio Software, Inc.

In January 2002,
we purchased the intellectual property and certain assets of Annuncio
through a business combination accounted for using the purchase method of
accounting. The intellectual property of Annuncio, a privately held company,
consists of marketing automation software solutions for email and web customer
interaction. The purchase price consisted of a $25.0 million cash payment.

We allocated the excess purchase price over the fair value of the net
tangible liabilities acquired to the following intangible assets: $16.6 million
to goodwill, $3.2 million to completed products and technology, $3.1 million to
other intangible assets and $2.8 million to in-process research and
development. As of the acquisition date, the technological feasibility of the
in-process technology had not been established and had no alternative future
use and therefore, we expensed the $2.8 million in accordance with accounting principles
generally accepted in the United States of America. The capitalized intangible
assets are being amortized based on estimated useful lives of one to three
years.

In performing this allocation, we considered, among other factors, our
intentions 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 back to their
present value using discount rates of 14% and 25% for developed and in-process
technology, respectively. 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.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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

License Revenue.We recognize revenue from license contracts when a
non-cancelable, non-contingent license agreement has been signed, the software
product has been delivered, no uncertainties exist surrounding product
acceptance, fees from the agreement are fixed and determinable, and collection
is probable. We use the residual method to recognize revenue when a license
agreement includes one or more elements to be delivered at a future date if
evidence of the fair value of all undelivered elements exists. If evidence of
the fair value of the undelivered elements does not exist, all revenue is
deferred until sufficient evidence exists or all elements have been delivered.
When we enter into a license agreement requiring that we provide significant
customization of the software products, the license and consulting revenue is
recognized using contract accounting.

Services Revenue. Revenue from consulting services is recognized as the
services are performed for time-and-materials contracts and contract accounting
is utilized for fixed-price contracts. Revenue from training and development
services is recognized as the services are performed. Revenue from maintenance



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



15



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agreements is recognized ratably over the term of the maintenance
agreement, which in most instances is one year.

We recognize our revenue in accordance with the Securities and Exchange
Commissions (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements (SAB 101) and The American Institute of Certified
Public Accountants (AICPA) 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. We believe that we are
currently 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 future
application. These discussions and the issuance of new interpretations, once
finalized, could lead to changes in the way we recognize revenue. They could
also drive significant adjustments to our business practices that could result
in increased administrative costs, lengthened sales cycles and other changes
that could affect our results of operations.

Capitalized Software

We capitalize the development cost of software, other than internal use
software, 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, but expense the costs associated with new
releases, which consist of enhancements or increased functionality of existing
products. We continually evaluate the recoverability of capitalized software
costs including software acquired through acquisitions or by direct purchase of
technology.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts at an amount we estimate to
be sufficient to provide adequate protection against loses resulting from
collecting less than full payment on our 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
historical activity. If actual warranty activities differ from our estimates,
revisions to the estimated warranty liability would be required.

Deferred Income Taxes

We account for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. 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.

Subsequent Event

We exercised our option to purchase one hundred percent of the outstanding
Class A Common Stock of Momentum for $90.0 million in cash. The transaction
closed on April 9, 2002 and will be accounted for using the purchase method of
accounting. Under the purchase method of accounting, the purchase price is
allocated to the net assets acquired based on their fair values, including
in-process research and development. Any portion of the purchase price
allocated to in-process research and development will be charged to expense
during the second quarter of 2002. The valuation to determine the fair value
of the net



16



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assets acquired has not been completed. However, we do not anticipate
that the amount allocated to in-process research and development will be a
significant portion of the purchase price.

LIQUIDITY AND CAPITAL RESOURCES

We had $478.2 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 March 31, 2002. Working capital was $1.4
billion at March 31, 2002. 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
second quarter cash purchase of Momentum for $90.0 million, the third quarter
debt maturity and expected purchases of property and equipment, at least
through the next twelve months.(1)

Cash provided by operating activities was $140.8 million during the three
months ended March 31, 2002 compared to $56.8 million during the three months
ended March 31, 2001. This increase is primarily due to the decrease in
accounts receivable, the increase in tax benefits from exercised stock options,
the increase in deferred revenues and the increase in net income, partially
offset by the decrease in accounts payable and accrued liabilities, the
decrease in accrued compensation and the decrease in income taxes payable.

Cash used in investing activities was $158.4 million during the three
months ended March 31, 2002 compared to $390.6 million during the three months
ended March 31, 2001. Our principal use of cash in investing activities during
the three months ended March 31, 2002 resulted from net purchases of
investments, principally of a short-term duration, of $106.0 million, purchases
of property and equipment of $22.4 million and acquisitions of $30.0 million.
Our principal use of cash in investing activities during the three months ended
March 31, 2001 resulted from net purchases of investments of $369.9 million and
purchases of property and equipment of $20.4 million.

Cash provided by financing activities was $63.7 million during the three
months ended March 31, 2002 compared to $29.8 million during the three months
ended March 31, 2001. The source of cash provided by financing activities
during the three months ended March 31, 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 three months ended March 31, 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 $40.3 million partially offset by
cash used to repurchase $10.5 million of convertible subordinated long-term
notes.



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



17



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ITEM 3  FINANCIAL RISK MANAGEMENT

Foreign Exchange Risk

Our revenue originating outside the United States was 29% and 27% of total
revenues during the three months ended March 31, 2002 and March 31, 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 sales subsidiaries in the local countries and are
typically denominated in the local currency of each country. These subsidiaries
incur most of their expenses in the local currency as well.

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

Our exposure to foreign exchange rate fluctuations arise in part from
intercompany transactions in which the cost of software, including certain
development costs, incurred in the United States is charged to our foreign
sales subsidiaries. Intercompany transactions are typically denominated in the
functional currency of the foreign subsidiary 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 on intercompany balances due
to changes in foreign exchange rates. The program uses forward exchange
contracts to hedge significant intercompany balances. We use two foreign
exchange banks for substantially all of these contracts. In general, these
forward foreign exchange contracts have terms of three months or less. Gains
and losses on the settled contracts are included in Other income, net in the
accompanying 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. To the extent these contracts do not
completely hedge the intercompany balances, the net impact is recognized in
Other income, net. The foreign currency hedging program is managed in
accordance with a corporate policy approved by our Board of Directors.

At March 31, 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 |                  
|                  
|Hong Kong dollars  |  | $               | 6.2 million  |  |      | 7.800             |  | 
|Singapore dollars  |  |                 | 5.4 million  |  |      | 1.849             |  | 
|Australian dollars |  |                 | 0.4 million  |  |      | 1.892             |  | 
|Chilean pesos      |  |                 | 0.3 million  |  |      | 668.000           |  | 
|Canadian dollars   |  |                 | 0.2 million  |  |      | 1.593             |  | 
|                   |  |                 |              |  |      |                   | 
|                   |  | $               | 12.5 million |  |      |                   | 
|                   |  |                 |              |  |      |                   | 



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



18



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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 |                  
|                  
|Euro               |  | $               | 2.3 million |  |      | 0.877             |  | 
|South African rand |  |                 | 2.2 million |  |      | 0.087             |  | 
|British pounds     |  |                 | 1.0 million |  |      | 1.427             |  | 
|Swiss francs       |  |                 | 0.7 million |  |      | 0.600             |  | 
|                   |  |                 |             |  |      |                   | 
|                   |  | $               | 6.2 million |  |      |                   |  | 
|                   |  |                 |             |  |      |                   | 

At March 31, 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 March 31, 2002.
During the three months ended March 31, 2002 and March 31, 2001 we recorded net
losses from these settled contracts and underlying foreign currency exposures
of approximately $0.5 million and $1.8 million.

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 March 31, 2002.

Interest Rate Risk

Investments in debt securities

We invest our cash in a variety of financial instruments, consisting
principally of investments in interest-bearing demand deposit accounts with
financial institutions, tax-exempt money market funds and highly liquid debt
and equity 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 and marketable equity 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 and equity 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 consolidated balance sheets. As of March 31, 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 future investment income may fall short of expectations due
to changes in interest rates or we may suffer losses in principal if forced to
sell securities that have declined in market value due to changes in interest
rates.(1)

Our investments are made in accordance with an investment policy approved
by the Board of Directors. At March 31, 2002, the average maturity of our
investment securities was less than three months. At March 31, 2002, all
investment securities had maturities of less than eighteen months. The
following table presents certain information about our financial instruments
held at March 31, 2002 that are sensitive to changes in interest rates. We
believe our investment securities, comprised of highly liquid debt securities
of corporations, and municipalities, are similar enough to aggregate. Due to
our anticipated tax rate, it is presently



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



19



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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 March 31, 2002, we invested heavily in
taxexempt investments which reduced our weighted average interest rate.

Below is a presentation of the maturity profile of our investment
securities held at March 31, 2002 (in millions, except interest rates):

|                               |  |                   |         |   |             |   |      |         |  |           |            |  |  |   |         | 
|------------------------------ |  | ----------------- | ------- | - | ----------- | - | ---- | ------- |  | --------- | ---------- |  |  | - | ------- | 
|                               |  | Expected Maturity |         |   |             |   |      |         |  |           |           
|                               |  |                   |         |   |             |   |      |         |  |           |           
|                               |  |                   |         |   |             |   |      |         |  | Principal |            |  |  |   |        
|                               |  | 1 Year or         |         |   | More than 1 |   |      | Amount  |  |           | Fair Value | 
|                               |  | less              |         |   | year        |   |      | 3/31/02 |  |           | 3/31/02    | 
|                               |  |                  
|Available-for-sale securities  |  | $                 | 1,361.8 |   |             | $ | 42.8 |         |  | $         | 1,404.6    |  |  | $ | 1,404.6 | 
|Weighted average interest rate |  |                   | 1.7     | % |             |   | 2.1  | %       |  |           |            |  |  |   |         | 

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. The swaps have an
aggregate notional amount of $175.0 million and 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. We recorded in Accumulated other comprehensive loss a $4.6
million unrealized loss as of March 31, 2002 in connection with these interest
rate swaps. Derivative losses included in Accumulated other comprehensive
loss in the accompanying consolidated balance sheets of $6.6 million 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 March 31, 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 $57.2 million and $57.6 million as of March
31, 2002 and December 31, 2001.



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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 Annual Report to Stockholders on Form 10-K.

Continued regional and/or global changes in economic, political and market
conditions could cause further decreases in 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. A regional and/or global change in the economy
and financial markets could result in the delay or reconsideration of customer
purchases. The current economic conditions have negatively impacted our
financial results. If demand for our software and related services decrease,
our revenues may decrease and our operating results would 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 stock price.

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 and are
relatively fixed. If our actual revenues fall below expectations, our net
income may be adversely affected. Many factors can affect our quarterly
operating results, including the following:



| |  | a significant number of our license agreements are typically completed within the last few weeks of the quarter;                                                                                                                                 
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | our sales cycle is relatively long and can vary as a result of our expanding our product line and the complexity of a
customers overall business needs;                                                                                         
| 
| |  | the complexity and size of license transactions can result in protracted negotiations;                                                                                                                                                           
| 
| |  | the effect of economic downturns and global political conditions may result in decreased product demand, price erosion, work
slowdowns and layoffs that may substantially reduce sales of licenses and services;                                 
| 
| |  | 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                                                                                                           



21



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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 purchase 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 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 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 we are currently 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.

A reduction in our contracting activity may result in reduced services revenues
in future periods.

Our ability to maintain or increase service revenue primarily depends on
our ability to increase the amount of software we license to customers.
Variances or slowdowns in licensing activity may impact our consulting,
training and maintenance service revenues in future periods.



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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 license revenue. However, the 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.

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, services which we outsource to third parties generally yield lower
gross margins than our service business overall. As a result, if service
revenues increase as a percentage of total revenue or if revenues from
outsourced services increase as a percentage of total services revenue, 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 resource management system
software and financial management systems 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 financial, 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.

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 law or regulation.                                                                                                                                                                                                                     



23



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Our future success depends on our ability to continue to attract and retain
qualified employees in a highly competitive labor market.

We believe that our future success will depend upon our ability to
continue to attract, train, retain and effectively manage 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. At times, we have had
difficulty 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 further decreases the pool
of available sales and technical personnel. These challenges will remain for
the foreseeable future.

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.

If we fail to compete effectively and introduce new products and service
offerings, our results of operations and business financial condition 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 business financial condition will be adversely affected and our stock price
will decline. 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.

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 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



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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 of products and service revenues could be adversely
affected.

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



25



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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.

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 our alliance partners 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 or the support of our products. 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 and maintain 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.

Acquisitions present many 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 acquire or invest in companies, products or
technologies, and 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;        



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| |  | 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.                                                                           

The acquisition of Momentum may have a negative impact on our future results of
operations.

On January 29, 2002, we exercised our option to purchase all of the
outstanding Class A common stock of Momentum for $90.0 million in cash. Upon
the closing of this transaction, which occurred on April 9, 2002, Momentum
became a wholly-owned subsidiary of PeopleSoft. Going forward, future
development services revenues from Momentum will be eliminated. The
elimination of future development services revenues from Momentum, the future
potential cost of internally funding development efforts, the future
amortization expense associated with the purchased technology and the possible
future impairment of acquired assets may have a negative impact on our future
financial results.

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 many 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 may adversely affect the results
of operations.

The uncertainty around the continuing introduction of the Euro may affect us
adversely.

PeopleSoft 8 contains European Monetary Union, or EMU, functionality that
allows for dual currency reporting and information management. However, since
the Euro has only recently become a legally required currency in member
nations, it is likely that not all issues related to conversion to EMU have
surfaced yet, and some that do emerge may not have been adequately addressed.
In addition, our products may be used with third-party products that may or may
not be EMU compliant. Although we continue to take steps to address the
impact, if any, of EMU compliance for such third-party products, failure of any
critical technology components to operate properly in light of the conversion
to the Euro may adversely affect our revenues or require us to incur
unanticipated expenses to remedy any problems.



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Terrorist activity may interfere with our ability to conduct business.

Terrorist attacks on United States interests similar to those of September
11, 2001, present a potential 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;                                                                                                                                             
| 
| |  | 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;                                                                                              
| 
| |  | 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.

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.



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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.



29



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PART II  OTHER INFORMATION

Item 1. Legal Proceedings

Vantive Securities Class Actions

On March 15, 2002, the Ninth Circuit Court of Appeal affirmed the March
21, 2000 ruling of the United States District Court for the Northern District
of California granting PeopleSofts motion to dismiss with prejudice a series
of securities class action lawsuits filed against The Vantive Corporation (a
company PeopleSoft acquired and merged with in December 1999) beginning on
July 6, 1999. The Plaintiffs have ninety (90) days following the entry of
the Ninth Circuit Courts order of dismissal to petition for review by the
U.S. Supreme Court.

Wrongful Termination Litigation

On November 5, 1996, a case was filed in the California Superior Court for
the County of Alameda (Yarborough v. PeopleSoft, Inc., Case No. 775405-2) by
a former employee of PeopleSoft whose employment was terminated in November
1995. The complaint alleged causes of action for wrongful discharge,
retaliation, age discrimination and harassment. PeopleSoft filed a cross
complaint based upon plaintiffs violation of Penal Code section 632 and the
wrongful taking of proprietary information from PeopleSoft. Following a jury
trial, the Court entered judgment on a verdict in favor of the plaintiff in
the amount of $5.4 million. The judgment has been satisfied by PeopleSoft.
On April 4, 2002, the Court denied a motion filed by the plaintiff, after the
entry of the judgment, seeking $8.1 million in attorneys
fees. Plaintiff
has sixty (60) days from April 4, 2002, to appeal the Courts order denying
the motion for fees.

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

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on
Form 8-K



| | (a) |  | Exhibits           
| | --- |  | -------------------
|
| |     |  | None               
|
| | (b) |  | Reports on Form 8-K



| | (i) |  | The Company filed a current report on Form
8-K on January 29, 2002, and reported that it will
exercise its option to purchase one hundred percent of the
issued and outstanding shares of the Class A Common Stock
of Momentum Business Applications, Inc.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (ii) |  | 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.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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: May 8, 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)



32