##### 



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 1934For the Quarterly Period Ended June 30,
2004
 OR [   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For 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, California 94588-8618 (Address of principal executive offices, Zip Code) (925) 225-3000 (Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] NO
[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No
[   ] On August 3, 2004, the
registrant had 366,881,431 shares of common stock
outstanding.




---



##### 



TABLE OF CONTENTS PART I  FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30,
2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 2004 and June 30, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2004 and June 30, 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 4.
    
    Controls and Procedures
    
    
    48PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    50Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
    
    
    52Item 3.
    
    Defaults Upon Senior Securities
    
    
    52Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    52Item 5.
    
    Other Information
    
    
    53Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    53SIGNATURES
    
    
    
    
    55
 2




---



##### 



PART I  FINANCIAL INFORMATION ITEM 1  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS PEOPLESOFT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited) June 30, 2004
    
    December 31, 2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    542,467
    
    
    $
    439,385Short-term investments and restricted cash
    
    
    1,034,255
    
    
    
    961,906Accounts receivable, net
    
    
    395,757
    
    
    
    462,528Income tax refunds receivable
    
    
    11,671
    
    
    
    18,749Deferred tax assets
    
    
    43,497
    
    
    
    58,630Prepaid expenses and other current assets
    
    
    66,616
    
    
    
    69,997Total current assets
    
    
    2,094,263
    
    
    
    2,011,195Property and equipment, net
    
    
    482,365
    
    
    
    448,211Long term investments
    
    
    40,713
    
    
    
    29,219Deferred tax assets
    
    
    56,698
    
    
    
    42,049Capitalized software, net
    
    
    204,483
    
    
    
    234,217Goodwill
    
    
    1,002,977
    
    
    
    1,005,660Other intangible assets, net
    
    
    413,351
    
    
    
    444,991Other assets
    
    
    10,291
    
    
    
    9,186Total assets
    
    $
    4,305,141
    
    
    $
    4,224,728LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    45,043
    
    
    $
    51,190Accrued liabilities
    
    
    150,823
    
    
    
    158,360Restructuring liabilities
    
    
    50,622
    
    
    
    78,250Accrued compensation and related expenses
    
    
    186,906
    
    
    
    224,983Income taxes payable
    
    
    64,680
    
    
    
    106,355Short-term deferred revenues
    
    
    669,692
    
    
    
    588,590Total current liabilities
    
    
    1,167,766
    
    
    
    1,207,728Long-term deferred revenues
    
    
    118,081
    
    
    
    119,896Other liabilities
    
    
    39,496
    
    
    
    37,655Total liabilities
    
    
    1,325,343
    
    
    
    1,365,279Commitments and contingencies (see Note 11)Stockholders Equity:Common stock
    
    
    3,828
    
    
    
    3,776Additional paid-in capital
    
    
    2,600,103
    
    
    
    2,508,995Retained earnings
    
    
    720,030
    
    
    
    684,847Treasury stock
    
    
    (387,714
    )
    
    
    (387,046
    )Accumulated other comprehensive income
    
    
    43,551
    
    
    
    48,877Total stockholders equity
    
    
    2,979,798
    
    
    
    2,859,449Total liabilities and stockholders equity
    
    $
    4,305,141
    
    
    $
    4,224,728
 See accompanying notes to unaudited condensed consolidated financial statements. 3




---



##### 



PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited) Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Revenues:License fees
    
    $
    130,016
    
    
    $
    111,726
    
    
    $
    260,902
    
    
    $
    192,567Maintenance revenue
    
    
    302,248
    
    
    
    205,563
    
    
    
    599,098
    
    
    
    405,484Professional services revenue
    
    
    215,001
    
    
    
    180,153
    
    
    
    430,384
    
    
    
    359,647Service revenue
    
    
    517,249
    
    
    
    385,716
    
    
    
    1,029,482
    
    
    
    765,131Total revenues
    
    
    647,265
    
    
    
    497,442
    
    
    
    1,290,384
    
    
    
    957,698Costs and expenses:Cost of license fees
    
    
    24,773
    
    
    
    9,563
    
    
    
    48,147
    
    
    
    18,289Cost of services
    
    
    226,442
    
    
    
    166,698
    
    
    
    449,408
    
    
    
    330,167Sales and marketing expense
    
    
    176,590
    
    
    
    131,492
    
    
    
    345,761
    
    
    
    251,050Product development expense
    
    
    137,938
    
    
    
    84,646
    
    
    
    265,312
    
    
    
    168,351General and administrative expense
    
    
    63,162
    
    
    
    41,024
    
    
    
    122,237
    
    
    
    74,039Restructuring, acquisition and other charges
    
    
    4,043
    
    
    
    13,799
    
    
    
    12,272
    
    
    
    13,799Total costs and expenses
    
    
    632,948
    

    
    
    447,222
    
    
    
    1,243,137
    
    
    
    855,695Operating income
    
    
    14,317
    
    
    
    50,220
    
    
    
    47,247
    
    
    
    102,003Other income, net
    
    
    2,696
    
    
    
    4,712
    
    
    
    7,796
    
    
    
    11,678Income before provision for income taxes
    
    
    17,013
    
    
    
    54,932
    
    
    
    55,043
    
    
    
    113,681Provision for income taxes
    
    
    6,035
    
    
    
    18,398
    
    
    
    19,860
    
    
    
    38,668Net income
    
    $
    10,978
    
    
    $
    36,534
    
    
    $
    35,183
    
    
    $
    75,013Basic income per share
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.24Shares used in basic income per share computation
    
    
    363,566
    
    
    
    315,707
    
    
    
    362,664
    
    
    
    315,302Diluted income per share
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.23Shares used in diluted income per share computation
    
    
    368,517
    
    
    
    318,630
    
    
    
    369,741
    
    
    
    319,299
 See accompanying notes to unaudited condensed consolidated financial statements. 4




---



##### 



PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) Six Months Ended June 30,2004
    
    2003Operating activities:Net income
    
    $
    35,183
    
    
    $
    75,013Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    111,790
    
    
    
    56,710Provision for doubtful accounts
    
    
    3,606
    
    
    
    5,544Tax benefits from employee stock transactions
    
    
    8,652
    
    
    
    3,585Provision for deferred income taxes
    
    
    688
    
    
    
    7,739Loss (gain) on sales of investments and disposition of property and equipment, net
    
    
    81
    
    
    
    (1,289
    )Non-cash stock compensation
    
    
    7,073
    
    
    
    4,628Non-cash restructuring, acquisition and other charges
    
    
    3,972
    
    
    
    1,722Changes in operating assets and liabilities:Accounts receivable
    
    
    56,977
    
    
    
    45,350Accounts payable and accrued liabilities
    
    
    (39,422
    )
    
    
    10,735Accrued compensation and related expenses
    
    
    (37,343
    )
    
    
    (26,157
    )Income taxes, net
    
    
    (34,763
    )
    
    
    (23,529
    )Deferred revenues
    
    
    83,192
    
    
    
    26,439Other
    
    
    5,066
    
    
    
    6,769Net cash provided by operating activities
    
    
    204,752
    
    
    
    193,259Investing activities:Purchase of available-for-sale investments
    
    
    (3,301,158
    )
    
    
    (6,822,384
    )Proceeds from sales and maturities of investments
    
    
    3,215,911
    
    
    
    6,732,056Purchase of property and equipment
    
    
    (88,938
    )
    
    
    (213,801
    )Net cash used in investing activities
    
    
    (174,185
    )
    
    
    (304,129
    )Financing activities:Net proceeds from employee stock transactions
    
    
    74,509
    
    
    
    49,145Net cash provided by financing activities
    
    
    74,509
    
    
    
    49,145Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (1,994
    )
    
    
    15,241Net increase (decrease) in cash and cash equivalents
    
    
    103,082
    
    
    
    (46,484
    )Cash and cash equivalents at beginning of period
    
    
    439,385
    
    
    
    319,344Cash and cash equivalents at end of period
    
    $
    542,467
    
    
    $
    272,860Supplemental disclosures:Cash paid for interest
    
    $
    329
    
    
    $
    74Cash paid for income taxes
    
    $
    42,660
    
    
    $
    50,330
 See accompanying notes to unaudited condensed consolidated financial statements. 5




---



##### 



PEOPLESOFT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The accompanying condensed consolidated financial statements for the three and six month periods
ended June 30, 2004 and 2003 have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP) and
are consistent in all material respects with those applied in PeopleSoft Incs.
(PeopleSoft or the Company) Annual Report on Form 10-K for the year ended
December 31, 2003. These financial statements are unaudited and in the opinion
of management, include all necessary normal recurring and other adjustments for
the fair presentation of the Companys financial position, results of
operations and changes in cash flows. The preparation of financial statements
in conformity with U.S. GAAP requires the Company to make estimates and
assumptions that may affect the amounts reported in the accompanying financial
statements. Despite the Companys best effort to make these good faith
estimates and assumptions, actual results may differ. Certain prior period
amounts have been reclassified to conform to the current period presentation. These interim financial statements are prepared in accordance with
Securities and Exchange Commission rules and regulations, which allow certain
information and footnote disclosures, normally included in annual financial
statements, to be condensed or omitted. As a result, these interim financial
statements should be read in conjunction with the Consolidated Financial
Statements filed with the Companys Annual Report on Form 10-K for the year
ended December 31, 2003. 2. Income Per Share Basic income per share is computed by dividing net income by the weighted
average number of common shares outstanding during the period, excluding
unvested restricted stock. Diluted income per share is computed by dividing net
income by the sum of weighted average number of common shares outstanding and
the number of potential dilutive common shares outstanding during the period,
if dilutive. Potential dilutive common shares consist of shares issuable upon
the exercise of stock options, restricted stock not yet vested, and shares
issuable resulting from compensation withheld to purchase stock under the
Companys employee stock purchase plan (ESPP), using the treasury stock method. The following table sets forth the computation of basic income per share
and diluted income per share (in thousands, except per share amounts): Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Numerator:Net income
    
    $
    10,978
    
    
    $
    36,534
    
    
    $
    35,183
    
    
    $
    75,013Denominator:Denominator for basic income
per share  Weighted average
shares outstanding
    
    
    363,566
    
    
    
    315,707
    
    
    
    362,664
    
    
    
    315,302Employee stock options and other
    
    
    4,951
    
    
    
    2,923
    
    
    
    7,077
    
    
    
    3,997Denominator for diluted income
per share  Weighted average
shares outstanding, assuming
exercise of potential dilutive
common shares
    
    
    368,517
    
    
    
    318,630
    
    
    
    369,741
    
    
    
    319,299Basic income per share
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.24Diluted income per share
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.23
 The following table sets forth the potential dilutive common shares that
were excluded from the diluted income per share computations because the
exercise prices were greater than the average market price of the common shares
during the period or were otherwise not dilutive (in millions): 6




---



##### 



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Employee stock options
    
    
    43.6
    
    
    
    51.9
    
    
    
    41.8
    
    
    
    45.3Unvested restricted stock
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.6
    
    
    
    0.7Total shares excluded
    
    
    44.4
    
    
    
    52.6
    
    
    
    42.4
    
    
    
    46.0
 The weighted average exercise prices of the employee stock options that
are antidilutive for the three months ended June 30, 2004 and 2003 were $27.98
and $25.78 per share, respectively, and for the six months ended June 30, 2004
and 2003 were $28.44 and $27.72 per share, respectively. On January 12, 2004, the Board of Directors authorized the repurchase of
up to $200 million of the Companys common stock, par value $0.01 per share, in
the open market or through privately negotiated purchases or otherwise,
depending on market prices and other conditions. During the six months ended
June 30, 2004, no common stock was repurchased under this program. 3. Stock-Based Compensation Our stock-based compensation consists of stock options and restricted
stock awards. The Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB Opinion No. 25). The following table
illustrates the effect on net income and income per share as if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123), to stock-based employee compensation for the three and six months ended
June 30, 2004 and 2003 (in thousands, except per share amounts). The 2003 pro
forma disclosure has been revised to correct the pro forma foreign tax benefits
associated with stock options. Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income, as reported
    
    $
    10,978
    
    
    $
    36,534
    
    
    $
    35,183
    
    
    $
    75,013Add: Stock-based employee
compensation expense included
in reported net income, net
of tax
    
    
    3,277
    
    
    
    2,067
    
    
    
    6,374
    
    
    
    4,147Deduct: Stock-based employee
compensation expense
determined under the fair
value method, net of tax
    
    
    (28,057
    )
    
    
    (36,749
    )
    
    
    (60,807
    )
    
    
    (80,455
    )Pro forma net income (loss)
    
    $
    (13,802
    )
    
    $
    1,852
    
    
    $
    (19,250
    )
    
    $
    (1,295
    )Basic income (loss) per shareAs reported
    
    $
    0.03
    
    
    $
    0.12
    
    
    $
    0.10
    
    
    $
    0.24Pro forma
    
    ($
    0.04
    )
    
    $
    0.01
    
    
    ($
    0.05
    )
    
    $
    0.00Diluted income (loss) per shareAs reported
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.23Pro forma
    
    ($
    0.04
    )
    
    $
    0.01
    
    
    ($
    0.05
    )
    
    $
    0.00
 The fair value of the Companys stock option awards to employees and the
shares purchased under the ESPP were estimated
as of the date of the grant using a Black-Scholes option pricing model.
Limitations on the effectiveness of the Black-Scholes option valuation model
are that it was developed for use in estimating the fair value of traded
options which have no vesting restrictions and are fully transferable and that
the model requires the use of highly subjective assumptions including expected
stock price volatility. The fair value of the Companys stock option awards to
employees and the shares purchased under the ESPP plan were estimated assuming
no expected dividends and the following weighted-average assumptions: ESPP
    
    OptionsThree Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Expected life (in years)
    
    
    0.50
    
    
    
    0.50
    
    
    
    3.18
    
    
    
    3.37Expected volatility
    
    
    0.37
    
    
    
    0.55
    
    
    
    0.69
    
    
    
    0.89Risk free interest rate
    
    
    1.02
    %
    
    
    1.15
    %
    
    
    2.98
    %
    
    
    1.75
    %
 7




---



##### 



ESPP
    
    OptionsSix Months Ended June 30,2004
    
    2003
    
    2004
    
    2003Expected life (in years)
    
    
    0.50
    
    
    
    0.50
    
    
    
    3.18
    
    
    
    3.34Expected volatility
    
    
    0.37
    
    
    
    0.56
    
    
    
    0.75
    
    
    
    0.89Risk free interest rate
    
    
    1.02
    %
    
    
    1.22
    %
    
    
    2.58
    %
    
    
    1.80
    %
 4. Comprehensive Income Comprehensive income primarily includes net income, unrealized gains or
losses on investments, mark-to-market adjustments on interest rate swap
transactions, and foreign currency translation adjustments, which are reflected
as a component of stockholders equity. The components of comprehensive income,
net of tax, are as follows (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    10,978
    
    
    $
    36,534
    
    
    $
    35,183
    
    
    $
    75,013Other comprehensive income:Net unrealized gain (loss) on investments
    
    
    (912
    )
    
    
    1,896
    
    
    
    (457
    )
    
    
    1,317Foreign currency translation adjustments
    
    
    (2,210
    )
    
    
    13,933
    
    
    
    (4,869
    )
    
    
    19,731Interest rate swap transactions:Net unrealized loss on cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (58
    )Reclassification adjustment for earnings recognized during the period
    
    
    
    
    
    
    871
    
    
    
    
    
    
    
    2,106Reclassification adjustment for realized loss on the termination of
interest rate swap
agreements
    
    
    
    
    
    
    881
    
    
    
    
    
    
    
    881Comprehensive income
    
    $
    7,856
    
    
    $
    54,115
    
    
    $
    29,857
    
    
    $
    98,990
 5. Derivative Financial Instruments Derivative financial instruments are only utilized by the Company to
reduce foreign currency exchange and interest rate risks. The Company does not
hold any derivative financial instruments for trading or speculative purposes. Forward Foreign Exchange Contracts The Company has a foreign exchange hedging program principally designed to
mitigate the potential impact due to changes in foreign currency exchange
rates. Forward exchange contracts are primarily used to hedge foreign currency
exposures and generally have terms of two months or less. 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. These contracts are recorded on the balance sheet at fair value in
Accrued liabilities. Changes in fair value of the contracts and the amounts
being hedged are included in Other income, net. At June 30, 2004, each of the
foreign exchange contracts matured within 60 days and had a book value that
approximated fair value. Neither the cost nor the fair value of these forward
foreign exchange contracts was material at June 30, 2004. During the three months ended June 30, 2004 and 2003, the Company recorded
net foreign currency transaction losses of $2.5 million and $1 million,
respectively. During the six months ended June 30, 2004 and 2003, the Company
recorded net foreign currency transaction losses of $4.5 million and $1.2
million, respectively. At June 30, 2004, the Company had the following outstanding forward
foreign exchange contracts to exchange foreign currency for U.S. dollars (in
millions): 8




---



##### 



Foreign Currency
    
    NotionalAmountSingapore dollars
    
    $
    14.9Hong Kong dollars
    
    
    8.5New Zealand dollars
    
    
    7.9British pounds
    
    
    6.2Japanese yen
    
    
    5.4Taiwanese dollars
    
    
    3.8$
    46.7
 At June 30, 2004, the Company had the following outstanding forward
foreign exchange contracts to exchange U.S. dollars for foreign currency (in
millions): NotionalForeign Currency
    
    AmountMexican pesos
    
    $
    12.5Canadian dollars
    
    
    5.3Swiss francs
    
    
    3.0Euro
    
    
    2.7Swedish krona
    
    
    1.0$
    24.5
 At June 30, 2003, the Company had the following outstanding forward
foreign exchange contracts to exchange foreign currency for U.S. dollars (in
millions): NotionalForeign Currency
    
    AmountSingapore dollars
    
    $
    8.8Canadian dollars
    
    
    8.5New Zealand dollars
    
    
    1.0Japanese yen
    
    
    1.0Swiss francs
    
    
    0.9Swedish krona
    
    
    0.8Euros
    
    
    0.7Taiwanese dollars
    
    
    0.4$
    22.1
 At June 30, 2003, the Company had the following outstanding forward
foreign exchange contracts to exchange U.S. dollars for foreign currency (in
millions): NotionalForeign Currency
    
    AmountHong Kong dollars
    
    $
    0.9South African rand
    
    
    0.6$
    1.5
 Interest Rate Swap Transactions The Company used interest rate swap transactions to manage its exposure to
interest rate changes on synthetic lease obligations related to certain of its
headquarters facilities located in Pleasanton, California. The swaps had an
aggregate notional principal amount of $175 million and matured at various
dates in 2003, consistent with the expiration of the synthetic leases. Under
the swap agreements, the Company received a variable interest rate based on the
three month LIBOR rate and paid a weighted average fixed interest rate of 6.8%.
The swaps were designated under SFAS 133 as hedges against changes in the
amount of future cash flows. In February 2003, the Company exercised its option
under a synthetic lease agreement to purchase certain of its headquarters
facilities 9




---



##### 



located in Pleasanton, California for $70 million, and concurrently, swaps
with an aggregate notional principal amount of $70 million matured. In June
2003, the Company exercised its option under a synthetic lease agreement to
purchase certain of its headquarters facilities located in Pleasanton,
California for $105 million. As a result of this transaction, the Company
terminated its remaining interest rate swap agreements with an aggregate
notional principal amount of $105 million resulting in pretax charge of $1.4
million to Other income, net. Included in Accumulated other comprehensive
income at March 31, 2003 was a $1.8 million unrealized loss (after-tax)
related to these interest rate swaps. In the second quarter of 2003, $0.9
million (after-tax) was reclassified from accumulated other comprehensive
income into earnings by making scheduled swap payments and $0.9 million
(after-tax) was recognized as a realized loss that was reclassified from
accumulated other comprehensive income into earnings upon the termination of
the remaining interest rate swap agreements. Concentrations of Credit Risk The Company does not have a significant concentration of credit or
operating risk in any one investment, customer, industry or geographic region
within or outside of the United States. 6. Restructuring Liabilities Third Quarter 2003 Restructuring Plan During the third quarter of 2003, in connection with the acquisition of
J.D. Edwards & Company (J.D. Edwards), management approved and initiated plans
to restructure the pre-acquisition operations of PeopleSoft to eliminate
certain duplicative activities and reduce the Companys cost structure.
Consequently, from the date of the J.D. Edwards acquisition through June 30,
2004, the Company has recorded approximately $31.7 million of restructuring
charges including costs for employee severance, acquisition-related employee
retention, consolidating duplicate facilities and contract terminations.
Approximately 200 pre-acquisition PeopleSoft employees were terminated under
this restructuring plan. Terminated employees entitled to receive payments
under this plan primarily consisted of general and administrative, consulting,
and sales and marketing employees. These costs are accounted for in accordance
with Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146) or Statement of
Financial Accounting Standards No. 112 (SFAS 112), Employers Accounting for
Postemployment Benefits  an Amendment of FASB Statements No. 5 and 43 and are
recorded as a charge to the results of operations in Restructuring,
acquisition and other charges. Future cash payments related to restructuring
liabilities for employee costs are expected to be made through October 2004.
Future cash payments related to restructuring liabilities for facilities
obligations are expected to be made through March 2012. The $10.8 million
restructuring liability at June 30, 2004 related to exiting certain
pre-acquisition activities of the Company is a cash obligation. The following table sets forth the activity in the Companys restructuring
liabilities accounted for under SFAS 146 or SFAS 112 for the six months ended
June 30, 2004, for liabilities established during 2003, as a result of the
acquisition of J.D. Edwards which pertain to the pre-acquisition operations of
PeopleSoft. These liabilities are included in Restructuring liabilities in
the accompanying condensed consolidated balance sheets (in thousands). Employee
    
    FacilitiesCosts
    
    Costs
    
    TotalBalance as of December 31, 2003
    
    $
    10,304
    
    
    $
    1,840
    
    
    $
    12,144Restructuring costs relating to the J.D. Edwards plan
    
    
    3,179
    
    
    
    9,093
    
    
    
    12,272Cash payments
    
    
    (8,490
    )
    
    
    (1,031
    )
    
    
    (9,521
    )Non-cash items
    
    
    (211
    )
    
    
    (3,852
    )
    
    
    (4,063
    )Balance as of June 30, 2004
    
    $
    4,782
    
    
    $
    6,050
    
    
    $
    10,832
 From the July 18, 2003 acquisition date of J.D. Edwards through June 30,
2004, the Company recorded approximately $97.5 million of restructuring costs
in connection with exiting certain pre-acquisition activities of J.D. Edwards
including employee severance costs, change in control payments, costs of
consolidating duplicate facilities, contract termination costs and other costs.
These costs have been accounted for in accordance with Emerging Issues Task
Force Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination (EITF 95-3) and have been recognized as a liability
assumed in the purchase business combination. Approximately 600 pre-acquisition
J.D. Edwards employees were terminated under this restructuring plan.
Terminated employees entitled to receive severance and change in control
payments under this plan primarily consisted of general and administrative,
consulting, and sales and marketing employees. Change in control payments are
made to employees covered by a plan 10




---



##### 



established by J.D. Edwards and subsequently assumed by PeopleSoft upon
the completion of the merger. The change in control plan provides for specified
severance and other change in control-related benefits to participants in the
plan. The change in control plan covered 197 senior management employees.
Future cash payments related to restructuring liabilities for employee costs
are expected to be made through January 2005. Future cash payments related to
restructuring liabilities for facilities obligations, contract terminations and
other costs are expected to be made through January 2008. The $35.2 million
restructuring liability at June 30, 2004 related to exiting certain
pre-acquisition activities of J.D. Edwards is a cash obligation. The following table sets forth the activity in the Companys restructuring
liabilities accounted for in accordance with EITF 95-3, for the six months
ended June 30, 2004, for liabilities established during 2003, as a result of
the acquisition of J.D. Edwards which pertain to the pre-acquisition activities
of J.D. Edwards. These liabilities are included in Restructuring liabilities
in the accompanying condensed consolidated balance sheets (in thousands). ContractEmployee
    
    Facilities
    
    Termination andCosts
    
    Costs
    
    Other Costs
    
    TotalBalance as of December 31, 2003
    
    $
    17,065
    
    
    $
    32,905
    
    
    $
    9,736
    
    
    $
    59,706Changes in estimated costs relating to the J.D. Edwards plan
    
    
    4,522
    
    
    
    (1,882
    )
    
    
    (225
    )
    
    
    2,415Cash payments
    
    
    (16,042
    )
    
    
    (9,926
    )
    
    
    (608
    )
    
    
    (26,576
    )Non-cash items
    
    
    (82
    )
    
    
    (250
    )
    
    
    
    
    
    
    (332
    )Balance as of June 30, 2004
    
    $
    5,463
    
    
    $
    20,847
    
    
    $
    8,903
    
    
    $
    35,213
 Other Restructuring Plans The following table sets forth the activity in the Companys restructuring
liabilities established prior to 2003 and accounted for in accordance with
Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring) for the six months ended June 30,
2004. Future cash payments related to these restructuring liabilities are
expected to be made through October 2005. These liabilities are included in
Restructuring liabilities in the accompanying condensed consolidated balance
sheets (in thousands). FacilitiesCostsBalance as of December 31, 2003
    
    $
    6,362Cash payments
    
    
    (1,785
    )Balance as of June 30, 2004
    
    $
    4,577
 7. Products and Service Warranty Reserve The Company provides for the estimated cost of product and service
warranties based on specific warranty claims received, provided that it is
probable that a liability exists, and provided the cost to repair or otherwise
satisfy the claim can be reasonably estimated. The amount of the reserve
recorded is equal to the costs to repair or otherwise satisfy the claim. If
existing claims are settled for amounts which differ from the Companys
estimates, or if the estimated monetary value of the warranty claims were to
increase or decrease, revisions to the estimated warranty liability may be
required and the warranty expense could change from current levels. The following table sets forth the activity in the Companys product and
service warranty reserve, which is included in Accrued liabilities, for the
six months ended June 30, 2004 (in thousands): TotalBalance as of December 31, 2003
    
    $
    18,828Expense related to new claims
    
    
    6,391Reduction in expense related to changes in estimates
    
    
    (5,161
    )Closed warranty claims, net of recoveries
    
    
    (3,688
    )Balance as of June 30, 2004
    
    $
    16,370
 11




---



##### 



8. Business Combinations Pursuant to an Amended and Restated Agreement and Plan of Merger with J.D.
Edwards dated June 16, 2003, the Company acquired approximately 85% of the
outstanding stock of J.D. Edwards on July 18, 2003 pursuant to an exchange
offer and the remaining shares on August 29, 2003. J.D. Edwards offered enterprise software as well as consulting, education
and support services. The Companys Board of Directors (Board) approved the
offer and the merger and believed that the offer and the merger would provide
the Company with increased breadth and depth across the Companys products,
market segments and industry coverage. The Companys Board believed that J.D.
Edwards expertise in manufacturing and distribution applications would
strengthen the Companys enterprise application suite. In addition, the Board
believed that J.D. Edwards mid-market focused applications and AS/400 based
solutions would be additive to the Companys Internet-based enterprise
application suite. In the exchange offer, holders of J.D. Edwards common stock were entitled
to make an election to tender their shares for cash or shares of PeopleSoft
stock. Such holders were entitled to receive cash, stock, or a combination of
cash and stock, in each case having a value, on a per share basis of $7.05 plus
0.43 of a share of the Companys common stock, allocated by prorating cash and
shares available in the exchange offer among the elections made by the holders.
At the completion of the acquisition, a total of 124,108,566 shares of J.D.
Edwards common stock were tendered and accepted for exchange by PeopleSoft. The Company exchanged options to purchase J.D. Edwards common stock held
by J.D. Edwards employees with options to purchase PeopleSoft common stock at a
rate of 0.43 of a PeopleSoft share per J.D. Edwards share. Each exchanged
PeopleSoft option retained the same vesting characteristics as the J.D. Edwards
option it replaced and each J.D. Edwards option holder will receive $7.05 per
share upon exercise in addition to the PeopleSoft shares. The aggregate purchase price was approximately $2 billion, which consisted
of approximately $875 million in cash, $959.6 million in PeopleSoft common
stock and stock options (net of deferred compensation), $97.5 million in
restructuring costs (Note 6, Restructuring Liabilities) and $22.7 million in
deal costs and other liabilities, which primarily consist of fees paid for
legal, accounting and financial advisory services. A total of 53,366,059 shares
of PeopleSoft common stock were issued in the transaction. The value of the
stock issued to tendering J.D. Edwards shareholders was based upon the average
of the closing prices of one share of the Companys common stock for a few days
before and after the amended terms of the merger were agreed to and announced,
which was $17.22. The fair value of the Companys stock-based awards to
employees was estimated using a Black-Scholes option pricing model. The intrinsic value allocated to the unvested J.D. Edwards options assumed
in the exchange was approximately $6.8 million at the date of the merger and
was recorded as deferred compensation in the purchase price allocation. Option
holders having options with strike prices of $7.05 (J.D. Edwards pre-merger
price) or less were given 0.43 shares of the Companys common stock plus $7.05
less the exercise price and any applicable taxes, in order to retire these
options. In allocating the purchase price based on estimated fair values, the
Company recorded approximately $948 million of goodwill, $477 million of
amortizable purchased intangible assets, $491 million of net tangible assets,
$226 million of capitalized software, $127 million of deferred tax liabilities,
$75 million of deferred revenue and $15 million of in-process research and
development. The purchase price allocation is preliminary and a final
determination of required purchase accounting adjustments will be made upon the
completion of a final analysis of the total purchase cost pending finalization
of restructuring costs related to estimated involuntary termination of
employees and facility related costs. Pro Forma Financial Information The unaudited financial information in the table below summarizes the
combined results of operations of PeopleSoft and J.D. Edwards, on a pro forma
basis, as though the companies had been combined as of the beginning of the
period presented. The impact of the restructuring charges associated with the
acquisition have been excluded. This pro forma financial information is
presented for informational purposes only and is not necessarily indicative of
the results of operations that would have been achieved had the acquisition
taken place at the beginning of the period presented. The unaudited pro forma
condensed combined statement of operations for the three months and six months
ended June 30, 2003 combines the historical results for PeopleSoft for the
three and six months ended June 30, 2003 and the historical results for J.D.
Edwards for the three and six months ended April 30, 2003. The 12




---



##### 



following amounts are in thousands, except per share amounts. Three Months
    
    Six MonthsEnded June
    
    Ended June30, 2003
    
    30, 2003Revenues
    
    $
    652,436
    
    
    $
    1,271,000Net loss
    
    $
    (22,817
    )
    
    $
    (38,414
    )Basic and diluted loss per share
    
    $
    (0.06
    )
    
    $
    (0.10
    )
 9. Goodwill and Other Intangible Assets The following table sets forth the carrying amount of goodwill (in
thousands): NorthAmerica
    
    International
    
    TotalBalance as of December 31, 2003
    
    $
    1,003,668
    
    
    $
    1,992
    
    
    $
    1,005,660Additional restructuring
costs incurred under the
Third Quarter 2003
Restructuring Plan (Note 6,
Restructuring Liabilities).
    
    
    2,415
    
    
    
    
    
    
    
    2,415Other goodwill adjustments
    
    
    (4,921
    )
    
    
    
    
    
    
    (4,921
    )Foreign currency translation
    
    
    
    
    
    
    (177
    )
    
    
    (177
    )Balance as of June 30, 2004
    
    $
    1,001,162
    
    
    $
    1,815
    
    
    $
    1,002,977
 At June 30, 2004, identifiable intangible assets consisted of the
following (in thousands): Gross
    
    Accumulated
    
    Net CarryingIdentifiable Intangible Assets
    
    Value
    
    Amortization
    
    AmountCapitalized software
    
    $
    310,881
    
    
    $
    106,398
    
    
    $
    204,483Patented technology
    
    
    61,190
    
    
    
    12,060
    
    
    
    49,130Customer contracts and related relationships
    
    
    106,600
    
    
    
    14,960
    
    
    
    91,640Maintenance agreements and related relationships
    
    
    306,231
    
    
    
    33,650
    
    
    
    272,581Non-compete agreements
    
    
    1,500
    
    
    
    1,500
    
    
    
    Balance as of June 30, 2004
    
    $
    786,402
    
    
    $
    168,568
    
    
    $
    617,834
 At December 31, 2003, identifiable intangible assets consisted of the
following (in thousands): Gross
    
    Accumulated
    
    Net CarryingIdentifiable Intangible Assets
    
    Value
    
    Amortization
    
    AmountCapitalized software
    
    $
    310,881
    
    
    $
    76,664
    
    
    $
    234,217Patented technology
    
    
    61,190
    
    
    
    5,927
    
    
    
    55,263Customer contracts and
related relationships
    
    
    106,600
    
    
    
    7,249
    
    
    
    99,351Maintenance agreements and
related relationships
    
    
    306,231
    
    
    
    15,917
    
    
    
    290,314Non-compete agreements
    
    
    1,500
    
    
    
    1,437
    
    
    
    63Balance as of December 31,
2003
    
    $
    786,402
    
    
    $
    107,194
    
    
    $
    679,208
 Total expected future annual amortization related to intangible assets is
set forth in the table below (in thousands): 13




---



##### 



Estimated Amortization ExpenseFor the year ended December 31, 2004 (remaining six months)
    
    $
    59,884For the year ended December 31, 2005
    
    
    115,417For the year ended December 31, 2006
    
    
    113,689For the year ended December 31, 2007
    
    
    109,152For the year ended December 31, 2008
    
    
    87,590Thereafter
    
    
    132,102$
    617,834
 10. Customer Assurance Program On June 6, 2003, Oracle Corporation (Oracle) announced that it intended
to commence an unsolicited cash tender offer to purchase all of the outstanding
shares of PeopleSoft for $16.00 per share, or approximately $5.1 billion in the
aggregate (the Oracle Tender Offer). The Oracle Tender Offer formally
commenced June 9, 2003. On June 18, 2003 Oracle amended the offer to increase
the purchase price from $16.00 to $19.50 per share or approximately $6.2
billion in the aggregate. On February 4, 2004, Oracle increased its offer price
to $26 per share, or approximately $9.5 billion in the aggregate. On May 14,
2004, Oracle reduced the offer price to $21 per share, or approximately $7.7
billion in the aggregate. Oracle has extended its tender offer period several
times, and on July 12, 2004 announced extension of its tender offer period to
August 27, 2004. In response to Oracles public statements about its intent to discontinue
PeopleSofts products, and to minimize the loss of business while the Oracle
Tender Offer remains pending, PeopleSoft implemented a customer assurance
program. This program incorporates in its standard perpetual licensing
arrangement a term that provides customers who purchase application licenses
with financial protection in the circumstances described below. That financial
protection is in the form of a payment generally equal to two to five times the
total arrangement fees, with the multiple increasing as the fees increase. The
specific criteria which have to be met before a payment is due under the
customer assurance program vary in some respects among each of five versions of
the language used in 2003 and through June 30, 2004. The customer assurance
program has most recently been extended until the earlier of the date that
Oracle terminates its tender offer or September 30, 2004. A payment will be
generally due under the customer assurance program if each of the following
events occurs:  
    
    either within one year or two years (depending upon the applicable
version of the program) from the contract effective date, there is an
acquisition of PeopleSoft, as specifically described in the version; and
    
    either within two or four years (depending upon the applicable
version of the program) from the contract effective date, the acquiring
company takes certain action to discontinue or reduce support,
licensing, updates or new releases for PeopleSofts products, as
specifically described in each version of the program; and
    
    the customer requests the payment in writing by a specified date and
the customer has timely paid for support services in accordance with the
terms of the customers agreement with PeopleSoft. In Version Five of the program the term acquisition is limited to an
acquisition of PeopleSoft by Oracle or its affiliates. This change is
consistent with the terms of a pending settlement of certain stockholder
litigation. See Note 11, Commitments and Contingencies. Customers retain rights to the licensed products whether or not the
customer assurance programs payments are triggered. No customer is entitled to
a refund of fees previously paid under the customers contract with PeopleSoft,
but the customer would be entitled to a payment under the customer assurance
program if all of the conditions stated above are met. The customer assurance program has no current financial statement impact
on PeopleSoft. A contingent liability may be recognized in the financial
statements of PeopleSoft or its acquirer upon or after the consummation of a
transaction that satisfies the acquisition criteria set forth in the specific
terms of the applicable version of the customer assurance program, and if the
amount due were probable and reasonably estimable. However, the determination
of the timing of recognition and amount of any such contingent liability would
be dependent upon the acquirers plans, assumptions and estimations. The terms
of the customer assurance program require an acquisition by an entity other
than PeopleSoft; therefore no action taken unilaterally by PeopleSoft would, by
itself, result in the recognition of a contingent liability or any other
financial statement impact. As discussed above, in Version Five of the
program, the term acquisition is limited to an acquisition of PeopleSoft by
Oracle or its affiliates. 14




---



##### 



The table below sets forth for each version of the customer assurance
program the dates during which such version was implemented in customer
contracts and the approximate potential maximum liability, as of June 30, 2004,
under the contracts containing language from each such version. As of June 30,
2004, the approximate aggregate maximum potential amount of future liability
under the customer assurance program was $2.02 billion. ApproximateAmount ofMaximumVersion
    
    Dates Offered to Customers*
    
    Potential LiabilityVersion One
    
    6/03/2003 to 9/12/2003
    
    $310 millionVersion Two
    
    9/12/2003 to 9/30/2003
    
    $170 millionVersion Three
    
    9/30/2003 to 11/7/2003
    
    $40 millionVersion Four
    
    11/18/2003 to 6/30/04
    
    $1,342 millionVersion Five
    
    6/16/04 to present
    
    $156 millionTotal Amount of Maximum Potential Liability:
    
    $2,018 million
 * Some contracts originally submitted to customers prior to these end
dates were executed following such dates. 11. Commitments and Contingencies Synthetic Leases As a result of the acquisition of J.D. Edwards, the Company assumed three
six-year master operating leases on four office buildings in Denver, Colorado
(the Denver Campus). Two of the three master leases are effective at June 30,
2004. On April 2, 2004, the third master lease agreement terminated and the
Company exercised its option to purchase two buildings for a net purchase price
of $58.6 million. The lessor, a wholly owned subsidiary of a bank, which
together with a syndication of other banks provided debt and equity financing
of $121.2 million for the purchase and construction costs of the buildings. The
lease payment obligations are based on a return on the lessors costs. The
Company has an option to refinance or purchase the remaining leased properties
at its sole discretion during the terms of the leases for approximately $62.6
million. In the event that the Company does not exercise its option to
refinance or purchase the leased properties, it must guarantee the residual
value of each building up to approximately 85% of the bank financing of $62.6
million or $53.2 million for the remaining two leases. The Company has
evaluated the fair value of the Denver Campus and determined that at June 30,
2004 it is not probable that the value of the leased properties at the end of
the lease terms will be less than the residual value guaranteed by the Company
and as a result the Company does not believe that it will be called upon to
perform under the residual guarantee. The Company is expecting to proceed with
cash purchases of the remaining office buildings. The leases for the remaining
buildings terminate during the third and fourth quarters of 2004. The Company may elect to reduce the interest rate used to calculate its
lease expense by collateralizing the Denver Campus financing arrangements with
investments. At June 30, 2004, investments totaling $63.8 million were
designated as collateral for these leases. The Company may withdraw the funds
used as collateral, excluding restricted amounts, at its sole discretion
provided that it is not in default under the lease agreements. At June 30,
2004, funds used as collateral in the amount of $40.8 million were available
for withdrawal. At June 30, 2004, the Company was in compliance with the
covenants, representations, and warranties required under the lease agreements. Customer Indemnification From time to time, the Company agrees to indemnify its customers against
liability if the Companys products infringe a third partys intellectual
property rights. In addition, the Company, on rare occasions, offers to its
customers indemnity for personal injury and property damage that may result
from the actions of the Companys employees. As of June 30, 2004, the Company
had no material claims or pending material litigation alleging that the
Companys products infringe the intellectual property rights of any third
parties or asserting that the Company has any payment obligation on these
customer indemnification provisions. PeopleSoft Stockholder Actions  Delaware Court of Chancery On June 6, 2003, Felix Ezeir (Case No. 20349-NC), Teresita Fay (Case No.
20350-NC), Robert Crescente (Case No. 20351-NC), 15




---



##### 



Robert Corwin (Case No. 20352-NC) and Ernest Hack (Case No. 20353-NC), all
of whom represented themselves to be PeopleSoft stockholders, each filed a
putative stockholder class action suit in the Delaware Court of Chancery
against the Company and several of the Companys officers and directors. The
suits allege that defendants breached their fiduciary duties in connection with
the response to the tender offer announced by Oracle Corporation on June 6,
2003 and formally commenced June 9, 2003. Plaintiffs in each of the actions
initially sought injunctive relief and an accounting. On June 10, 2003, Steven
Padness filed an action in the Delaware Court of Chancery against these same
defendants (Case No. 20358-NC) making similar allegations and seeking similar
relief. On June 12, 2003, Thomas Nemes filed an action in the Delaware Court of
Chancery (which was subsequently amended June 18, 2003) against these same
defendants (Case No. 20365-NC), making similar allegations and seeking similar
relief (the Nemes Action). On June 25, 2003, on an application filed in the Nemes Action, the Court
consolidated the actions listed above under a single caption and case number:
In re PeopleSoft, Inc. Shareholder Litigation,Consol. C.A. No. 20365-NC. On July 2, 2003, Richard Hutchings (Case No. 20403-NC) filed a putative
stockholder class action in the Delaware Court of Chancery against PeopleSoft
and several of the Companys officers and directors. This action alleges that
defendants breached their fiduciary duties in connection with the response to
Oracles tender offer. Plaintiff sought injunctive relief, an accounting and
damages. On July 22, 2003, the Delaware Court ordered that this action be
consolidated with the other putative Delaware shareholder actions mentioned
above. On May 26, 2004, PeopleSoft announced that the parties to the Delaware
consolidated putative stockholder class action had entered into a memorandum of
understanding providing for the settlement of that action. On June 17, 2004,
the parties in the Delaware consolidated putative stockholder class action
signed a Stipulation and Agreement of Compromise, Settlement and Release
providing for settlement of that action (the Settlement Stipulation) and on
July 22, 2004 filed the Settlement Stipulation with the Delaware Court of
Chancery. In the Settlement Stipulation the stockholder plaintiffs state that, based
on the actions of the US Department of Justice and the European Union and the
current status of their anti-trust reviews and/or opposition to Oracles
proposed acquisition of the Company, the discovery to date, and subject to
confirmatory discovery, they had determined that the customer assurance program
(see Note 10, above), as it relates to Oracle, serves a legitimate corporate
purpose in light of Oracles tender offer and other conduct. Pursuant to the
Settlement Stipulation, the Company agreed that if it extended the customer
assurance program beyond June 30, 2004, the term acquisition would be limited
to an acquisition of the Company by Oracle or its affiliates, and that prior to
June 30, 2004 it would attempt to use that more limited definition in certain
new contracts. In the Settlement Stipulation, which is subject to approval by
the Delaware Court of Chancery, the stockholder plaintiffs, on behalf of a
class of PeopleSoft stockholders, agreed to settle and dismiss all claims that
were raised or could have been raised in the action against the Company and its
directors. The Settlement Stipulation also provides, among other things, that
following Delaware Court of Chancery approval of the settlement (if obtained),
the Company will, for a two year period, amend its Bylaws to shorten the advance notice a stockholder
must give to nominate candidates for director and amend
its stockholder rights plan to provide that the rights plan will generally
cease to be applicable to certain qualifying tender offers unless, within 90
days following commencement or amendment of the price term of the qualifying
tender offer or certain other events, the Board of Directors, including a
majority of its independent directors, shall have adopted a resolution
determining that the rights plan shall remain applicable to such offer. The
Settlement Stipulation also provides for the Company to pay attorneys fees and
expenses of the stockholder plaintiffs in an amount to be determined by the
Court as fair and reasonable. If approved, the settlement will bind all
PeopleSoft stockholders except that it will not apply to Oracle, which is not
precluded by the Settlement Stipulation from continuing to pursue its claims in
the Delaware Court of Chancery and its counterclaims in the California Superior
Court action, both as described immediately below. The Company believes that the claims and allegations asserted in each of
the foregoing putative class action lawsuits are without merit, and intends to
vigorously defend against these lawsuits if the proposed settlement of them is
not approved by the Delaware Court of Chancery. In the opinion of management, resolution of these matters is not expected
to have a material adverse effect on the financial position, results of
operations and cash flows of the Company. Oracle v. PeopleSoft  Delaware Court of Chancery On June 18, 2003, Oracle and Pepper Acquisition Corp. filed a lawsuit in
the Delaware Court of Chancery (Case No. 20377-NC) (captioned Oracle Corp. v.
PeopleSoft, Inc.) against the Company, several of its directors (the Director
Defendants), and J.D. Edwards, alleging that the named directors breached
their fiduciary duties in connection with the response to Oracles tender
offer, 16




---



##### 



and that J.D. Edwards aided and abetted the named directors purported
breach of fiduciary duty. Oracle sought injunctive, declaratory and rescissory
relief. On June 24, 2004, Oracle and Pepper Acquisition Corp. filed an amended
complaint in this action, eliminating J.D. Edwards as a separate defendant and
adding PeopleSoft director Michael Maples as a defendant. The amended complaint updates the plaintiffs claims challenging
PeopleSofts response to Oracles tender offer and alleges, among other things,
that the directors of PeopleSoft have breached their duty of loyalty and duty
of care and that the customer assurance program violates Delaware corporation
law and was implemented without proper approval or supervision by PeopleSofts
Board of Directors. The amended complaint seeks declaratory and injunctive
relief, including an injunction prohibiting the future use of the customer
assurance program and requiring PeopleSofts Board of Directors to eliminate
the Companys Shareholder Rights Plan. Discovery in this action is proceeding and is being coordinated with
discovery in PeopleSofts action against Oracle in California, discussed below.
Trial in the Delaware action has been scheduled to commence on September 27,
2004. The Company believes that the claims and allegations asserted in this
action are without merit, and intends vigorously to defend against this
lawsuit. In the opinion of management, resolution of this matter is not expected to
have a material adverse effect on the financial position, results of operations
and cash flows of the Company. PeopleSoft Stockholder Actions  California Superior Court for the County of
Alameda On June 6, 2003, separate actions were filed in the California Superior
Court for the County of Alameda by Doris Staehr (Case No. RG03100291), the West
Virginia Laborers Pension Trust Fund (Case No. RG03100306) and Lorrie McBride
(Case No. RG03100300). On June 10, 2003, Ray Baldi (Case No. RG03100696) filed
an additional case in the same court. The plaintiffs in these actions
(collectively, the Initial Alameda Shareholder Actions) all purport to be
PeopleSoft stockholders, and they make claims against several of PeopleSofts
executive officers and directors. The suits allege that the defendants breached
their fiduciary duties in connection with (i) the response to Oracles tender
offer, (ii) the Companys agreement to acquire J.D. Edwards, and (iii) the
implementation of the 2003 Directors Stock Plan, which was approved by the
PeopleSoft stockholders at the 2003 Annual Meeting of Stockholders. Plaintiffs
seek injunctive, rescissory and declaratory relief. On June 16, 2003, the
Initial Alameda Shareholder Actions were consolidated. On June 11 and 17, 2003,
respectively, two additional actions were filed by Moshe Panzer (Case No.
VG03100876) and Arace Brothers (Case No. VG03101830) asserting similar claims.
By Order dated July 11, 2003, the Panzer and Arace Brothers actions were
consolidated with the Initial Alameda Shareholder Actions (collectively the
Alameda Shareholder Actions). By Order dated June 18, 2003, the Alameda County Superior Court granted
the Companys Motion to Stay the Initial Alameda Shareholder Actions pending
resolution of the claims involving the duties of the defendant directors by the
Delaware Court of Chancery. The California Court found that the stockholder
actions required application of Delaware law, and that allowing the
consolidated cases to proceed would create the specter of inconsistent orders.
By Order dated July 11, 2003, the Alameda County Superior Court also stayed the
Panzer and Arace Brothers cases pursuant to the June 18, 2003 Order in the
Initial Alameda Shareholder Actions. Accordingly, all of the Alameda
Shareholder Actions currently are stayed by order of the California Court. The Company believes that the claims and allegations asserted in each of
the foregoing putative class action lawsuits are without merit, and intends to
vigorously defend against these lawsuits if they are not dismissed by virtue of
the settlement of the Delaware putative stockholder class action discussed
above, or if that settlement is not approved by the Delaware Court of Chancery. In the opinion of management, resolution of these matters is not expected
to have a material adverse effect on the financial position, results of
operations and cash flows of the Company. PeopleSoft v. Oracle  California Superior Court for the County of Alameda On June 13, 2003, PeopleSoft filed an action in the California Superior
Court for the County of Alameda against Oracle and its subsidiary Pepper
Acquisition Corp. and unnamed defendants affiliated with the two named
defendants (Case No. RG03101434). On December 12, 2003, the Company filed a second amended complaint,
incorporating claims formerly pursued by J.D. Edwards, which is now a
subsidiary of the Company. In this lawsuit, PeopleSoft alleges that in
connection with Oracles tender offer, the 17




---



##### 



defendants have engaged in: (i) untrue and misleading advertising in
violation of Californias Business & Professions Code; (ii) unlawful
disparagement of the Companys products and services; (iii) unlawful
interference with the Companys relationships with its customers and
prospective customers; and (iv) unfair trade practices in violation of
Californias Business & Professions Code. The Companys second amended
complaint, portions of which have been filed with the California Court under
seal, alleges new facts about what the Company believes are Oracles ongoing
acts of unfair trade practices and attempts to eliminate PeopleSoft as a
competitor, and Oracles deliberate campaign to mislead our customers about
Oracles plans to terminate our products and force customers to migrate to
Oracle systems. The Company seeks injunctive relief precluding Oracle from
engaging in unfair trade practices and other unlawful actions, and from
proceeding with the tender offer. The Company also seeks restitution and
damages, including damage caused to J.D. Edwards. On January 20, 2004, Oracle
demurred to the second amended complaint, which the court overruled on February
25, 2004. On March 30, 2004, Oracle filed a cross-complaint against PeopleSoft and
members of its board, alleging, among other things, that they acted illegally
in refusing to accept Oracles tender offer and in implementing a customer
assurance program. The cross-complaint alleges causes of action for
interference with prospective economic advantage and violations of various
sections of Californias Civil Code and Business & Professions Code. Oracle
seeks damages, restitution, punitive damages, and injunctive and equitable
relief. PeopleSoft and the board members filed an answer to the cross-complaint
on April 29, 2004, denying the allegations of the cross-complaint and asserting
several affirmative defenses. The Company believes that the claims and
allegations asserted in the cross-complaint are without merit, and intends to
vigorously defend against them. On May 5, 2004, the court issued an order setting a jury trial in the
action to commence on November 1, 2004. In the opinion of management, resolution of these matters is not expected
to have a material adverse effect on the financial position, results of
operations and cash flows of the Company. Other Matters The Company is party to various legal disputes and proceedings arising
from the ordinary course of general business activities. In the opinion of
management, resolution of these matters is not expected to have a material
adverse affect on the financial position, results of the operations and cash
flows of the Company. However, depending on the amount and the timing, an
unfavorable resolution of some or all of these matters could materially affect
the Companys future results of operations or cash flows in a particular
period. 12. Segment Information The Companys chief operating decision maker is its President and Chief
Executive Officer (CEO). While the CEO is apprised of a variety of financial
metrics and information, PeopleSoft is principally managed on a geographic
basis in terms of revenue and segment margin performance. The Companys two
geographic business segments are: North America, which includes the United
States and Canada, and International, which includes all other geographic
regions. Operating expenses are managed functionally on a global basis. Assets
are not identified with geographic segments because the CEO does not evaluate
that information to make resource allocation decisions. Revenues are defined as revenues generated from unaffiliated customers. The
segment margins reported for the North America and International business
segments are computed by subtracting cost of revenues from revenues from
unaffiliated customers. Cost of revenues includes the cost of license, cost of
services and the direct selling cost included in sales and marketing expense.
Operating expenses, which are managed functionally on a global basis, include
corporate marketing, product development, general and administrative expenses
as well as restructuring, acquisition and other charges. The accounting policies for each of the reportable segments are the same
as those used on a consolidated basis. The following table presents a summary
of operating information for the three and six months ended June 30, 2004 and
2003 (in thousands): Three Months Ended June 30, Operating Segments2004
    
    North America
    
    International
    
    Other
    
    TotalRevenues
    
    $
    461,723
    
    
    $
    185,542
    
    
    $
    
    
    
    $
    647,265
 18




---



##### 



Operating Segments2004
    
    North America
    
    International
    
    Other
    
    TotalCost of revenues
    
    
    222,514
    
    
    
    106,758
    
    
    
    
    
    
    
    329,272Segment margin
    
    $
    239,209
    
    
    $
    78,784
    
    
    $
    
    
    
    $
    317,993Operating expenses
    
    
    
    
    
    
    
    
    
    
    303,676
    
    
    
    303,676Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    14,317
 Operating Segments2003
    
    North America
    
    International
    
    Other
    
    TotalRevenues
    
    $
    367,458
    
    
    $
    129,984
    
    
    $
    
    
    
    $
    497,442Cost of revenues
    
    
    169,230
    
    
    
    70,562
    
    
    
    
    
    
    
    239,792Segment margin
    
    $
    198,228
    
    
    $
    59,422
    
    
    $
    
    
    
    $
    257,650Operating expenses
    
    
    
    
    
    
    
    
    
    
    207,430
    
    
    
    207,430Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    50,220
 Six Months Ended June 30, Operating Segments2004
    
    North America
    
    International
    
    Other
    
    TotalRevenues
    
    $
    909,205
    
    
    $
    381,179
    
    
    $
    
    
    
    $
    1,290,384Cost of revenues
    
    
    443,320
    
    
    
    214,428
    
    
    
    
    
    
    
    657,748Segment margin
    
    $
    465,885
    
    
    $
    166,751
    
    
    $
    
    
    
    $
    632,636Operating expenses
    
    
    
    
    
    
    
    
    
    
    585,389
    
    
    
    585,389Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    47,247
 Operating Segments2003
    
    North America
    
    International
    
    Other
    
    TotalRevenues
    
    $
    718,113
    
    
    $
    239,585
    
    
    $
    
    
    
    $
    957,698Cost of revenues
    
    
    328,709
    
    
    
    139,098
    
    
    
    
    
    
    
    467,807Segment margin
    
    $
    389,404
    
    
    $
    100,487
    
    
    $
    
    
    
    $
    489,891Operating expenses
    
    
    
    
    
    
    
    
    
    
    387,888
    
    
    
    387,888Operating income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    102,003
 Revenues from the Europe/Middle-East/Africa region represented 17% and 15% of
revenues, respectively, for the three months ended June 30, 2004 and 2003.
Revenues from the Europe/Middle-East/Africa region represented 18% and 14% of
revenues, respectively, for the six months ended June 30, 2004 and 2003. No
other international region had revenues equal to or greater than 10% for the
three and six months ended June 30, 2004 and 2003. Revenues originated in each
individual foreign country were less than 5% of total revenues during the three
and six months ended June 31, 2004 and 2003 with the exception of Canada.
Canadian revenues comprised 6% of total revenues for both the three and six
month periods ended June 30, 2003. For the three months ended June 30, 2004 and 2003, revenues attributable
to the U.S. were $431.3 million and $343.5 million, respectively. For the six
months ended June 30, 2004 and 2003, revenues attributable to the U.S. were
$852.4 million and $668.5 million, respectively. 19




---



##### 



ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report contains descriptions of our expectations regarding
our future results and trends affecting our business and other forward-looking
statements, all of which are subject to risks and uncertainties. Use of the
future tense and words such as anticipate, believe, estimate, forecast,
intend, may, plan, project, predict, should and will and similar
expressions as they relate to PeopleSoft, Inc. are intended to identify such
forward-looking statements. The forward-looking statements made in this
Quarterly Report are made in reliance upon the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Future results in particular
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 risks and uncertainties and
other factors that could affect future results, see Factors That May Affect
Our Future Results or The Market Price of Our Stock. starting on page 36. We
undertake no obligation to update the information contained in this Quarterly
Report. MANAGEMENT OVERVIEW PeopleSoft, Inc. designs, develops, markets, implements and supports
enterprise application software products for use throughout large and medium
sized organizations worldwide. These organizations include corporations,
educational institutions, non-profit organizations and national, state,
provincial and local government agencies. Our strategy is to offer
comprehensive applications that enable organizations to manage mission critical
business processes and analyze and enhance their relationships with customers,
suppliers, employees and partners. Business Environment Our revenues for the second quarter and the first six months of 2004
increased relative to the same period last year, due to the addition of new
product offerings from the acquisition of J.D. Edwards & Company (J.D. Edwards)
and an improving economic environment. The impact of the Oracle Tender Offer
(see below) continues to affect sales of licenses to new and existing customers
resulting in longer customer sales cycles. In the second quarter of 2004, the
added publicity of the anti-trust trial brought by the Department of Justice
against Oracle further impacted customer confidence regarding the continued
development and support of PeopleSofts products. We believe this added
uncertainty impacted our second quarter 2004 revenue by causing delays in the
sales cycle, delayed closure of deals and a decline in the average selling
price, as we had to give larger discounts in certain cases and close smaller
sized deals than initially anticipated. We believe our professional service
revenue was also impacted, as customers delayed implementing software they had
already licensed, pending the completion of the anti-trust trial. Additionally,
the Oracle Tender Offer related litigation and the anti-trust trial have
consumed extensive human and financial resources. Financial Highlights  
    
    Our total revenues for the second quarter of 2004 were $647.3
million, a 30% increase over the second quarter of 2003. Our total revenues for the first six months of
2004 were $1,290.4 million, a 35% increase over the first six months of
2003. The primary reason for the increase in revenues for the second quarter and the first six months
of 2004 is the addition of new product offerings from the acquisition of J.D. Edwards.
Second quarter 2004 license fees of $130 million increased by $18.3 million over the
same period last year. License fees for the first six months of 2004 increased by $68.3 million to
$260.9 million. The growth in license fees is due to the licensing of
PeopleSoft EnterpriseOne and PeopleSoft World software as a result of
the expansion of our product families from the acquisition of J.D. Edwards. We experienced an increase in
maintenance fees of $96.7 million and $193.6 million for the second
quarter of 2004 and for the first six months of 2004, respectively,
compared to the same periods in 2003 due to an increase in our installed
base of customers under maintenance agreements. Professional service
revenue increased $34.8 million and $70.7 million for the second quarter
of 2004 and for the first six months of 2004, respectively, compared to
the same periods in 2003 as PeopleSofts consulting organization
continued to win new customers.
    
    Due to the impact of purchase accounting charges resulting from the
acquisition of J.D. Edwards and costs associated with the Oracle Tender
Offer, our net income for the second quarter and the first six months of
2004 declined. Our net income decreased to $11 million in the second
quarter of 2004 from $36.5 million in the second quarter of 2003. Our
net income decreased to $35.2 million in the first six months of 2004
from $75 million in the first six months of 2003. The purchase
accounting charges (after-tax) are primarily comprised of the
amortization of capitalized software and other intangible assets of
$16.4 million and $32.9 million and restructuring charges of $2.5
million and $7.6 million for the second quarter and the first six months
of 2004, respectively. Expenses (after-tax) of responding to the Oracle
Tender Offer were $10.5 million and 20




---



##### 



$18.7 million for the second quarter and the first six months of 2004,
respectively, and are comprised primarily of legal and investment banker
fees.
    
    Cash provided by operations in the first six months of 2004 was
approximately $204.8 million. During the first six months of 2004, our
cash and investment balances increased by $186.9 million, when compared
to our cash and investment balances at December 31, 2003. Integration of J.D. Edwards & Company We acquired J.D. Edwards in the third quarter of 2003 for approximately $2
billion, making PeopleSoft the second largest provider of enterprise
application software in the world based on total revenues. We now have over
12,400 customers and approximately 11,500 employees. The combination has made
PeopleSoft:  
    
    a leader in both the mid-sized and large enterprise market-segments
with three product families of high quality enterprise applications:
PeopleSoft Enterprise, PeopleSoft EnterpriseOne and PeopleSoft World.
(PeopleSoft EnterpriseOne and PeopleSoft World applications are
primarily comprised of the former J.D. Edwards 5 and J.D. Edwards World
Software applications.)
    
    a recognized leader in serving the enterprise software needs of
service related industries including: financial services,
communications, healthcare, education and government. PeopleSoft is also
a leading provider to manufacturing and distribution related industries
including: industrial and wholesale distribution, consumer products,
pulp and paper manufacturing, life sciences and the construction
industry. In the second quarter of 2004, we continued to execute on our J.D. Edwards
integration plans across the Company as we consolidate redundant facilities,
combine operations globally and integrate our various general and
administrative functions. As of June 30, 2004, we were ahead of our internal
planned cost reduction schedule targets and we remain confident in our stated
objective of achieving $167 million to $207 million in revenue and cost
synergies for the full year of 2004 as a part of the J.D. Edwards integration
plan. Oracle Tender Offer On June 9, 2003, following our announcement to acquire J.D. Edwards,
Oracle Corporation (Oracle) launched a hostile tender offer of $16.00 per
share to acquire PeopleSoft. On June 18, 2003, Oracle increased its bid to
$19.50 per share. On June 12, 2003 and again June 19, 2003, based upon a
recommendation from the Transaction Committee of our Board of Directors, our
Board of Directors unanimously recommended that our stockholders reject the
offer because the Board believed that the offer would face prolonged regulatory
delays, with a significant likelihood that the offer would not be allowed to
proceed and that Oracles offers significantly undervalued PeopleSoft. On
February 4, 2004, Oracle amended its offer to increase the purchase price from
$19.50 to $26.00 per share. On February 7, 2004, based upon the recommendation
of the Transaction Committee, the Board unanimously recommended that our
stockholders reject the revised offer because the Board believed the offer is
inadequate from a financial point of view and does not reflect PeopleSofts
real value, and the proposed combination of PeopleSoft and Oracle continues to
face substantial regulatory scrutiny in both the United States and Europe and
there is a significant likelihood that the transaction will be prohibited under
antitrust law. On February 26, 2004, the United States Department of Justice (DOJ),
joined by the states of Texas, Hawaii, Maryland, Massachusetts, Minnesota, New
York and North Dakota filed a civil antitrust suit in the U.S. District Court
for the Northern District of California to enjoin Oracles proposed acquisition
of PeopleSoft. The plaintiffs allege that the effect of the proposed
acquisition of PeopleSoft by Oracle would be to lessen competition
substantially in interstate trade and commerce in violation of the Clayton Act.
On April 14, 2004, the DOJs complaint was amended to add as plaintiffs the
states of Connecticut, Michigan and Ohio. The trial commenced June 7, 2004 and
closing arguments were presented on July 20, 2004. On February 13, 2004, the European Commission announced that the
four-month schedule of the second stage of its investigation had resumed and
that the provisional deadline by which the European Commission must decide
whether it will challenge the proposed acquisition is May 11, 2004. On April
14, 2004, this deadline was extended indefinitely pending receipt of
information requested from Oracle by the European Commission. On May 14, 2004, Oracle amended its offer to decrease the purchase price
from $26.00 per share to $21.00 per share. On May 26, 21




---



##### 



2004, based upon the recommendation of the Transaction Committee, the
Board unanimously recommended that our stockholders reject the revised offer
because the Board believed the offer is inadequate from a financial point of
view and does not reflect PeopleSofts real value, and the proposed combination
of PeopleSoft and Oracle continues to face substantial regulatory scrutiny in
both the United States and Europe and there is a significant likelihood that
the transaction will be prohibited under antitrust law. On July 12, 2004,
Oracle announced extension of its tender offer period to August 27, 2004. If
the trial judge in the DOJ lawsuit referred to above were to rule against
Oracle, but Oracle appeals that ruling, the delay and uncertainty regarding the
outcome of the Oracle Tender Offer may continue to disrupt and damage our
business. If the trial judge in the DOJ lawsuit referred to above were to rule
against the DOJ, our ability to successfully conduct our business could be
materially adversely impacted. The Oracle tender offer will continue to be a distraction to management at
least until the outcomes of the U.S. antitrust litigation and European review
are known. The recommendations to stockholders by the PeopleSoft Board of Directors
are discussed and included in PeopleSofts Solicitation/ Recommendation
Statement on Schedule 14D-9 and the amendments thereto filed with the SEC.
These documents can be obtained without charge at www.sec.gov and
www.peoplesoft.com. Our stockholders should read these filings as they contain
important information about the Oracle Tender Offer and the Boards
recommendations. From June 6, 2003 through June 30, 2004 we incurred over $70
million in investment banking, legal and other fees and a significant amount of
internal resources to respond to the tender offer and the related lawsuits.
During the second quarter of 2004, we incurred $17.2 million in investment
banking, legal and other fees and a significant amount of internal resources to
respond to the tender offer and the related lawsuits. See Part II, Item 1 
Legal Proceedings. It is not possible to predict the amount of money or
internal resources that will be required to respond to the Oracle Tender Offer
in the future. RESULTS OF OPERATIONS The following table indicates the percentage of total revenues and the
percentage of period-over-period changes represented by line items in our
consolidated statements of operations: Percentage of
    
    
    
    
    
    
    
    
    
    PercentageDollar
    
    Percentage of Total
    
    of Dollar
    
    Percentage of TotalChange
    
    Revenues
    
    Change
    
    RevenuesThree Months Ended June 30,
    
    Six Months Ended June 30,2004/2003
    
    2004
    
    2003
    
    2004/2003
    
    2004
    
    2003Revenues:License fees
    
    
    16
    %
    
    
    20
    %
    
    
    22
    %
    
    
    35
    %
    
    
    20
    %
    
    
    20
    %Maintenance revenue
    
    
    47
    
    
    
    47
    
    
    
    42
    
    
    
    48
    
    
    
    47
    
    
    
    42Professional services revenue
    
    
    19
    
    
    
    33
    
    
    
    36
    
    
    
    20
    
    
    
    33
    
    
    
    38Total revenues
    
    
    30
    
    
    
    100
    
    
    
    100
    
    
    
    35
    
    
    
    100
    
    
    
    100Costs and expenses:Cost of license fees
    
    
    159
    
    
    
    4
    
    
    
    2
    
    
    
    163
    
    
    
    4
    
    
    
    2Cost of services
    
    
    36
    
    
    
    35
    
    
    
    34
    
    
    
    36
    
    
    
    35
    
    
    
    34Sales and marketing expense
    
    
    34
    
    
    
    27
    
    
    
    26
    
    
    
    38
    
    
    
    27
    
    
    
    26Product development expense
    
    
    63
    
    
    
    21
    
    
    
    17
    
    
    
    58
    
    
    
    20
    
    
    
    18General and administrative expense
    
    
    54
    
    
    
    10
    
    
    
    8
    
    
    
    65
    
    
    
    9
    
    
    
    8Restructuring, acquisition and other charges
    
    
    (71
    )
    
    
    1
    
    
    
    3
    
    
    
    (11
    )
    
    
    1
    
    
    
    1Total costs and expenses
    
    
    42
    
    
    
    98
    
    
    
    90
    
    
    
    45
    
    
    
    96
    
    
    
    89Operating income
    
    
    (72
    )
    
    
    2
    
    
    
    10
    
    
    
    (54
    )
    
    
    4
    
    
    
    11Other income, net
    
    
    (43
    )
    
    
    1
    
    
    
    1
    
    
    
    (33
    )
    
    
    1
    
    
    
    1Income before provision for income taxes
    
    
    (69
    )
    
    
    3
    
    
    
    11
    
    
    
    (52
    )
    
    
    5
    
    
    
    12Provision for income taxes
    
    
    (67
    )
    
    
    1
    
    
    
    4
    
    
    
    (49
    )
    
    
    2
    
    
    
    4Net income
    
    
    (70
    )
    
    
    2
    %
    
    
    7
    %
    
    
    (53
    )
    
    
    3
    %
    
    
    8
    %Diluted income per share
    
    
    (73
    )%
    
    
    
    
    
    
    
    
    
    
    (57
    )%
 Net income decreased $25.6 million or 70% from $36.5 million in the second
quarter of 2003 to $11 million in the second quarter of 2004. Diluted income
per share decreased from $0.11 per share in the second quarter of 2003 to $0.03
per share in the second quarter of 2004. For the first six months of 2004 net
income decreased $39.8 million or 53% from $75 million in the first six months 22




---



##### 



of 2003 to $35.2 million in the first six months of 2004. Diluted income
per share decreased from $0.23 per share in the first six months of 2003 to
$0.10 per share in the first six months of 2004. Revenues License Fee Revenues Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)License fees
    
    $
    130,016
    
    
    $
    111,726
    
    
    $
    260,902
    
    
    $
    192,567Percentage of revenue
    
    
    20
    %
    
    
    22
    %
    
    
    20
    %
    
    
    20
    %Change from prior year
    
    
    16
    %
    
    
    
    
    
    
    35
    %
 Our software products generally are licensed to end-user customers under
non-exclusive, perpetual license agreements. Revenue from license fees
increased by 16% in the second quarter of 2004 as compared to the second
quarter of 2003 and 35% for the first six months of 2004 as compared to the
first six months of 2003. The increase was driven by the addition of the
PeopleSoft EnterpriseOne and PeopleSoft World product families to our product
offerings. We believe the ongoing impact of the Oracle Tender Offer and the
anti-trust trial brought by the Department of Justice against Oracle and the
related publicity negatively impacted our second quarter 2004 revenue. In the
second quarter of 2004 we added 160 new customers compared to 109 in the same
quarter last year. In the first six months of 2004, while the global economy is
improving modestly, technology spending appears to remain sluggish. In the
coming quarters, we expect to see a gradual strengthening of the economy and
seasonal increases in software license purchases by new and existing customers,
however, our ability to grow license revenue will largely depend on the outcome
of the Oracle anti-trust trial and the related publicity. Services Revenues Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Maintenance revenue
    
    $
    302,248
    
    
    $
    205,563
    
    
    $
    599,098
    
    
    $
    405,484Percentage of revenue
    
    
    47
    %
    
    
    42
    %
    
    
    47
    %
    
    
    42
    %Change from prior year
    
    
    47
    %
    
    
    
    
    
    
    48
    %Professional services revenue
    
    $
    215,001
    
    
    $
    180,153
    
    
    $
    430,384
    
    
    $
    359,647Percentage of revenue
    
    
    33
    %
    
    
    36
    %
    
    
    33
    %
    
    
    38
    %Change from prior year
    
    
    19
    %
    
    
    
    
    
    
    20
    %
 Our services revenue consists of software maintenance fees and
professional services fees, which includes consulting fees, customer training
fees, hosting fees and other miscellaneous fees. The increase in maintenance revenue in the second quarter and the first
six months of 2004 as compared to the same periods last year is primarily
attributable to the growth of our installed base of software applications,
arising from sales to both new and existing customers. As a result of the
acquisition of J.D. Edwards in July 2003, our installed base of customers has
grown considerably. At the end of the second quarter 2004, we had an increase
of approximately 639 installed customers over the end of the second quarter of
2003. In accordance with the purchase method of accounting, we were required to
record J.D. Edwards deferred maintenance revenue at fair value as of the
acquisition date reducing our maintenance revenue related to that expanded
customer base by $14.9 million in the second quarter of 2004 and by $39.2
million in the first six months of 2004. As the J.D. Edwards customers, having
deferred maintenance balances as of the acquisition date, renew their contracts
with PeopleSoft during the remainder of 2004, we expect to increase revenues
without incurring additional costs. The increase in professional services revenue in the second quarter and
the first six months of 2004 is primarily due to additional consulting revenue
attributed to the addition of the PeopleSoft EnterpriseOne and PeopleSoft World
product families. We believe that our professional services was negatively
impacted by the Oracle anti-trust trial, as customers delayed implementing
software they had already licensed, pending the outcome of the trial. Changes
in license revenues during a given period may also adversely impact our future
services revenue, since professional services are typically related to our
licensing activity in prior quarters. Our ability to maintain or increase maintenance or professional services
revenue in the future depends primarily on our ability to 23




---



##### 



increase our installed customer base, renew maintenance agreements, and to
maintain or increase the number or size of our professional services
engagements. Revenues by Segment The Companys chief operating decision maker is its President and Chief
Executive Officer (CEO). While the CEO is apprised of a variety of financial
metrics and information, PeopleSoft is principally managed on a geographic
basis in terms of revenue and segment margin performance. The Companys two
geographic business segments are: North America, which includes the United
States and Canada, and International, which includes all other geographic
regions. Revenues by geographic segment from external customers for the second
quarter and six months ended June 30, 2004 and 2003 were: Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)North America
    
    $
    461,723
    
    
    $
    367,458
    
    
    $
    909,205
    
    
    $
    718,113International
    
    
    185,542
    
    
    
    129,984
    
    
    
    381,179
    
    
    
    239,585Total revenues
    
    $
    647,265
    
    
    $
    497,442
    
    
    $
    1,290,384
    
    
    $
    957,698
 Total revenues from the North America segment increased by 26% in the
second quarter of 2004 as compared to the second quarter of 2003 and by 27% in
the first six months of 2004 as compared to the first six months of 2003. As a
percentage of total segment revenues, revenues from the North America segment
were 71% in the second quarter of 2004 and 74% in the second quarter of 2003
and 70% in the first six months of 2004 and 75% in the first six months of
2003. Total revenues from the International segment increased by 43% in the
second quarter of 2004 from the second quarter of 2003 and by 59% in the first
six months of 2004 as compared to the first six months of 2003. As a percentage
of total segment revenues, revenues from the International segment were 29% in
the second quarter of 2004 and 26% in the second quarter of 2003 and 30% in the
first six months of 2004 and 25% in the first six months of 2003. The increase
in revenues from the second quarter and the first six months of 2003 to the
second quarter and the first six months of 2004 resulted primarily from the
acquisition of J.D. Edwards. In the North America segment, revenues attributable to the United States
were $431.3 million and $852.4 million in the second quarter and the first six
months of 2004 and $343.5 million and $668.5 million in the second quarter and
first six months of 2003. Revenues from the Europe/Middle-East/Africa region
represented 17% and 15% of revenues, respectively, for the three months ended
June 30, 2004 and 2003. Revenues from the Europe/Middle-East/Africa region
represented 18% and 14% of revenues, respectively, for the six months ended
June 30, 2004 and 2003. No other international region had revenues equal to or
greater than 10% for the three and six months ended June 30, 2004 and 2003.
Revenues originated in each individual foreign country were less than 5% of
total revenues during the three and six months ended June 31, 2004 and 2003
with the exception of Canada. Canadian revenues comprised 6% of total revenues
for both the three and six month periods ended June 30, 2003. Costs and Expenses Cost of Licenses Fees Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Cost of license fees
    
    $
    24,773
    
    
    $
    9,563
    
    
    $
    48,147
    
    
    $
    18,289Percentage of revenue
    
    
    4
    %
    
    
    2
    %
    
    
    4
    %
    
    
    2
    %Change from prior year
    
    
    159
    %
    
    
    
    
    
    
    163
    %
 Our software products are based on a combination of internally developed
and acquired technology, as well as bundled third party products and
technology. Costs of license fees consist principally of royalties, license
fees for certain third party software products, amortization of capitalized
software and product warranty costs. The second quarter of 2004 increase of
159% over the same period last year primarily results from $11.3 million in
amortization costs for the capitalized software acquired in the J.D. Edwards
acquisition and from a $4.1 million increase in the cost of license fees
associated with changes in the mix of royalty bearing license contracts and the
increase in our license revenues in the same period. The increase of 163% for
the six months ended June 2004 over the same period last year primarily results
from $22.6 million in amortization costs for the capitalized software acquired
in the J.D. Edwards acquisition and from a $6.5 million increase in the cost of
license fees associated with changes in the mix of royalty bearing license
contracts and the increase in our license revenues in the same period. 24




---



##### 



Cost of Services Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Cost of services
    
    $
    226,442
    
    
    $
    166,698
    
    
    $
    449,408
    
    
    $
    330,167Percentage of revenue
    
    
    35
    %
    
    
    34
    %
    
    
    35
    %
    
    
    34
    %Change from prior year
    

    
    36
    %
    
    
    
    
    
    
    36
    %
 Cost of services consists primarily of employee costs and the related
infrastructure costs incurred in providing professional services and
maintenance. Cost of services increased by 36% in the second quarter of 2004 as
compared to the second quarter of 2003, and 36% in the six months ended June
2004 as compared to the six months ended June 2003, primarily due to the
expansion of the support organization resulting from the larger installed base
created by the J.D. Edwards acquisition and the expansion of the professional
services activities and organization. Cost of services also increased $8.8
million in the second quarter of 2004 and $17.6 million for the six months
ended June 2004 due to the amortization of acquired intangible assets for
maintenance relationships and consulting agreements acquired from J.D. Edwards.
Cost of services as a percentage of services revenues was 44% in the second
quarter and first six months of 2004. Cost of services as a percentage of
services revenues was 43% for the second quarter and first six months of 2003.
If the demand for services from new and existing customers for installation,
consulting, maintenance and training services increases over the next several
quarters, we anticipate that our cost of services may also increase. Sales and Marketing Expense Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Sales and marketing
    
    $
    176,590
    
    
    $
    131,492
    
    
    $
    345,761
    
    
    $
    251,050Percentage of revenue
    
    
    27
    %
    
    
    26
    %
    
    
    27
    %
    
    
    26
    %Change from prior year
    
    
    34
    %
    
    
    
    
    
    
    38
    %
 The increase in sales and marketing expense in the second quarter of 2004
and the first six months of 2004 as compared to the same periods last year is
primarily due to costs associated with the growth of our sales force and
marketing activities to support our expanded product line and geographic scope
following the integration of J.D. Edwards. These expense increases are
primarily attributed to compensation and related infrastructure costs
associated with our expanded sales force. Additionally, the second quarter and
first six months of 2004 includes $3.8 million and
$7.5 million, respectively,
of amortization of intangible assets relating to acquired customer
relationships. Sales and marketing expense may increase in future periods as we
increase our sales force and marketing and advertising expenses to increase our
competitive positioning in the marketplace and to promote brand awareness and
global recognition of our products. Product Development Expense Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Product development expense
    
    $
    137,938
    
    
    $
    84,646
    
    
    $
    265,312
    
    
    $
    168,351Percentage of revenue
    
    
    21
    %
    
    
    17
    %
    
    
    20
    %
    
    
    18
    %Change from prior year
    
    
    63
    %
    
    
    
    
    
    
    58
    %
 Product development expense consists primarily of costs related to our
software developers and the associated infrastructure costs of product
development initiatives. The 63% increase in product development expense in the
second quarter of 2004 as well as the 58% increase in the first six months of
2004 as compared to the comparable periods in 2003 were primarily due to the
expansion of our development organization to support our expanded product
offerings following the acquisition of J.D. Edwards. The second quarter and
first six months of 2004 also includes amortization of intangible assets
acquired from J.D. Edwards of $3 million and $6 million, respectively, for
acquired patented technology. In addition, we incurred higher costs for
outsourced development of $3.9 million in the second quarter of 2004 and $6.7
million for the first six months of 2004 as compared to the same period last
year. We did not capitalize any internal development costs in the second
quarter of 2004 or six month period ending June 30, 2004. Our current focus is
to continue to extend our software offerings by delivering enhanced
functionality to all three product families and to further develop new
applications across both the PeopleSoft Enterprise and PeopleSoft EnterpriseOne
application families. 25




---



##### 



General and Administrative Expense Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)General and administrative expense
    
    $
    63,162
    
    
    $
    41,024
    
    
    $
    122,237
    
    
    $
    74,039Percentage of revenue
    
    
    10
    %
    
    
    8
    %
    
    
    9
    %
    
    
    8
    %Change from prior year
    
    
    54
    %
    
    
    
    
    
    
    65
    %
 General and administrative expense consists primarily of salary and other
employee related costs plus outside service costs to perform legal, finance,
and human resource functions. In addition, corporate insurance is recorded as
general and administrative costs. The increase in general and administrative
expense for the second quarter of 2004 as compared to the second quarter of
2003 includes additional administrative staff, infrastructure costs and other
costs resulting from the J.D. Edwards acquisition and an increase in legal and
investment banker fees of $5.6 million relating to our response to the Oracle
Tender Offer and related legal proceedings. The increase in general and
administrative expense for the six months ended June 30, 2004 as compared to
the six months ended June 30, 2003 includes additional administrative staff,
infrastructure costs and other costs resulting from the J.D. Edwards
acquisition, an increase in legal and investment banker fees of $18.4 relating
to our response to the Oracle Tender Offer and related legal proceedings and an
increase in third party integration fees of $4.7 million relating to the J.D.
Edwards acquisition. It is not possible to predict the amount of money or
internal resources that will be required to respond to the Oracle Tender Offer
and related legal proceedings in 2004. We expect the third party integration
costs to decline in the remainder of 2004 as the integration of J.D. Edwards is
completed. Restructuring, Acquisition and Other Charges The following table sets forth the components of Restructuring,
acquisition and other charges: Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Restructuring, acquisition and other charges
    
    $
    4,043
    
    
    $
    13,799
    
    
    $
    12,272
    
    
    $
    13,799
 Restructuring charges and adjustments of $4 million in the second quarter
of 2004 and of $12.3 million in the six month period ending June 30, 2004 are
primarily the result of the Third Quarter 2003 Restructuring Plan relating to
the acquisition of J.D. Edwards. In connection with the Third Quarter 2003
Restructuring Plan, we initiated plans to restructure our pre-acquisition
operations to eliminate certain duplicative activities and reduce our cost
structure. The costs associated with that plan include costs for employee
severance, acquisition related employee retention, consolidating duplicate
facilities and contract terminations. Terminated employees entitled to receive
payments under this plan primarily consisted of general and administrative,
consulting, and sales and marketing employees. The second quarter 2004
restructuring charge includes approximately $0.7 million related to employee
costs and $3.3 million related to costs of consolidating duplicate facilities.
The six month period ending June 30, 2004 restructuring charge includes
approximately $3.2 million related to employee costs and $9.1 million related
to costs of consolidating duplicate facilities. Of the $9.1 million in
facilities costs, approximately $4 million relates to impaired furniture and
equipment assets which were identified as certain duplicate facilities were
vacated. Future cash payments related to these restructuring liabilities for
employee costs are expected to be made through October 2004. Future cash
payments related to facilities obligations are expected to be made through
March 2012. Although management believes the liabilities recorded under the
plans are substantially quantified, estimated restructuring costs may change in
the future. Restructuring
charges of $13.8 million for the second quarter and first six months of 2003 relate to the
second quarter 2003 restructuring plan. These restructuring charges consisted of employee severance
charges, fair value of lease obligations associated with the closure of an office facility
and leasehold improvement write-offs. This restructuring plan was completed in the second quarter of 2004. 26




---



##### 



Other Income, Net The following table sets forth the significant components of Other
income, net: Quarters Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003($ in thousands)Interest income
    
    $
    5,343
    
    
    $
    7,387
    
    
    $
    11,898
    
    
    $
    14,640Interest expense
    
    
    (251
    )
    
    
    71
    
    
    
    (295
    )
    
    
    (192
    )Foreign currency transaction losses and other, net
    
    
    (2,396
    )
    
    
    (2,746
    )
    
    
    (3,807
    )
    
    
    (2,770
    )Other income, net
    
    $
    2,696
    
    
    $
    4,712
    
    
    $
    7,796
    
    
    $
    11,678
 The decrease in interest income of 28% in the second quarter of 2004 and
19% in the first six months of 2004 as compared to the same periods in the
prior year was primarily due to lower interest rates and lower average cash and
investment balances. The decrease in cash and investment balances is primarily
due to the J.D. Edwards acquisition, the repurchase of common stock in the
fourth quarter of 2003 and the purchase of the two buildings in the Denver
Campus (see Liquidity and Capital Resources below). Provision for Income Taxes Our provision for income taxes decreased to $6 million in the second
quarter of 2004 from $18.4 million in the second quarter of 2003. Our
provision for income taxes decreased to $19.9 million for the first six months
of 2004 from $38.7 million in the first six months of 2003. The effective tax
rate was 36.1% and 34% for the six months ended June 30, 2004 and 2003,
respectively. The effective tax rate has increased primarily as a result of a
decrease in tax exempt interest income earned from investments. Net deferred
tax assets at June 30, 2004 were $100.2 million. In accordance with Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes,
(SFAS 109), the realization of the benefit associated with deferred tax
assets is based upon an estimate of both the timing and amount of future
taxable income. Future taxable income may be derived from pre-tax earnings
generated by future operations, subsequent reversals of deferred tax
liabilities and other sources. 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 results. We believe policies and estimates related to revenue
recognition, business combinations, capitalized software, allowance for
doubtful accounts, product and service warranty reserve, deferred tax asset
valuation allowance and impairment of goodwill and long-lived assets represent
our critical accounting policies and estimates. Future results may differ from
our estimates under different assumptions or conditions. Revenue Recognition We recognize revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position (SOP) 97-2, Software
Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions, SOP 81-1,
Accounting for Performance of Construction-type and Certain Production-type
Contracts, the Securities and Exchange Commissions Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, SAB No. 104,
Revenue Recognition, and other authoritative accounting literature. We derive
revenues from the following sources: license fees, maintenance fees and
professional services. License Fee Revenue.For software license agreements that do not require
significant modifications or customization of the software, we recognize
software license revenue when all of the following are met:  
    
    Persuasive Evidence of an Arrangement Exists.It is our practice to
require a contract signed by both the customer and PeopleSoft, or a
purchase order from those customers that have previously negotiated an
end user license arrangement.  
    
    Delivery Has Occurred.We deliver software by both physical and
electronic means. Both means of delivery transfer title and risk to the
customer. Physical delivery terms are generally FOB shipping point. For
electronic delivery of the software, delivery is complete when the
customer has been provided electronic access to their software.
Acceptance provisions included in a software license agreement generally
grant customers a right of refund or replacement only if the licensed 27




---



##### 



software does not perform in accordance with its published specifications.
Based on our history, the likelihood of non-acceptance in these situations
is remote, and we recognize revenue when all other criteria of revenue
recognition are met. If the likelihood of non-acceptance is determined to
be other than remote, revenue is recognized upon the earlier of receipt of
written acceptance or when the acceptance period has lapsed.
    
    The Vendors Fee is Fixed or Determinable.Fees are generally
considered fixed or determinable when payment terms are within 120 days
of contract execution date. For contracts with payment terms beyond 120
days, license revenue is generally recognized as payment becomes due and
payable, assuming all other revenue recognition criteria have been met.
We recognize revenue for delivered elements only when the fair value of
the undelivered elements is known, uncertainties regarding customer
acceptance are resolved, and there are no refund, cancellation, or
return rights affecting the revenue recognized for delivered elements.
Determination of the fees fixed or determinable nature is unaffected by
the customer assurance program (see Customer Assurance Program below
for further discussion).
    
    Collectibility is Probable.Customers must meet collectibility
requirements pursuant to our credit policy. We perform a collectibility
assessment for each transaction. For contracts that do not meet our
collectibility criteria, revenue is recognized when cash is received. Our software license agreements generally include multiple products and
services, or elements. We use the residual method to recognize revenue when a
license agreement includes one or more elements to be delivered at a future
date and vendor specific objective evidence of the fair value of all
undelivered elements exists. The fair value of the undelivered elements is
determined based on the historical evidence of stand-alone sales of these
elements to customers. Under the residual method, the fair value of the
undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. If evidence of the fair value of one or more
undelivered elements does not exist, the total revenue is deferred and
recognized when delivery of those elements occurs or when fair value is
established. Consulting services, which are normally sold on a standalone basis, do not
generally involve significant modification or customization of the licensed
software, and will be accounted for under the residual method. In rare
instances where consulting services do involve significant modification or
customization as an element of the software license agreement, we account for
the license revenue under SOP 81-1. Maintenance Revenue.Generally, maintenance is initially sold as an
element of a license arrangement, with subsequent annual renewal. Maintenance
revenue is recognized ratably over the term of the maintenance period, which
typically is one year. Professional Services Revenue.Professional services revenue primarily
consists of consulting and customer training revenues, which are usually
charged on a time and materials basis and are recognized as the services are
performed. Revenue from certain fixed price contracts is recognized on a
proportional performance basis, which involves the use of estimates related to
total expected hours to complete the contract derived, in part, from historical
experience with similar contracts. If we do not have a sufficient basis to
measure the progress towards completion, revenue is recognized when the project
is completed or when we receive final acceptance from the customer. Customer Assurance Program In response to Oracles public statements about its intent to discontinue
PeopleSofts products, and to minimize the loss of business during Oracles
offer to purchase all outstanding shares of PeopleSoft common stock (the
Oracle Offer), PeopleSoft implemented a customer assurance program. The
customer assurance program incorporates a contingent change in control
provision in PeopleSofts standard perpetual licensing arrangement. That
provision provides customers who purchase application licenses with financial
protection in certain circumstances, as described below. That financial
protection is in the form of a payment generally equal to two to five times the
total arrangement fees. The multiple increases as the arrangement fees
increase. PeopleSoft implemented the initial version of the customer assurance
program in June 2003, and has used five different versions of the program. On
July 6, 2004, the Board of Directors extended the program through the earlier
of the date that Oracle terminates its tender offer or September 30, 2004.
Under all versions of the customer assurance program, customers retain rights
to the licensed products whether or not the customer assurance programs
payments are triggered. No customer is entitled to a refund of arrangement fees
previously paid under the customers contract with PeopleSoft, but the customer
would be entitled to a payment under the customer assurance program if all of
the conditions stated below for the respective versions are met. 28




---



##### 



The customer assurance program has no current financial statement impact
on PeopleSoft. A contingent liability may be recognized in the financial
statements of PeopleSoft or its acquirer upon or after the consummation of a
transaction that satisfies the acquisition criteria set forth in the specific
terms of the applicable version of the customer assurance program, and if the
amounts due were probable and reasonably estimable. However, the determination
of the timing of recognition and amount of any such contingent liability would
be dependent upon the acquirers plans, assumptions and estimations. The terms
of the customer assurance program require an acquisition by an entity other
than PeopleSoft; therefore no action taken unilaterally by PeopleSoft would, by
itself, result in the recognition of a contingent liability or any other
financial statement impact. In Version Five of the program, the term acquisition is limited to an
acquisition of PeopleSoft, Inc. by Oracle Corporation or its affiliates. This
change was adopted consistent with the terms of a pending settlement of certain
stockholder litigation. See Note 11, Commitments and Contingencies of the
Notes to the unaudited Condensed Consolidated Financial Statements. The table below sets forth for each version of the customer assurance
program the dates during which such version was implemented in customer
contracts and the approximate potential maximum liability, as of June 30, 2004,
under the contracts containing language from each such version. Following the
table is a description of the material terms of each version of the program.
With respect to each version, some variations exist in the specific language
used in contracts, but such language generally incorporates the material terms
of the applicable version, as described below. As of June 30, 2004, the
approximate aggregate maximum potential amount of future liability under the
customer assurance program was $2.02 billion. Approximate Amount ofMaximumVersion
    
    Dates Offered to Customers*
    
    Potential LiabilityVersion One
    
    6/03/2003 to 9/12/2003
    
    $310 millionVersion Two
    
    9/12/2003 to 9/30/2003
    
    $170 millionVersion Three
    
    9/30/2003 to 11/7/2003
    
    $40 millionVersion Four
    
    11/18/2003 to 6/30/04
    
    $1,342 millionVersion Five
    
    6/16/04 to present
    
    $156 millionTotal Amount of Maximum Potential Liability:
    
    $2,018 million
   *
    
    Some contracts originally submitted to customers prior to these end
dates were executed following such dates. Version One Generally under Version One, a payment will be paid provided that the
following events occur:  
    
    within one year from the contract effective date, an entity
acquires or merges with PeopleSoft, and PeopleSoft is not the
surviving entity, and
    
    within two years from the contract effective date, the acquiring
company;  
    
    announces its intention to discontinue, or discontinues, support
services before the end of the normal support term as
defined by PeopleSofts standard policies,
    
    announces its intention to discontinue licensing PeopleSofts
products to new customers, or
    
    announces its intention to not provide updates or new releases for
supportable products; and  
    
    the customer requests the payment in writing before December 31,
2005, and is, at the time of the request, and has been a continuous,
compliant subscriber to support services and has timely paid all
amounts owed under the customers agreement with PeopleSoft. Version Two 29




---



##### 



Generally under Version Two, a payment will be paid provided that the
following events occur:  
    
    within two years from the contract effective date, PeopleSoft is
acquired by an entity not owned or controlled by or under the control
of PeopleSoft, and
    
    within four years from the contract effective date, the acquiring
company announces its intention:  
    
    to discontinue, or discontinues, support services before the end of
the normal support term as defined by PeopleSofts
standard policies or materially reduces the level of support services
from the level provided by PeopleSoft prior to the
acquisition, or
    
    to discontinue licensing PeopleSofts products to new customers or
certain existing customers, or
    
    to reduce, or materially reduces, the amount of money spent to
develop updates for the supportable modules or provide
support services below the level spent by PeopleSoft in the 12 months
preceding the acquisition, or
    
    to delay, or delays, the timing of release of updates or new releases
for the products or to reduce the extent and quality
of such updates and new releases, compared to the timing, extent and
quality of updates and new releases delivered in
the release cycle prior to the acquisition, or
    
    to reduce or limit, or reduces or limits, the ability of the
supportable modules to integrate or operate with third party
products such as databases, software, products, and technologies; and  
    
    the customer requests the payment in writing by June 30, 2008,
and is, at the time of the request, and has been a continuous,
compliant subscriber to support services and no amounts are owed under
the customers agreement with PeopleSoft. For purposes of Version Two, the term acquired means (a) any person
becomes the direct or indirect owner of more than 51% of PeopleSofts
outstanding stock, (b) there is a change in the composition of the board of
directors during a two-year period, such that less than a majority of the
directors are either directors who were directors as of the date of the
applicable contract or who were elected or nominated by a majority of incumbent
directors, (c) the consummation of a merger of PeopleSoft unless stockholders
prior to the merger hold at least 55% of the stock of the combined company, or
(d) the sale of all or substantially all of PeopleSofts assets. PeopleSoft entered into contracts containing the terms of Version Two with
175 customers. Subsequent to entering into these contracts, PeopleSoft sent
approximately 144 of the customers a letter clarifying that PeopleSoft would
not be deemed acquired under the terms of Version Two as a result of a board
composition change unless PeopleSoft were acquired after such change.
PeopleSoft did not send such a letter to approximately 31 of such customers. Oracle has asserted that under Version Two of the customer assurance
program a customer potentially could assert that a change in a majority of
PeopleSofts board of directors, as described in Version Two (a board
composition change), would, by itself, constitute an acquisition of PeopleSoft
as that term is used in Version Two. Based upon all of the language of Version
Two, PeopleSoft does not believe that such an interpretation is correct.
However, if a board composition change were to occur prior to the expiration of
Version Two, and if customers were to assert successfully that such board
composition change, by itself, constituted an acquisition of PeopleSoft under
Version Two, and if an entity not owned or controlled by or under the control
of PeopleSoft (the acquiring entity) were to announce its intention to
discontinue, reduce, delay or limit products or services as specified under the
terms of Version Two, PeopleSoft could have a maximum potential liability of
approximately $170 million. If there were a contested election of directors,
stockholders of PeopleSoft should be aware of that possibility when electing
directors of PeopleSoft who are not nominated by PeopleSofts current board of
directors, despite PeopleSofts belief that this interpretation of Version Two
is incorrect. On February 26, 2004, Oracle announced that it was withdrawing
its director nominations and stockholders proposals for the PeopleSoft 2004
Annual Meeting of Stockholders which, if all of Oracles director nominees were
elected and its stockholder proposals were passed, would have caused a board
composition change. If a board composition change were to occur, it is possible that the newly
elected board might refrain from taking certain actions it might otherwise
decide to take relating to products and services, if it believed that such
actions could be deemed to be taken by an acquiring entity and could trigger
the product support, update and related criteria under the terms of Version Two
and result in a 30




---



##### 



potential liability to PeopleSoft. However, given PeopleSofts overall
commitment to developing and supporting its products and services, which is
essential to the continuing vitality of PeopleSofts business, PeopleSoft
believes that it is unlikely that a newly elected board would take such actions
in any event or that PeopleSoft would incur such liability. If an entity not owned or controlled by or under the control of PeopleSoft
acquires a majority of PeopleSofts common stock and PeopleSoft remains a
stand-alone entity continuing to publish its own standalone financial
statements, it is possible that, under the terms of Version Two, a customer
could assert that PeopleSoft would be obligated to make payments upon the
occurrence of one of the required product or service support events described
above. Version Three The terms of Version Three are virtually identical to Version Two, except
that language was added to clarify that a change in the composition of the
board by itself is not sufficient to be deemed an acquisition of PeopleSoft
under the terms of the customer assurance program  there has to be both a
change in the board and PeopleSoft has to be acquired. Version Three also
changed from money spent to resources allocated the criteria to determine
reduction of support for updates and services. Version Four Generally under Version Four, a payment will be paid provided that the
following events occur:  
    
    within two years from the contract effective date, PeopleSoft is
acquired by an entity not owned or controlled by or under the control
of PeopleSoft, and
    
    within four years from the contract effective date, the company
that results from an acquisition:  
    
    discontinues or materially reduces support services before the end
of the normal support term as defined by
PeopleSofts standard policies, or
    
    discontinues licensing PeopleSofts products to new or existing
customers, or
    
    discontinues providing updates for the supportable modules; provided
that licensing for specific products may be
discontinued and updates do not have to be provided if that product
does not operate substantially as warranted or third
party technology required for the operation of the product is no
longer commercially available; and  
    
    the customer requests the payment in writing by June 30, 2008,
and is, at the time of the request, and has been a continuous,
compliant subscriber to support services and no amounts are owed under
the customers agreement with PeopleSoft. For purposes of Version Four, the term acquired generally is identical
to Versions Two and Three except there is no provision regarding a change in
the composition of the board of directors. Version Five The Company implemented Version Five of the program in June 2004, to apply
to contracts first presented to customers at that time. Version Five of the
program, consistent with the terms of a pending settlement of Delaware
stockholder litigation, revised the definition of the term acquisition to
provide that the term acquisition includes an acquisition solely by Oracle
and its affiliates. In other respects, Version Five is the same as Version
Four, except that for contracts signed after June 30, 2004, the date by which
the customer must request payment is December 31, 2008 rather than June 30,
2008. The Board believes that all versions of the customer assurance program
give new and existing customers assurance that their investments in PeopleSoft
products and services will be protected. This is reflected in customers
continued purchases of products and services from PeopleSoft, and the Board
believes the program ultimately preserves and enhances stockholder value. The
Board also believes that the customer assurance program, and its beneficial
effects on PeopleSofts ability to sell to new and existing customers, may
increase the amount of consideration that a potential acquirer would be willing
to pay for PeopleSoft. Nevertheless, it is possible that a potential acquirer
of PeopleSoft would intend to discontinue, reduce, delay or limit products or
services of PeopleSoft in a manner that would trigger payments under the
customer assurance program or incur additional costs in continuing such
products and 31




---



##### 



services in order to avoid making such payments, and such costs might
limit the total amount of consideration that the potential acquirer would be
willing to pay for PeopleSoft. Business Combinations In accordance with the purchase method of accounting, we allocate the
purchase price of acquired companies to the tangible and intangible assets
acquired, liabilities assumed, as well as in-process research and development
based on their estimated fair values. We engage independent third-party
appraisal firms to assist in determining the fair values of assets acquired and
liabilities assumed. Such a valuation requires management to make significant
estimates and assumptions, especially with respect to intangible assets. Management makes estimates of fair value based upon assumptions believed
to be reasonable. These estimates are based on historical experience and
information obtained from the management of the acquired companies. Critical
estimates in valuing certain of the intangible assets include but are not
limited to: future expected cash flows from license sales, maintenance
agreements, consulting contracts, customer contracts, and acquired developed
technologies and patents; expected costs to develop the in-process research and
development into commercially viable products and estimating cash flows from
the projects when completed; the acquired companys brand awareness and market
position, as well as assumptions about the period of time the acquired brand
will continue to be used in the combined companys product portfolio; and
discount rates. These estimates are inherently uncertain and unpredictable.
Assumptions may be incomplete or inaccurate, and unanticipated events and
circumstances may occur which may affect the accuracy or validity of such
assumptions, estimates or actual results. Other estimates associated with the accounting for acquisitions include
restructuring costs. Restructuring costs are primarily comprised of severance
costs, change in control payments, costs of consolidating duplicate facilities,
and contract termination costs. During the second quarter of 2004,
restructuring costs were incurred as a result of the acquisition of J.D.
Edwards. Restructuring costs associated with pre-acquisition activities of J.D.
Edwards have been accounted for in accordance with Emerging Issues Task Force
Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase
Business Combination (EITF 95-3) and have been recognized as a liability
assumed in the purchase business combination. Other restructuring costs
associated with activities of PeopleSoft are accounted for in accordance with
Statement of Financial Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, (SFAS 146) or Statement of
Financial Accounting Standards No. 112, Employers Accounting for
Postemployment Benefits  an Amendment of FASB Statements No. 5 and 43 (SFAS
112) and are recorded as a charge to the results of operations in
Restructuring, acquisition and other charges. Restructuring costs are based
upon plans that have been committed to by management and are subject to
refinement. To estimate restructuring costs accounted for in accordance with
EITF 95-3, management utilized assumptions of the number of employees that will
either voluntarily or involuntarily terminate employment with PeopleSoft and of
future costs to operate and eventually vacate duplicate facilities. Estimated
restructuring costs may change as management executes the approved plan.
Decreases to the estimates of executing the currently approved plans accounted
for in accordance with EITF 95-3 are recorded as an adjustment to goodwill
while increases to the estimates are recorded as an adjustment to goodwill
within one year of the acquisition date and as operating expenses thereafter.
Changes to currently approved plans accounted for in accordance with SFAS 146
or SFAS 112 will be recorded in Restructuring, acquisition and other charges. Our financial projections may ultimately prove to be inaccurate and
unanticipated events and circumstances may occur. Therefore, no assurance can
be given that the underlying assumptions used to project revenues and costs to
develop such products will transpire as anticipated. Capitalized Software We account for the development cost of software intended for sale 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). SFAS 86 requires product development costs to be charged to
expense as incurred until technological feasibility is attained. Technological
feasibility is attained when our software has completed system testing and has
been determined viable for its intended use. The time between the attainment of
technological feasibility and completion of software development has
historically been relatively short with immaterial amounts of development costs
incurred during this period. Accordingly, we did not capitalize any development
costs in the second quarter and the first six months of 2004. We capitalize
software acquired through technology purchases and business combinations if the
related software under development has reached technological feasibility or if
there are alternative future uses for the software. We periodically evaluate the recoverability of capitalized software based
on an estimate of future product revenues reduced by the estimated cost of
completing the products and of performing maintenance and customer support. If
our gross product revenues were to 32




---



##### 



be significantly less than our original estimate, the net realizable value
of our capitalized software intended for sale may be partially or completely
impaired. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts at an amount estimated to
be sufficient to provide adequate protection against losses resulting from
collecting less than full payment on our receivables. Individual overdue
accounts are reviewed, and allowance adjustments are recorded when determined
necessary to state receivables at realizable value. Additionally, we judge the
overall adequacy of the allowance for doubtful accounts by considering multiple
factors including the aging of our receivables, historical bad debt experience,
and the general economic environment. The key factor is the aging of our
receivables, and the improvement or deterioration of the age of our receivables
is the factor which will drive either a decrease or an increase to the
allowance. A considerable amount of judgment is required when we assess the
collectibility of our receivables, including assessing the probability of
collection and the current creditworthiness 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. Once all collection efforts are exhausted, the receivable is
written-off against the balance in the allowance for doubtful accounts. Product and Service Warranty Reserve We provide for the estimated cost of product and service warranties based
on specific warranty claims received, provided that it is probable that a
liability exists, and provided the cost to repair or otherwise satisfy the
claim can be reasonably estimated. The amount of the reserve recorded is equal
to the costs to repair or otherwise satisfy the claim. If existing claims are
settled for amounts which differ from our estimates, or if the estimated
monetary value of the warranty claims were to increase or decrease, revisions
to the estimated warranty liability may be required and the warranty expense
could change from current levels. Deferred Tax Asset Valuation Allowance 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 assets will be recovered from future taxable
income. To the extent we believe that based upon all the available positive and
negative evidence, it is not likely that we will realize the benefit of a
deferred tax asset in the future, we establish a valuation allowance. We
consider our potential future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the amount of the valuation allowance.
Adjustments may be required in the future if we determine that the amount of
deferred tax assets to be realized is greater or less than the amount we have
recorded. Our valuation allowance relates mainly to established allowances on
net operating losses incurred in certain foreign jurisdictions as well as on
operating loss carryforwards and other tax benefits relating to various
jurisdictions of certain acquired companies. Impairment of Goodwill and Long-Lived Assets On January 1, 2002, we adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets, (SFAS 142). SFAS 142
requires that goodwill no longer be amortized and that goodwill be tested
annually for impairment or more frequently if events and circumstances warrant.
We selected the third quarter to perform our annual goodwill impairment
testing. We determined that our reporting units are equivalent to our operating
segments for the purposes of completing our SFAS 142 impairment test based upon
the similar economic characteristics of each of the components that make up our
operating segments (see Note 12, Segment and Geographic Areas of the Notes to
the unaudited Condensed Consolidated Financial Statements). For purposes of
performing our impairment test, we allocated tangible and intangible assets and
liabilities to each reporting unit based upon the location in which the asset
or liability was initially recorded and would ultimately be assigned to in the
event of a purchase transaction. We determined that the carrying amount of
goodwill was not impaired during the third quarter of 2003. Our impairment
analysis was based upon the fair value assigned to each reporting unit. In
estimating the fair value of the individual reporting units, we considered the
enterprise fair value based upon the average closing price of the Companys
common stock from July 17, 2003 to July 31, 2003. We are not aware of any
events or circumstances that would warrant an impairment charge through the
second quarter of 2004. We account for the impairment and disposal of long-lived assets utilizing
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, (SFAS 144). SFAS 144 requires
that long-lived assets, such as property and equipment, and purchased
intangible assets subject to amortization, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The recoverability of an asset is measured by a
comparison of the carrying amount of an asset to its estimated undiscounted
future cash flows expected to be generated. 33




---



##### 



If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. We do not believe
there were any circumstances which indicated that the carrying value of an
asset may not be recoverable. LIQUIDITY AND CAPITAL RESOURCES We generate cash from licensing our software, providing professional
services and through maintenance renewals. Our days sales outstanding for the
second quarter of 2004 was 55 days, meaning that was the average number of days
that passed before we collected payment from our customers. We use cash to pay
our employees salaries, commissions, bonuses, and benefits; pay landlords to
lease office space, procure insurance, pay taxes and pay vendors for services
and supplies. In addition, we use cash to purchase capital assets to support
the business. These assets are typically information technology hardware and
facilities. On June 30, 2004, we did not have any debt, and we currently have
no plans to pay cash dividends on our capital stock. On January 12, 2004, we announced our intention to repurchase $200 million
of PeopleSoft common stock. We anticipate the successful completion of this
repurchase in 2004. This repurchase activity is in keeping with our stated
objective of continuing to utilize our positive cash flow to increase
stockholder value. We intend to hold all shares repurchased pursuant to the
stock repurchase program as treasury stock. We intend to fund all share
repurchases from cash surplus and general corporate funds generated from
operations. We believe that the combination of our cash and cash equivalents
and short-term investment balances and currently anticipated cash flow from
operations will be sufficient to satisfy our cash requirements, at least
through the next twelve months. The table shown below presents our liquidity position for the quarter
ended June 30, 2004 and for the prior year end: Quarter
    
    YearEnded
    
    EndedJune 30,
    
    December 31,2004
    
    2003($ in millions)Cash and cash equivalents
    
    $
    542.5
    
    
    $
    439.4Short-term investments and restricted cash (1)
    
    $
    1,034.2
    
    
    $
    961.9Total
    
    $
    1,576.7
    
    
    $
    1,401.3Working capital
    
    $
    926.5
    
    
    $
    803.5
   (1)
    
    Short-term investments and restricted cash principally include
interest-bearing demand deposit accounts with various financial
institutions, tax-advantaged money market funds and highly liquid debt
securities of corporations and municipalities. As of June 30, 2004, our cash, cash equivalents and short-term investments
increased by $175.4 million as compared to December 31, 2003. This increase was
primarily due to positive operating cash flow and proceeds from employee stock
purchases and stock option exercises, partially offset by the purchase of
property and equipment, including two office buildings in Denver, Colorado. We generated cash flows from operations of $204.8 million in the first six
months of 2004 compared to $193.3 million in the first six months of 2003. The
principle source of our cash generated from operating activities comes from our
net income adjusted for depreciation and amortization and collections on our
accounts receivable. Partially offsetting our positive cash flows from
operations in 2004 are payments made relating to the J.D. Edwards restructuring
liabilities (See Note 6, Restructuring Liabilities of the Notes to the
unaudited Condensed Consolidated Financial Statements) of $36.1 million and
payments made for legal and investment banker fees relating to the Oracle
Tender Offer of approximately $18 million. We historically have used cash for investing activities. Surplus cash has
generally been used to purchase short-term investments, although in the third
quarter of 2003 we liquidated some of our short-term investments to fund the
cash portion of the purchase price of J.D. Edwards. We purchased property and
equipment of $88.9 million during the first six months of 2004. We assumed
operating leases on four office buildings in Denver as a result of our
acquisition of J.D. Edwards. On April 2, 2004, one of the master lease
agreements terminated and we exercised our option to purchase two buildings for
a net purchase price of $58.6 million. We are currently considering cash
purchases, totaling $62.6 million for the remaining two office buildings. The
leases for the remaining buildings terminate during the third and fourth
quarters of 2004. We purchased property and equipment of $213.8 million during
the first six months of 2003, of which $175 million was utilized to purchase
certain of our headquarters facilities in Pleasanton, California which we had
been leasing under synthetic leases. 34




---



##### 



The principal source of cash generated from financing activities relates
to the exercise of stock options by our employees and the issuance of our
common stock under the employee stock purchase program. These equity
transactions generated cash of $74.5 million in the first six months of 2004.
The Company has modified its equity compensation strategy to emphasize equity
incentives other than stock options, and the cash generated from financing
activities related to employee equity compensation may decrease in the future. Future cash payments related to restructuring liabilities for employee
costs are expected to be made through January 2005. Future cash payments
related to facilities obligations are expected to be made through March 2012.
Our $50.6 million restructuring liability at June 30, 2004 is a cash
obligation. Restructuring costs are being funded through operating cash flow.
See Note 6 Restructuring Liabilities of the Notes to the unaudited Condensed
Consolidated Financial Statements. Commercial Commitments Synthetic Leases As a result of the acquisition of J.D. Edwards, we assumed three six-year
master operating leases on four office buildings in Denver, Colorado (the
Denver Campus). Two of the three master leases are effective at June 30,
2004. On April 2, 2004, the third master lease agreement terminated and we
exercised our option to purchase two buildings for a net purchase price of
$58.6 million. The lessor, a wholly owned subsidiary of a bank, which together
with a syndication of other banks provided debt and equity financing of $121.2
million for the purchase and construction costs of the buildings. The lease
payment obligations are based on a return on the lessors costs. We have an
option to refinance or purchase the remaining leased properties at our sole
discretion during the terms of the leases for approximately $62.6 million. In
the event that we do not exercise our option to refinance or purchase the
leased properties, we must guarantee the residual value of each building up to
approximately 85% of the bank financing of $62.6 million or $53.2 million for
the remaining two leases. We have evaluated the fair value of the Denver Campus
and determined that at June 30, 2004 it is not probable that the value of the
leased properties at the end of the lease terms will be less than the residual
value guaranteed by us and as a result we do not believe that we will be called
upon to perform under the residual guarantee. We are expecting to proceed with
cash purchases of the remaining office buildings. The leases for the remaining
buildings terminate during the third and fourth quarters of 2004. We may elect to reduce the interest rate used to calculate our lease
expense by collateralizing the Denver Campus financing arrangements with
investments. At June 30, 2004, investments totaling $63.8 million were
designated as collateral for these leases. We may withdraw the funds used as
collateral, excluding restricted amounts, at our sole discretion provided that
we are not in default under the lease agreements. At June 30, 2004, funds used
as collateral in the amount of $40.8 million were available for withdrawal. At
June 30, 2004, we were in compliance with the covenants, representations, and
warranties required under the lease agreements. 35




---



##### 



FACTORS THAT MAY AFFECT OUR FUTURE RESULTS OR THE MARKET PRICE OF OUR STOCK We operate in a dynamic, rapidly changing environment that involves
numerous risks and uncertainties. The following section describes some, but not
all, of these risks and uncertainties that 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
the accompanying Notes thereto and the other parts of Managements Discussion
and Analysis of Financial Condition and Results of Operations included in this
Quarterly 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 contained in our 2003 Annual Report on Form
10-K. We may not successfully complete the integration of J.D. Edwards business
operations into ours. In addition, we may not achieve all the anticipated
benefits of the merger, which could adversely affect the price of our common
stock. We completed the merger with J.D. Edwards on August 29, 2003, with the
expectation that the acquisition would result in benefits to the combined
company, including synergies and cost efficiencies related to combining
operations and products. While the benefits have begun to be realized, the
integration of both companies is in progress and there is a risk that the
benefits might not be fully realized. To date, a combined product roadmap has
been defined and we commenced delivery of intefaced products. During the first
six months of 2004, we successfully completed the integration of our worldwide
sales and service organizations to provide a consistent approach and
methodology to our selling and consulting activities. Integrating the two
companies operations may be difficult, time consuming and costly, particularly
in light of the technical and complex nature of each companys products. It is
possible that the integration efforts will not be completed as efficiently or
successfully as planned or will distract management from the operations of the
Companys business. The primary J.D. Edwards integration challenges that we believe remain,
and the risks related to their execution, include the following:  
    
    successful completion of the task of providing key integration
applications between J.D. Edwards and PeopleSofts products,
coordinating software development operations in an efficient manner to
ensure timely development of product, and releasing future products to
market in a timely manner;
    
    coordinating and integrating sales and marketing efforts to
effectively communicate the capabilities of the combined company,
cross selling products, and successfully managing the combined sales
force;
    
    demonstrating to our existing and potential customers that the
business combination will not result in adverse changes in customer
service standards or business focus;
    
    retaining relationships on attractive terms with key suppliers,
distributors, system integrators, customers, licensors, facility
owners and other business partners;
    
    completing the consolidation of all the business data systems of
the combined company to a fully operational coordinated system,
including implementing and testing the systems, and training employees
in the use of the systems;
    
    managing a substantially larger number of employees across a larger geographical area;
    
    creating and effectively implementing uniform standards, controls, procedures, and policies in a timely manner;
    
    retaining and recruiting key personnel; and
    
    successfully operating the combined companys business with a
minimum of disruption and distraction of management during the
integration phase. The combined company may not successfully complete the integration of the
operations of PeopleSoft and J.D. Edwards in a timely manner, or at all. There
may be greater than anticipated costs and expenses related to restructuring,
including employee severance or relocation costs, employee retention costs, and
costs related to vacating leased facilities; and there may be potential unknown
liabilities associated with any acquisition of a companys business and
combining its operations with an acquiror, such as 36




---



##### 



our acquisition and integration of J.D. Edwards. The combined company may
not realize the anticipated benefits of the merger to the extent, or in the
timeframe, anticipated, which could significantly harm our business and have a
material adverse effect on the operations of the combined company. Charges to earnings resulting from the acquisition of J.D. Edwards, including
the application of the purchase method of accounting and restructuring and
integration costs, may adversely affect the market value of our common stock. In accordance with accounting principles generally accepted in the United
States of America, we accounted for the acquisition of J.D. Edwards using the
purchase method of accounting. Accordingly, we have allocated the total
purchase price to J.D. Edwards net tangible assets, amortizable intangible
assets, and in-process research and development based on their fair values as
of the date of completion of the merger, and recorded the excess of the
purchase price over those fair values as goodwill. Managements estimates of
fair value are based upon assumptions believed to be reasonable, but which are
inherently uncertain. Assumptions may be inaccurate, and unanticipated events
and circumstances may occur, which may adversely affect future financial
results. In the future, our financial results, including earnings per share,
could be adversely affected by charges related to the purchase accounting,
including the following:  
    
    Goodwill may become impaired and we may be required to incur material
charges relating to that impairment.
    
    Deferred revenue on J.D. Edwards balance sheet at the closing of the
merger, which predominately represented maintenance revenue, was reduced
to fair value in our balance sheet. The impact of this fair value
reduction will continue to reduce the amount of deferred maintenance
revenue available to be recognized into earnings as a result of the J.D.
Edwards acquisition for the remaining term of the related maintenance
contracts.
    
    We will incur charges to income to eliminate certain PeopleSoft
pre-acquisition activities that are duplicative in nature with the
assumed J.D. Edwards activities or to reduce cost structure. We expect to continue to incur costs associated with combining the
operations of the two companies, which may be substantial. Additional costs
that may be incurred relate to employee redeployment or relocation, accelerated
amortization of deferred equity compensation and severance payments, employee
retention which could include salary increases or bonuses, reorganization or
closure of facilities, relocation and disposition of excess equipment,
termination of contracts with third parties that provide redundant or
conflicting services and other integration costs. We expect to account for
these costs as expenses that may decrease our net income for the periods in
which those charges are made. These costs may adversely impact earnings, which may result in a material
adverse effect on the market value of our common stock. Oracle Corporations tender offer to purchase all of our outstanding common
stock is disruptive to our business and threatens to adversely affect our
operations and results. On June 6, 2003, Oracle announced that it intended to commence a cash
tender offer, referred to as the Oracle Tender Offer, to purchase all of our
outstanding common stock. Oracle has changed the offering price and extended
the offering period several times. On May 14, 2004, Oracle reduced the offer to
$21.00 per share. The Oracle Tender Offer currently expires on August 27,
2004. We believe that the Oracle Tender Offer raises significant antitrust
concerns that have resulted in a lengthy regulatory review process and
litigation. On February 26, 2004, the United States Department of Justice
(DOJ), joined by the states of Texas, Hawaii, Maryland, Massachusetts,
Minnesota, New York and North Dakota, filed a civil antitrust suit in the U.S.
District Court for the Northern District of California to enjoin Oracles
proposed acquisition of PeopleSoft. On April 14, 2004, the DOJs complaint was
amended to add as plaintiffs the states of Connecticut, Michigan and Ohio. The
plaintiffs allege that the effect of the proposed acquisition of PeopleSoft by
Oracle would be to lessen competition substantially in interstate trade and
commerce in violation of the Clayton Act. The trial commenced June 7, 2004 and
closing arguments were delivered on July 20, 2004. In addition, antitrust
investigations by the European Commission and numerous other state attorneys
general are ongoing. The European Commission has issued a preliminary statement
of objections to Oracle in connection with its proposed acquisition of
PeopleSoft. The delay and uncertainty associated with the continued regulatory
review and the uncertainty regarding the outcome of the Oracle tender offer has
caused significant business disruption and damages to us, and may continue to
disrupt and damage our business. If the trial judge in the DOJ lawsuit
referred to above were to rule against Oracle, but Oracle appeals that ruling,
the delay and uncertainty regarding the outcome of the Oracle Tender Offer may
continue to disrupt and damage our business. If the trial judge in the DOJ
lawsuit referred to above were to rule against the DOJ, our ability to
successfully conduct our business could be materially adversely impacted, which
could result in a 37




---



##### 



material adverse effect on our financial condition and operating results. Oracles initial public statements were widely interpreted to reflect its
intent to discontinue the development, sale and support of PeopleSoft products
if the Oracle tender offer were to be successful. We believe the statements and
perceptions have adversely impacted and may continue to adversely impact our
ability to attract new customers and have caused and could continue to cause
potential or current customers to defer purchases or to cancel existing orders.
Oracles later statements that it would continue to sell to existing customers
and to support PeopleSoft products for some time have resulted in additional
confusion and uncertainty for our customers and prospective customers.
Moreover, as a result of the Oracle tender offer, certain of our suppliers,
distributors, and other business partners may seek to change or terminate their
relationships with us. These actions may adversely affect our financial
condition and results of operations. Additionally, as a consequence of the uncertainty surrounding our future,
our key employees may seek other employment opportunities. Moreover, our
ability to attract and retain key management, sales, marketing and technical
personnel could be harmed. If key employees leave as a result of the Oracle
tender offer, or if we are unable to attract or retain qualified personnel,
there could be a material adverse effect on our business and results of
operations. Responding to the Oracle tender offer has been, and may continue to be, a
major distraction for our management and employees and has required and will
continue to require us to incur significant costs which could impact spending
on other initiatives. Management and employee distraction related to the Oracle
tender offer also may adversely impact our ability to successfully conduct our
business and complete the integration of J.D. Edwards with PeopleSoft, which
could adversely affect our business and results of operations as described
above. Litigation related to the Oracle tender offer may result in significant
monetary damages or may otherwise negatively impact our business and results of
operations. At least fourteen stockholder lawsuits have been filed in Delaware and
California state courts against PeopleSoft and certain of our directors and
officers alleging breaches of fiduciary duties in connection with the Oracle
tender offer. The California stockholder lawsuits have been stayed pending
resolution of the Delaware matters. While the parties to the consolidated
Delaware stockholder litigation have executed a Stipulation and Agreement of
Compromise, Settlement and Release (the Settlement Stipulation) relating to
that litigation and have filed the Settlement Stipulation with the Delaware
Court of Chancery, the Delaware Court of Chancery has not yet approved any
settlement of that litigation and there can be no assurance that it will do so.
On June 18, 2003, Oracle filed a lawsuit against PeopleSoft and members of our
board in the Delaware Court of Chancery. The lawsuit alleges breaches of
fiduciary duties against PeopleSofts board of directors and seeks to enjoin us
from continuing to use our customer assurance program and to require
elimination of the Companys Shareholder Rights Plan. In addition, on March
30, 2004, Oracle filed a cross-complaint against PeopleSoft and its directors
in California state court seeking damages and an injunction arising out of the
customer assurance program and alleged misrepresentations and unfair
competition. Fluctuation in the price of PeopleSoft common stock may also
expose the Company to the risk of securities class-action lawsuits. Any
conclusion of such litigation in a manner adverse to PeopleSoft could have a
material adverse effect on the combined companys business, financial condition
and results of operations. In addition, the cost of defending this litigation,
even if resolved favorably, will be substantial. Such litigation could also
substantially divert the attention of management and resources in general.
Furthermore, uncertainties resulting from the initiation and continuation of
any litigation could harm our ability to compete in the marketplace. For a more
detailed description of the litigation related to the Oracle tender offer, see
the discussions under Part II, Item 1, Legal Proceedings and Note 11,
Commitments and Contingencies of the Notes to the unaudited Condensed
Consolidated Financial Statements. Our Certificate of Incorporation and Bylaws include anti-takeover provisions
that may 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 it more difficult to
successfully complete a merger, tender offer or proxy contest involving us.
These provisions include adoption of a Preferred Shares Rights Agreement
(Rights Agreement), commonly known as a poison pill and provisions in our
Certificate of Incorporation that give 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 our outstanding voting stock. In addition, the
staggered terms of our board of directors could have the effect of delaying or
deferring a change in control. 38




---



##### 



One of the conditions of the Oracle tender offer is the removal or
amendment of our Rights Agreement such that Oracles acquisition of PeopleSoft
stock would not trigger the provisions of the Rights Agreement. To date, our
board of directors has not agreed to such removal or amendment. We currently
are involved in litigation with Oracle in which it seeks to cause us to redeem
the Rights issuable under the Rights Agreement or to render the Rights
Agreement inapplicable to the proposed acquisition of PeopleSoft by Oracle. In addition, certain provisions of the Delaware General Corporation Law
(DGCL) including Section 203 of the DGCL, may have the effect of delaying or
preventing changes in the control or management of PeopleSoft. In its current
litigation, Oracle also seeks to enjoin our Board from taking any action to
enforce Section 203 of the DGCL. Section 203 of the DGCL provides, with certain
exceptions, for waiting periods applicable to business combinations with
stockholders owning at least 15% and less than 85% of the voting stock
(exclusive of stock held by directors, officers and employee plans) of a
company. The above factors 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 our common stock. We can give
no assurance as to the ultimate outcome of the litigation seeking to invalidate
or enjoin the action of our takeover defenses or provisions of Delaware law, as
described above. Our stock price may remain volatile. The trading price of our common stock has fluctuated significantly in the
past. Changes in our business, operations or prospects, ongoing market
assessments of the benefits of the J.D. Edwards merger and the industry in
which we compete, regulatory considerations, general market and economic
conditions, or other factors may affect the price of our common stock. Many of
these factors are beyond our control. We believe the future trading price of
our common stock is likely to be volatile and could be subject to wide price
fluctuations in response to such factors, including:  
    
    the impact of the pending unsolicited Oracle tender offer (discussed
in the preceding risk factors) or any other proposed acquisition of us;
    
    actual or anticipated fluctuations in revenues or operating results,
including revenue or results of operations in any quarter failing to
meet the expectations, published or otherwise, of the investment
community;
    
    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 other
means;
    
    announcements of technological innovations by us or our competitors;
    
    introduction and success of new products or significant customer wins or losses by us or our competitors;
    
    fluctuations in demand for our products, which may depend on, among
other things, potential uncertainty regarding the success of the J.D.
Edwards merger and the operations of the combined company, our customer
assurance program, the acceptance of our products in the marketplace and
the general level of spending in the software industry;
    
    the mix of products and services sold by us;
    
    the timing of significant orders received by us;
    
    developments (including infringement claims or other matters which
could result in costly litigation) with respect to our intellectual
property rights, including patents, or those of our competitors;
    
    changes in management;
    
    proposed and completed acquisitions or other significant transactions by us or our competitors; 39




---



##### 




    
    conditions and trends in the software industry, or consolidation
within the technology industry, that may impact our customers, partners,
suppliers or competitors;
    
    adoption of new accounting standards, including those affecting the software industry;
    
    acts of war or terrorism; and
    
    general market conditions. Our future revenue is dependent in part on our installed customer base
continuing to license additional products, renew maintenance agreements and
purchase additional professional services. Our installed customer base has traditionally generated additional
license, professional service and maintenance revenues. In future periods,
customers may not necessarily license additional products or contract for
additional services or maintenance. Maintenance is generally renewable annually
at a customers option, and there are no mandatory payment obligations or
obligations to license additional software. If our customers decide not to
renew their maintenance agreements or license additional products or contract
for additional services, or if they reduce the scope of the maintenance
agreements, our revenues could decrease and our operating results could be
adversely affected. If we fail to introduce new or improved products and service offerings or if
our current products become technologically obsolete, our results of operations
and the financial condition of the business could 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 services and create new products. Our future success
may depend in part upon our ability to:  
    
    invest in research and development and/or acquire complementary
technologies or businesses;
    
    improve our existing products and develop new ones to keep pace with
technological developments, including developments related to the
internet;
    
    successfully integrate third party products;
    
    enter new markets;
    
    satisfy customer requirements with respect to products and services; and
    
    maintain market acceptance. While we are one of the largest providers of enterprise applications, our
competitors may have more resources than we do. Our decisions regarding how to
utilize our resources to either develop or acquire new products are critical.
If, as a result of our decisions, resources are used ineffectively and we are
unable to meet the challenge of delivering new or improved product and service
offerings, our results of operations and our financial condition may be
adversely affected. Market acceptance of new platforms and operating environments may require us to
undergo the expense of developing and maintaining compatible product lines. Although our software products can be licensed for use with a variety of
popular industry standard relational database management system platforms,
there may be existing or future platforms that achieve popularity in the
marketplace which may not be architecturally compatible with our software
product design. Moreover, existing or future user interfaces that achieve
popularity within the business application marketplace may or may not be
architecturally compatible with our current software product design. 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 40




---



##### 



operations. To maintain software performance across accepted platforms and
operating environments, or to enjoy continued market acceptance of those that
we support, or to adapt to popular new ones, our expenses may increase and our
sales and revenues may be adversely affected. Competitive pressures in our industry or general economic conditions may
require that we increase product development expenditures, reduce our prices or
offer other favorable terms to customers on our products and services which
could result in lower margins and reduce net income. We compete with other software vendors in all of our major product lines.
Some of our competitors may have advantages over us due to their larger
worldwide presence, longer operating and product development history,
substantially greater technical and marketing resources, or exclusive
intellectual property rights. We compete with SAP and Oracle within the large
enterprise market segment, each of whom has considerable resources with which
to compete on price, contract terms and development activity. We also compete
with SAP and Oracle and a variety of other competitors in the mid-market for
enterprise applications and in more narrowly defined market segments. If competitors offer more favorable pricing, payment or other contractual
terms, warranties, or functionality which we do not currently provide, or if
general economic conditions decline such that customers are less willing or
able to pay the cost of our products, we may need to lower prices or offer
other favorable terms in order to successfully compete. As our international business grows, currency risks, political considerations
and other costs and contingencies 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 fluctuations in currency exchange rates and currency
controls;
    
    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, increased withholding or other taxes
on payments by subsidiaries, import and export license requirements,
trade tariffs or restrictions, war, terrorism and civil unrest;
    
    higher operating costs due to local laws or regulation; and
    
    inability to hedge the currency risk for some transactions because of
uncertainty or the inability to reasonably estimate our foreign exchange
exposure. Political and market conditions may cause a decrease in demand for our software
and related services which may negatively affect our revenue and operating
results. Our revenue and profitability depend on the overall demand for our
software, professional services and maintenance. Regional and global changes in
the economy, governmental budget deficits and political instability in certain
geographic areas have resulted in companies, government agencies and
educational institutions reducing their spending for technology projects
generally and delaying or reconsidering potential purchases of our products and
related services. The uncertainty posed by the long-term effects of the war in
the Middle East, terrorist activities and related uncertainties and risks and
other geopolitical issues may impact the purchasing decisions of current or
potential customers. Future declines in demand for our products and/or services
could adversely affect our revenues and operating results. 41




---



##### 



Catastrophic events or national security issues could result in disruptions to
our business and may negatively affect our operating results or financial
condition. Our corporate headquarters, including our data center and certain of our
research and development operations, are located in Pleasanton, California, in
an area known for seismic activity. A major earthquake in that region, or other
major catastrophe such as fire, flood or terrorist attack, could severely
disrupt our business. Significant structural damage to the data center could
cause a disruption of our information systems and loss of financial data and
certain customer data. In addition, disruptions in airline travel due to
terrorist threats or attacks could also impair our ability to sell and market
our products, provide consulting services, and otherwise be able to compete,
because of the world wide geographic scope of our business. Any such event or
occurrence could reduce revenue or entail significant expense to us and
adversely impact our results of operations or financial condition. If our customers lose confidence in the security of data on the internet, our
revenues could be adversely affected. Maintaining the security of computers and computer networks is an issue of
critical importance for our customers. Attempts by experienced computer
programmers, or hackers, to penetrate customer networks security or the
security of web sites to misappropriate confidential information are currently
an industry-wide phenomenon that affects computers and networks across all
platforms. As we develop new products and improve existing products, our
development and improvement efforts include the creation of features designed
to optimize security in our products. Despite these efforts, actual or
perceived security vulnerabilities in our products (or the
internet in general) could lead some customers to seek to reduce or delay
future purchases or to purchase competitive products which are not internet
based applications. Customers may also increase their spending to protect their
computer networks from attack, which could delay adoption of new technologies.
Any of these actions by customers could adversely affect our revenues. We may be required to undertake a costly redesign of our products if third
party software development tools become an industry standard or cause
obsolescence of our toolsets. Our software products include a suite of proprietary software development
tools, known as PeopleTools® and EnterpriseOne tools, which are fundamental to
effective use of our 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 tools as
the accepted industry standard. If a software product were to emerge as a
clearly established and widely accepted industry standard or if rising
expectations of toolsets of applications cause our toolsets to become obsolete,
we may not be able to adapt our tools appropriately or rapidly enough to
satisfy market demand. In addition, we could be forced to abandon or modify our
tools 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. 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. Increased complexity of our software may result in more difficult detection and
correction of errors, delays in the introduction of new products and 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 our 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. Errors in our software could subject us to litigation and liability based
on 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. We license software and technology from third parties, including some
competitors, and incorporate them into or sell them in conjunction with our own
software products, some of which are critical to the operation of our software.
If any of the third party software vendors were to change product offerings,
increase prices or terminate our licenses, we might need to seek alternative
vendors and incur additional internal or external development costs to ensure
continued performance of our products. Such alternatives may not be available
on attractive terms, or may not be as widely accepted or as effective as the
software provided by our 42




---



##### 



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 these system integrators are
unable to recruit and adequately train a sufficient number of consulting
personnel to support the successful implementation of our software products, we
may lose customers. Moreover, our relationships with these companies are not
exclusive, and they are free to start, or in some cases increase, the marketing
of competitive business application software, or to otherwise discontinue their
relationships with us. In addition, integrators who generate consulting fees
from customers by providing implementation services may be less likely to
recommend our software if our products are more difficult or costly to install
than competitors similar product offerings. Disruption of our relationships
with these companies could adversely affect 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. Our future success depends on our ability to continue to retain and attract
qualified employees. We believe that our future success depends upon our ability to continue to
train, retain, effectively manage and attract highly skilled technical,
managerial, sales and marketing personnel. If our efforts in these areas are
not successful, our costs may increase, development and sales efforts may be
hindered and our customer service may be degraded. Without limiting the foregoing, uncertainty created by the Oracle Tender
Offer and the United States versus Oracle antitrust trial may result in an increase
in our compensation expense if we were to implement and/or increase employee retention programs. Although we invest
significant resources in recruiting and retaining employees, there is intense
competition for personnel in the software industry. From time to time, we
experience difficulties in locating enough highly qualified candidates in
desired geographic locations, or with required industry-specific expertise. 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 must be retained by us to meet our
objectives. Due to the competitive employment nature of the software industry
and due to the uncertainty of the Oracle tender offer, 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 operations. 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. Decreased effectiveness of equity compensation could negatively impact our
ability to attract and retain employees, and a modification to our equity
compensation strategy or proposed changes in accounting for equity compensation
could adversely affect our earnings. We have historically used stock options and other forms of equity
compensation as key components of our employee compensation program in order to
align employees interests with the interests of our stockholders, encourage
employee retention, and provide competitive compensation packages. In recent
periods, many of our employee stock options have had exercise prices in excess
of our market stock price, which could affect our ability to retain our
employees. In addition, the Financial Accounting Standards Board and other
agencies have proposed changes to accounting principles generally accepted in
the United States that would require us (as well as other companies) to record
a charge to earnings for employee stock option grants, sales of shares under
our employee stock purchase plan and other equity compensation awards and for
certain liability classified awards. At the Companys 2004 annual 43




---



##### 



meeting of stockholders, a stockholder proposal was adopted urging the
Board of Directors to adopt a policy that we treat the value of stock options
granted to employees and directors as compensation expense. The Board is
reviewing the issue, including the stockholder vote, as part of its evaluation
of the accounting treatment of option grants. Moreover, recent changes in
applicable stock exchange listing standards relating to obtaining stockholder
approval of equity compensation plans could make it more difficult or expensive
for us to grant options to employees in the future. We have modified our equity
compensation strategy to emphasize equity incentives other than stock options
in light of these developments. If employees believe that the grants that they
receive under this modified strategy are less attractive, we may find it
difficult to attract, retain and motivate employees. In addition, the use of
alternative equity incentives may increase our compensation expense and may
negatively impact our earnings. To the extent that new regulations make it
more difficult or expensive to grant stock options to employees, we may incur
increased compensation costs, further change our equity compensation strategy
or find it difficult to attract, retain and motivate employees as a result of a
modified equity compensation strategy, each of which could materially and
adversely affect our business. Our quarterly revenues and results of operations can be difficult to predict
and may fluctuate substantially, which may adversely affect our net income. Our revenues and results of operations can be difficult to predict and may
fluctuate substantially from quarter to quarter. Our operating expense
decisions, capital commitments and hiring plans are based on projections of
future revenues. If our actual revenues fall below expectations, our net income
may be adversely affected. Factors that may affect the predictability of actual
revenues include the following:  
    
    the impact of the pending Oracle tender offer or any other proposed
acquisition of PeopleSoft;
    
    our sales cycle may vary as a result of the complexity of a
customers overall business needs and may extend over one or more
quarters;
    
    the complexity and size of license transactions can result in
protracted negotiations;
    
    a significant number of our license agreements typically are
completed within the last few weeks of the quarter and purchasing
decisions may be delayed to future quarters;
    
    the effect of economic downturns and unstable political conditions
may result in decreased product demand, price erosion, and other factors
that may substantially reduce license and service revenue;
    
    customers may unexpectedly postpone or cancel anticipated system
replacement or new system implementation due to changes in strategic
priorities, project objectives, budgetary constraints, internal
purchasing processes or company management;
    
    changes in our competitors and our own pricing policies and discount
plans may affect customer purchasing patterns and decisions;
    
    the number, timing and significance of our competitors and our own
software product enhancements and new software product announcements may
affect purchasing decisions; and
    
    changes in customers seasonal purchasing patterns may result in
imprecise quarterly revenue projections. We may be required to defer recognition of license revenue for a significant
period of time after entering into an agreement, which could negatively impact
our results of operations. We may have to delay recognizing license 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; 44




---



##### 




    
    transactions that involve non-standard acceptance criteria or identified product-related performance issues; and
    
    transactions that include contingency-based payment terms or fees. These factors and other specific accounting requirements 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
we believe meets the criteria for current revenue recognition on delivered
elements, we negotiate and revise these terms and conditions in some
transactions. Therefore, it is possible that from time to time we may license
our software or provide service with terms and conditions that do not 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. There are several accounting standards and interpretations covering
revenue recognition for the software industry. These pronouncements include,
Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended
by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions, SOP 81-1, Accounting for Performance of
Construction-type and Certain Production-type Contracts, the Securities and
Exchange Commissions Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements, SAB No. 104, Revenue Recognition, and
other authoritative accounting literature. These standards address software
revenue recognition matters primarily from a conceptual level and do not
include specific implementation guidance. We believe that our revenue has been
recognized in compliance with these three standards. The accounting profession and regulatory agencies continue to discuss
various provisions of these pronouncements 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
reported revenues and results of operations. Increases in service revenue as a percentage of total revenues may decrease
overall margins. We realize lower margins on services revenue than on license revenues. In
addition, we may contract with certain third parties to supplement the services
we provide to customers, which generally yields lower gross margins than our
service business. As a result, if service revenue increases as a percentage of
total revenue or if we increase our use of third parties to provide such
services, our gross margins would be lower and our operating results may be
impacted. Our intellectual property and proprietary rights may offer only limited
protection. We consider certain aspects of our internal operations and our software
and documentation to be proprietary, and we rely on a combination of patent,
copyright, trademark and trade secret laws and other measures to protect our
proprietary rights. Patent applications or issued patents, as well as
trademark, copyright, and trade secret rights, may not provide significant
protection or a competitive advantage. We also rely on contractual restrictions
in our agreements with customers, employees and others to protect our
intellectual property rights. There can be no assurance that these agreements
will not be breached, that we have adequate remedies for any breach, or that
our patents, copyrights, trademarks or trade secrets will not come into the
public domain. Moreover, the laws of some countries do not protect intellectual
property rights at all or as effectively as do the laws of the United States.
Protecting and defending our intellectual property rights could be costly
regardless of venue. Through an escrow arrangement, we have granted some of our customers a
contingent future right to use our source code solely for maintenance services
to support their internal use of our software. If our source code is accessed
through escrow, the likelihood of misappropriation or other misuse of our
intellectual property may increase. Third parties may claim that our products infringe upon their intellectual
property rights, which could result in material costs or our use of certain
rights could be enjoined. Third parties may assert infringement claims against us in the future,
especially in light of recent developments in patent law 45




---



##### 



expanding the scope of patents on software and business methods. These
assertions, regardless of their validity, could result in costly and
time-consuming litigation, including damage awards and indemnification payments
to customers, or could require costly redesign of products or present the need
to enter into royalty arrangements which could decrease margins and could
adversely affect our results of operations. Any such litigation or redesign of
products could also negatively impact customer confidence in our products and
could result in damage to our reputation and reduced licensing revenue. Future acquisitions may present risks and we may be unable to achieve the
product, financial or strategic goals intended at the time of any acquisition. As a component of our strategy, in addition to our acquisition of J.D.
Edwards, we may acquire or invest in companies, products or technologies, and
may enter into joint ventures and strategic alliances with other companies. The
risks that would commonly impact such transactions include:  
    
    difficulty assimilating the operations and personnel of the acquired company;
    
    difficulty effectively integrating the acquired technologies or products with our current products and technologies;
    
    difficulty in maintaining controls, procedures and policies during the transition and integration;
    
    ongoing business may be disrupted by transition and integration issues;
    
    key technical and managerial personnel from the acquired business may not be able to be retained;
    
    the financial and strategic goals for the acquired and combined businesses may not be achieved;
    
    relationships with partner companies or third party providers of technology or products could be adversely affected;
    
    relationships with employees and customers could be impaired;
    
    due diligence processes may fail to identify significant issues with
product quality, product architecture, legal and financial
contingencies, and product development, among other things; and
    
    significant exit charges may be sustained if products acquired in
business combinations are unsuccessful. It has been and may continue to be increasingly expensive to obtain and
maintain liability insurance. We contract for insurance to cover a variety of potential risks and
liabilities. Over the last two years, our premiums and deductibles have
increased significantly. In the current market, insurance coverage continues to
be more restrictive, and when insurance coverage is offered, the deductibles
for which we are responsible are larger and the premiums are increasing. This
has resulted in our being forced to bear the burden of an increased portion of
risks for which we have traditionally been covered by insurance. If we were
found to be liable for a significant claim in the future, our results of
operations may be negatively impacted. 
 ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Currency Exchange Rate Risk International sales are made mostly from our foreign subsidiaries in their
respective countries and are typically denominated in the local currency of
each country. Our foreign subsidiaries incur most of their expenses in local
currency as well. Our international business is subject to risks, including, but not limited
to: unique economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely
impacted by changes in these or other factors. Our exposure to foreign exchange rate fluctuations arises in part from
intercompany transactions in which certain costs incurred in the United States
are charged to our foreign subsidiaries. Intercompany transactions are
typically denominated in the functional 46




---



##### 



currency of the foreign subsidiaries in order to centralize foreign
exchange risk in 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 future potential impact due to changes in foreign currency
exchange rates. Forward exchange contracts are used to hedge foreign currency
exposures of the parent company as well as foreign currency exposures of our
foreign subsidiaries. We operate in certain countries in Latin America and Asia
Pacific where there are limited forward currency exchange markets, and thus we
have unhedged exposures in these countries. In general, our forward foreign
exchange contracts have terms of two months or less, which approximate the
expected settlement date of the underlying exposure. Gains and losses on the
settled contracts are included in Other income, net in the accompanying
unaudited condensed consolidated statements of operations and are recognized in
the current period, consistent with the period in which the gain or loss of the
underlying transaction is recognized. The foreign currency hedging program is
managed in accordance with a corporate policy approved by our Board of
Directors. In addition to hedging existing transaction exposures, our foreign
exchange management policy allows for the hedging of exposure resulting from
the translation of foreign subsidiary financial results into U.S. dollars. Such
hedges can only be undertaken to the extent that the exposures are highly
certain, reasonably estimable and significant in amount. No such hedges have
occurred through June 30, 2004. At June 30, 2004, we had the following outstanding forward foreign exchange
contracts to exchange foreign currency for U.S. dollars (in millions, except
for notional weighted average exchange rates): Notional WeightedNotional
    
    Average ExchangeFunctional Currency
    
    Amount
    
    Rate per US $Singapore dollars
    
    $
    14.9
    
    
    
    1.711Hong Kong dollars
    
    
    8.5
    
    
    
    7.791New Zealand dollars
    
    
    7.9
    
    
    
    1.569British pounds
    
    
    6.2
    
    
    
    0.549Japanese yen
    
    
    5.4
    
    
    
    108.066Taiwanese dollars
    
    
    3.8
    
    
    
    33.77$
    46.7
 At June 30, 2004, we had the following outstanding forward foreign exchange
contracts to exchange U.S. dollars for foreign currency (in millions, except
for notional weighted average exchange rates): Notional WeightedAverage ExchangeFunctional Currency
    
    Notional Amount
    
    Rate per US $Mexican pesos
    
    $
    12.5
    
    
    
    11.487Canadian dollars
    
    
    5.3
    
    
    
    1.346Swiss francs
    
    
    3.0
    
    
    
    1.245Euro
    
    
    2.7
    
    
    
    1.217Swedish krona
    
    
    1.0
    
    
    
    7.525$
    24.5
 Each of these contracts matured within 60 days and had a cost that
approximated fair value. Neither the cost nor the fair value of these forward
foreign exchange contracts was material at June 30, 2004. During the three
months ended June 30, 2004 and 2003, the Company recorded net foreign currency
transaction losses of $2.5 million and $1 million, respectively. During the six
months ended June 30, 2004 and 2003, the Company recorded net foreign currency
losses of $4.5 million and $1.2 million, respectively. 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 47




---



##### 



accounts with financial institutions, tax-exempt money market funds and
highly liquid debt securities of corporations and municipalities. Our
investments are made in accordance with an investment policy approved by our
Board of Directors. Cash balances in foreign currencies overseas represent
operating balances that are typically invested in short term time deposits in
local operating banks. We classify debt securities based on maturity dates on the date of
purchase and re-evaluate the classification as of each balance sheet date. Debt
securities which management has the intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost. All other debt
securities are classified as available-for-sale and carried at fair value,
which is determined based on quoted market prices, with net unrealized gains
and losses included in Accumulated other comprehensive income, net of tax, in
the accompanying condensed consolidated balance sheets. If unrealized losses
are determined to be other-than-temporary, they are reclassified from
Accumulated other comprehensive income into earnings. As of June 30, 2004,
all our investments were classified as available-for-sale and no
other-than-temporary impairments were identified. Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may
have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities, that typically have a shorter duration,
may produce less income than expected if interest rates fall. Due in part to
these factors, our investment income may decrease in the future due to changes
in interest rates. At June 30, 2004, the average maturity of our investment securities was
less than four months and all investment securities had maturities of less than
eighteen months. The following table presents certain information about our
financial instruments at June 30, 2004 that are sensitive to changes in
interest rates. Due to our tax rate, it is presently advantageous for us to
invest largely in tax-exempt securities. The average interest rates shown below
reflect a weighted average rate for both taxable and tax-exempt investments. At
June 30, 2004, we invested heavily in tax-exempt investments which reduced our
weighted average interest rate. Below is a presentation of the maturity profile of our investments in debt
securities at June 30, 2004 ($ in millions): Expected
    
    ExpectedMaturity
    
    Maturity1 Year
    
    More Than
    
    Principal
    
    Fairor Less
    
    1 Year
    
    Amount
    
    ValueAvailable-for-sale
securities
    
    $
    1,008.4
    
    
    $
    40.4
    
    
    $
    1,048.8
    
    
    $
    1,051.3Weighted average
interest rate
    
    
    1.2
    %
    
    
    1.3
    %
 Interest Rate Swap Transactions We used interest rate swap transactions to manage our exposure to interest
rate changes on synthetic lease obligations related to certain of our
headquarters facilities located in Pleasanton, California. The swaps had an
aggregate notional principal amount of $175 million and matured at various
dates in 2003, consistent with the expiration of the synthetic leases. Under
the swap agreements, we received a variable interest rate based on the three
month LIBOR rate and paid a weighted average fixed interest rate of 6.8%. The
swaps were designated under Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities as hedges
against changes in the amount of future cash flows. In February 2003, we
exercised our option under a synthetic lease agreement to purchase certain of
our headquarters facilities located in Pleasanton, California for $70 million,
and concurrently, swaps with an aggregate notional principal amount of $70
million matured. In June 2003, we exercised our option under the synthetic
lease agreement to purchase certain of our headquarters facilities located in
Pleasanton, California for $105 million. As a result of this transaction, we
terminated our remaining interest rate swap agreements with an aggregate
notional principal amount of $105 million resulting in a pretax charge of $1.4
million. There are no remaining amounts included in Accumulated other
comprehensive income at June 30, 2004 related to these interest rate swaps. 
 ITEM 4  CONTROLS AND PROCEDURES As of the end of the second quarter ended June 30, 2004, the Company
completed an evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures pursuant to Rule 13a-15(b) of the
Securities Exchange Act of 1934. That evaluation was completed under the
supervision and participation of members of our management including the 48




---



##### 



Companys Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, the Companys Chief Executive Officer and the Companys Chief
Financial Officer have concluded that the Companys disclosure controls and
procedures are effective in alerting them in a timely manner to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Companys periodic SEC filings. During the most recent fiscal quarter, there has not occurred any change
in the Companys internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 49




---



##### 



PART II  OTHER INFORMATION Item 1. Legal Proceedings PeopleSoft Shareholder Actions  Delaware Court of Chancery On June 6, 2003, Felix Ezeir (Case No. 20349-NC), Teresita Fay (Case No.
20350-NC), Robert Crescente (Case No. 20351-NC), Robert Corwin (Case No.
20352-NC) and Ernest Hack (Case No. 20353-NC), all of whom represented
themselves to be PeopleSoft stockholders, each filed a putative stockholder
class action suit in the Delaware Court of Chancery against the Company and
several of the Companys officers and directors. The suits allege that
defendants breached their fiduciary duties in connection with the response to
the tender offer announced by Oracle Corporation on June 6, 2003 and formally
commenced June 9, 2003. Plaintiffs in each of the actions initially sought
injunctive relief and an accounting. On June 10, 2003, Steven Padness filed an
action in the Delaware Court of Chancery against these same defendants (Case
No. 20358-NC) making similar allegations and seeking similar relief. On June
12, 2003, Thomas Nemes filed an action in the Delaware Court of Chancery (which
was subsequently amended June 18, 2003) against these same defendants (Case No.
20365-NC), making similar allegations and seeking similar relief (the Nemes
Action). On June 25, 2003, on an application filed in the Nemes Action, the Court
consolidated the actions listed above under a single caption and case number:
In re PeopleSoft, Inc. Shareholder Litigation,Consol. C.A. No. 20365-NC. On July 2, 2003, Richard Hutchings (Case No. 20403-NC) filed a putative
stockholder class action in the Delaware Court of Chancery against us and
several of our officers and directors. This action alleges that defendants
breached their fiduciary duties in connection with the response to Oracles
tender offer. Plaintiff sought injunctive relief, an accounting and damages. On
July 22, 2003, the Delaware Court ordered that this action be consolidated with
the other putative Delaware shareholder actions mentioned above. On May 26, 2004, PeopleSoft announced that the parties to the Delaware
consolidated putative stockholder class action had entered into a memorandum of
understanding providing for the settlement of that action. On June 17, 2004,
the parties in the Delaware consolidated putative stockholder class action
signed a Stipulation and Agreement of Compromise, Settlement and Release
providing for settlement of that action (the Settlement Stipulation) and on
July 22, 2004 filed the Settlement Stipulation with the Delaware Court of
Chancery. In the Settlement Stipulation the stockholder plaintiffs state that, based
on the actions of the US Department of Justice and the European Union and the
current status of their anti-trust reviews and/or opposition to Oracles
proposed acquisition of the Company, the discovery to date, and subject to
confirmatory discovery, they had determined that the customer assurance program
(see Note 10, above), as it relates to Oracle, serves a legitimate corporate
purpose in light of Oracles tender offer and other conduct. Pursuant to the
Settlement Stipulation, the Company agreed that if it extended the customer
assurance program beyond June 30, 2004, the term acquisition would be limited
to an acquisition of the Company by Oracle or its affiliates, and that prior to
June 30, 2004 it would attempt to use that more limited definition in certain
new contracts. In the Settlement Stipulation, which is subject to approval by
the Delaware Court of Chancery, the stockholder plaintiffs, on behalf of a
class of PeopleSoft stockholders, agreed to settle and dismiss all claims that
were raised or could have been raised in the action against the Company and its
directors. The Settlement Stipulation also provides, among other things, that
following Delaware Court of Chancery approval of the settlement (if obtained),
the Company will, for a two year period, amend its Bylaws to shorten the advance notice a stockholder
must give to nominate candidates for director and amend
its stockholder rights plan to provide that the rights plan will generally
cease to be applicable to certain qualifying tender offers unless, within 90
days following commencement or amendment of the price term of the qualifying
tender offer or certain other events, the Board of Directors, including a
majority of its independent directors, shall have adopted a resolution
determining that the rights plan shall remain applicable to such offer. The
Settlement Stipulation also provides for the Company to pay attorneys fees and
expenses of the stockholder plaintiffs in an amount to be determined by the
Court as fair and reasonable. If approved, the settlement will bind all
PeopleSoft stockholders except that it will not apply to Oracle, which is not
precluded by the Settlement Stipulation from continuing to pursue its claims in
the Delaware Court of Chancery and its counterclaims in the California Superior
Court action, both as described immediately below. We believe that the claims and allegations asserted in each of the
foregoing putative class action lawsuits are without merit, and intend to
vigorously defend against these lawsuits if the proposed settlement of them is
not approved by the Delaware Court of Chancery. Oracle v. PeopleSoft  Delaware Court of Chancery 50




---



##### 



On June 18, 2003, Oracle and Pepper Acquisition Corp. filed a lawsuit in
the Delaware Court of Chancery (Case No. 20377-NC) (captioned Oracle Corp. v.
PeopleSoft, Inc.)against us, several of our directors and J.D. Edwards,
alleging that the named directors breached their fiduciary duties in connection
with the response to Oracles tender offer, and that J.D. Edwards aided and
abetted the named directors purported breach of fiduciary duty. Oracle sought
injunctive, declaratory and rescissory relief. On June 24, 2004, Oracle and Pepper Acquisition Corp. filed an amended
complaint in this action, eliminating J.D. Edwards as a separate defendant and
adding PeopleSoft director Michael Maples as a defendant. The amended complaint updates the plaintiffs claims challenging PeopleSofts
response to Oracles tender offer and alleges, among other things, that the
directors of PeopleSoft have breached their duty of loyalty and duty of care
and that the customer assurance program violates Delaware corporation law and
was implemented without proper approval or supervision by PeopleSofts Board of
Directors. The amended complaint seeks declaratory and injunctive relief,
including an injunction prohibiting the future use of the customer assurance
program and requiring PeopleSofts Board of Directors to eliminate the
Companys Shareholder Rights Plan. Discovery in this action is proceeding and is being coordinated with
discovery in PeopleSofts action against Oracle in California, discussed below.
Trial in the Delaware action has been scheduled to commence on September 27,
2004. We believe that the claims and allegations asserted in this action are
without merit, and intend vigorously to defend against this lawsuit. PeopleSoft Shareholder Actions  California Superior Court for the County of
Alameda On June 6, 2003, separate actions were filed in the California Superior
Court for the County of Alameda by Doris Staehr (Case No. RG03100291), the West
Virginia Laborers Pension Trust Fund (Case No. RG03100306) and Lorrie McBride
(Case No. RG03100300). On June 10, 2003, Ray Baldi (Case No. RG03100696) filed
an additional case in the same court. The plaintiffs in these actions
(collectively, the Initial Alameda Shareholder Actions) all purport to be
PeopleSoft stockholders, and they make claims against several of our executive
officers and directors. The suits allege that the defendants breached their
fiduciary duties in connection with (i) the response to Oracles tender offer,
(ii) our agreement to acquire J.D. Edwards, and (iii) the implementation of the
2003 Directors Stock Plan, which was approved by the PeopleSoft stockholders at
the 2003 Annual Meeting of Stockholders. Plaintiffs seek injunctive, rescissory
and declaratory relief. On June 16, 2003, the Initial Alameda Shareholder
Actions were consolidated. On June 11 and 17, 2003, respectively, two
additional actions were filed by Moshe Panzer (Case No. VG03100876) and Arace
Brothers (Case No. VG03101830) asserting similar claims. By Order dated July
11, 2003, the Panzer and Arace Brothers actions were consolidated with the
Initial Alameda Shareholder Actions (collectively the Alameda Shareholder
Actions). By Order dated June 18, 2003, the Alameda County Superior Court granted
our Motion to Stay the Initial Alameda Shareholder Actions pending resolution
of the claims involving the duties of the defendant directors by the Delaware
Court of Chancery. The California Court found that the stockholder actions
required application of Delaware law, and that allowing the consolidated cases
to proceed would create the specter of inconsistent orders. By Order dated July
11, 2003, the Alameda County Superior Court also stayed the Panzer and Arace
Brothers cases pursuant to the June 18, 2003 Order in the Initial Alameda
Shareholder Actions. Accordingly, all of the Alameda Shareholder Actions
currently are stayed by order of the California Court. We believe that the claims and allegations asserted in each of the
foregoing putative class action lawsuits are without merit, and intend to
vigorously defend against these lawsuits if they are not dismissed by virtue of
the settlement of the Delaware putative stockholder class action discussed
above, or if that settlement is not approved by the Delaware Court of Chancery. PeopleSoft v. Oracle  California Superior Court for the County of Alameda On June 13, 2003, we filed an action in the California Superior Court for
the County of Alameda against Oracle and its subsidiary Pepper Acquisition
Corp. and unnamed defendants affiliated with the two named defendants (Case No.
RG03101434). On December 12, 2003, we filed a second amended complaint, incorporating
claims formerly pursued by J.D. Edwards, which is now our subsidiary. In this
lawsuit, we allege that in connection with Oracles tender offer, the
defendants have engaged in: (i) untrue and misleading advertising in violation
of Californias Business & Professions Code; (ii) unlawful disparagement of the
Companys products and services; (iii) unlawful interference with the Companys
relationships with its customers and prospective customers; and (iv) unfair
trade practices in violation of Californias Business & Professions Code. Our
second amended complaint, portions of which have been filed with the California
Court under seal, alleges new facts about what we believe are Oracles ongoing
acts of unfair trade 51




---



##### 



practices and attempts to eliminate PeopleSoft as a competitor, and
Oracles deliberate campaign to mislead our customers about Oracles plans to
terminate our products and force customers to migrate to Oracle systems. We
seek injunctive relief precluding Oracle from engaging in unfair trade
practices and other unlawful actions, and from proceeding with the tender
offer. We also seek restitution and damages, including damage caused to J.D.
Edwards. On January 20, 2004, Oracle demurred to the second amended complaint,
which the court overruled on February 25, 2004. On March 30, 2004, Oracle filed a cross-complaint against PeopleSoft and
members of its board, alleging, among other things, that they acted illegally
in refusing to accept Oracles tender offer and in implementing the customer
assurance program. The cross-complaint alleges causes of action for
interference with prospective economic advantage and violations of various
sections of Californias Civil Code and Business & Professions Code. Oracle
seeks damages, restitution, punitive damages, and injunctive and equitable
relief. PeopleSoft and the board members filed an answer to the cross-complaint
on April 29, 2004, denying the allegations of the cross-complaint and asserting
several affirmative defenses. We believe that the claims and allegations
asserted in the cross-complaint are without merit, and intend to vigorously
defend against them. On May 5, 2004, the court issued an order setting a jury trial in the
action to commence on November 1, 2004. Other Matters We are party to various legal disputes and proceedings arising during the
ordinary course of business. In the opinion of management, resolution of these
matters is not expected to have a material adverse effect on our financial
position, results of operations or cash flows. Notwithstanding our belief, an
unfavorable resolution of some or all of these matters could materially affect
our future results of operations or cash flows. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities ISSUER PURCHASES OF EQUITY SECURITIES (d) MaximumNumber (orApproximate(c) Total Number
    
    Dollar Value) ofof Shares (or
    
    Shares (or Units)Units) Purchased
    
    that May Yet Be(a) Total Number
    
    (b) Average Price
    
    as Part of Publicly
    
    Purchased Underof Shares (or
    
    Paid per Share (or
    
    Announced Plans
    
    the Plans orPeriod
    
    Units) Purchased
    
    Unit)
    
    or Programs
    
    ProgramsMonth #1 April
1-30, 2004
    
    4,946 shares1
    
    $16.88  per share
    
    
    
    
    
    $200 million2Month #2 May 1-31,
2004
    
    1,622 shares1
    
    $17.66 per share
    
    
    
    
    
    $200 million2Month #3 June 1-30,
2004
    
    1,659 shares3
    
    $18.39 per share
    
    
    
    
    
    $200 million2Total
    
    8,227 shares
    
    
    
    
    
    
    
    
    
    $200 million2
   1 Represents shares delivered to the Company from restricted stock held by the
Company employees upon vesting for the purpose of covering the recipients tax
withholding obligations.2 Represents the maximum aggregate dollar amount of shares authorized for
repurchase by the Company as announced on January 12, 2004. The program does
not contain an expiration date.3 Represents shares delivered to the Company to pay the purchase price of stock
received upon exercise of options under the Companys stock option plans. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders 52




---



##### 



Not applicable. 
 Item 5. Other Information None. 
 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 2.1
    
    Amended and Restated Agreement and Plan of Merger and Reorganization, dated as of June 16,
2003, by and among PeopleSoft, Inc., J.D .Edwards & Company and Jersey Acquisition
Corporation (incorporated by reference to Exhibit 2.1 filed with PeopleSoft, Inc.s
Registration Statement on Form S-4 (No. 333-106269) filed with the Securities and Exchange
Commission on June 19, 2003).10.1
    
    Assignment and Assumption Agreement and Acknowledgement and Consent dated as of September 30,
2003, by and among J.D. Edwards & Company LLC (JDE LLC), PeopleSoft, Inc. (PeopleSoft)
and Selco Service Corporation (Selco) (incorporated by reference to Exhibit 10.1 to
PeopleSofts Quarterly Report on Form 10-Q filed on November 14, 2003).10.2
    
    Assignment and Assumption of Security Documents and Amendment to Memorandum of Lease
(including Lease Supplement No. 1) (Phase I) dated as of September 30, 2003, by and among JDE
LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.2 to PeopleSofts
Quarterly Report on Form 10-Q filed on November 14, 2003).10.3
    
    Assignment and Assumption of Security Documents, Amendment to Memorandum of Lease and
Amendment to Memorandum of Ground Lease(Phases II/III) dated as of September 30, 2003, by and
among JDE LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.3 to
PeopleSofts Quarterly Report on Form 10-Q filed on November 14,2003).10.4
    
    Assignment and Assumption of Security Documents, Amendment to Memorandum of Lease (including
Lease Supplement No.1) and Amendment to Memorandum of Ground Lease (Phase IV) dated as of
September 30, 2003, by and among JDE LLC, PeopleSoft and Selco (incorporated by reference to
Exhibit 10.4 to PeopleSofts Quarterly Report on Form 10-Q filed on November 14, 2003).10.5
    
    Second Amendment to Definitions Appendix (Phase I) dated as of September 30, 2003, by and
among Selco, PeopleSoft and KeyBank National Association (KeyBank) (incorporated by
reference to Exhibit 10.5 to PeopleSofts Quarterly Report on Form 10-Q filed on November 14,
2003).10.6
    
    Second Amendment to Definitions Appendix (Phase II/III) dated as of September 30, 2003, by
and among Selco, PeopleSoft and KeyBank (incorporated by reference to Exhibit 10.6 to
PeopleSofts Quarterly Report on Form 10-Q filed on November 14, 2003).10.7
    
    Second Amendment to Definitions Appendix (Phase IV) dated as of September 30, 2003, by and
among Selco, PeopleSoft and KeyBank (incorporated by reference to Exhibit 10.7 to
PeopleSofts Quarterly Report on Form 10-Q filed on November 14, 2003).10.8
    
    Addendum to Employment Contract between Guy Dubois and PeopleSoft, Inc. dated January 1, 2004.10.9
    
    Memorandum of understanding regarding settlement of stockholder class actions (incorporated
by reference to Exhibit (e)(13) to PeopleSofts Amendment No. 26 to Schedule 14D-9 filed on
May 27, 2004).10.10
    
    Amendment to memorandum of understanding regarding settlement of stockholder class actions
(incorporated by reference to Exhibit (e)(14) to PeopleSofts Amendment No. 27 to Schedule
14D-9 filed on June 14, 2004).10.11
    
    Second amendment to memorandum of understanding regarding settlement of stockholder class
actions (incorporated by reference to Exhibit (e)(17) to PeopleSofts Amendment No. 28 to
Schedule 14D-9 filed on June 16, 2004).10.12
    
    Amended Executive Severance PolicyExecutive Vice Presidents, amended as of June 14, 2004
(incorporated by reference to Exhibit (e)(18) to PeopleSofts Amendment No. 29 to Schedule
14D-9 filed on June 18, 2004).10.13
    
    Amended Executive Severance PolicySenior Vice Presidents, amended as of June 14, 2004
(incorporated by reference to Exhibit (e)(19) to PeopleSofts Amendment No. 29 to Schedule
14D-9 filed on June 18, 2004).
 53




---



##### 



10.14
    
    Stipulation and Agreement of Compromise, Settlement and Release dated June 17, 2004
(incorporated by reference to Exhibit (e)(21) to PeopleSofts Amendment No. 29 to Schedule
14D-9 filed on June 18, 2004).31.1
    
    Certification by the Chief Executive Officer Pursuant to Rule13a-14(a)/15d-14(a) under the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Certification by the Chief Financial Officer Pursuant to Rule13a-14(a)/15d-14(a) under the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1
    
    Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 (b) Reports on Form 8-K.  1.
    
    The Company furnished a Current Report on Form 8-K on April 22, 2004
reporting under Item 12 the issuance of a press release and an earnings
conference call announcing its earnings results for the first quarter of
2004.2.
    
    The Company filed a Current Report on Form 8-K on June 24, 2004
reporting under Item 11 the notice of a trading blackout issued to
PeopleSoft directors and executives related to a corresponding pension
plan blackout in connection with the Oracle tender offer. 54




---



##### 



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. Date: August 6, 2004 PEOPLESOFT, INC.By:
    /s/ KEVIN T. PARKERKevin T. ParkerExecutive Vice President,
Finance and Administration,
Chief Financial Officer 55




---



##### 



INDEX TO EXHIBITS Exhibit Number
    
    Description2.1
    
    Amended and Restated Agreement and Plan of Merger and Reorganization, dated as of June 16,
2003, by and among PeopleSoft, Inc., J.D .Edwards & Company and Jersey Acquisition
Corporation (incorporated by reference to Exhibit 2.1 filed with PeopleSoft, Inc.s
Registration Statement on Form S-4 (No. 333-106269) filed with the Securities and Exchange
Commission on June 19, 2003).10.1
    
    Assignment and Assumption Agreement and Acknowledgement and Consent dated as of September 30,
2003, by and among J.D. Edwards & Company LLC (JDE LLC), PeopleSoft, Inc. (PeopleSoft)
and Selco Service Corporation (Selco) (incorporated by reference to Exhibit 10.1 to
PeopleSofts Quarterly Report on Form 10-Q filed on November 14, 2003).10.2
    
    Assignment and Assumption of Security Documents and Amendment to Memorandum of Lease
(including Lease Supplement No. 1) (Phase I) dated as of September 30, 2003, by and among JDE
LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.2 to PeopleSofts
Quarterly Report on Form 10-Q filed on November 14, 2003).10.3
    
    Assignment and Assumption of Security Documents, Amendment to Memorandum of Lease and
Amendment to Memorandum of Ground Lease(Phases II/III) dated as of September 30, 2003, by and
among JDE LLC, PeopleSoft and Selco (incorporated by reference to Exhibit 10.3 to
PeopleSofts Quarterly Report on Form 10-Q filed on November 14,2003).10.4
    
    Assignment and Assumption of Security Documents, Amendment to Memorandum of Lease (including
Lease Supplement No.1) and Amendment to Memorandum of Ground Lease (Phase IV) dated as of
September 30, 2003, by and among JDE LLC, PeopleSoft and Selco (incorporated by reference to
Exhibit 10.4 to PeopleSofts Quarterly Report on Form 10-Q filed on November 14, 2003).10.5
    
    Second Amendment to Definitions Appendix (Phase I) dated as of September 30, 2003, by and
among Selco, PeopleSoft and KeyBank National Association (KeyBank) (incorporated by
reference to Exhibit 10.5 to PeopleSofts Quarterly Report on Form 10-Q filed on November 14,
2003).10.6
    
    Second Amendment to Definitions Appendix (Phase II/III) dated as of September 30, 2003, by
and among Selco, PeopleSoft and KeyBank (incorporated by reference to Exhibit 10.6 to
PeopleSofts Quarterly Report on Form 10-Q filed on November 14, 2003).10.7
    
    Second Amendment to Definitions Appendix (Phase IV) dated as of September 30, 2003, by and
among Selco, PeopleSoft and KeyBank (incorporated by reference to Exhibit 10.7 to
PeopleSofts Quarterly Report on Form 10-Q filed on November 14, 2003).10.8
    
    Addendum to Employment Contract between Guy Dubois and PeopleSoft, Inc. dated January 1, 2004.10.9
    
    Memorandum of understanding regarding settlement of stockholder class actions (incorporated
by reference to Exhibit (e)(13) to PeopleSofts Amendment No. 26 to Schedule 14D-9 filed on
May 27, 2004).10.10
    
    Amendment to memorandum of understanding regarding settlement of stockholder class actions
(incorporated by reference to Exhibit (e)(14) to PeopleSofts
Amendment No. 27 to Schedule 14D-9 filed on June 14, 2004).10.11
    
    Second amendment to memorandum of understanding regarding settlement of stockholder class
actions (incorporated by reference to Exhibit (e)(17) to PeopleSofts Amendment No. 28 to
Schedule 14D-9 filed on June 16, 2004).10.12
    
    Amended Executive Severance PolicyExecutive Vice Presidents, amended as of June 14, 2004
(incorporated by reference to Exhibit (e)(18) to PeopleSofts Amendment No. 29 to Schedule
14D-9 filed on June 18, 2004).10.13
    
    Amended Executive Severance PolicySenior Vice Presidents, amended as of June 14, 2004
(incorporated by reference to Exhibit (e)(19) to PeopleSofts Amendment No. 29 to Schedule
14D-9 filed on June 18, 2004).10.14
    
    Stipulation and Agreement of Compromise, Settlement and Release dated June 17, 2004
(incorporated by reference to Exhibit (e)(21) to PeopleSofts Amendment No. 29 to Schedule
14D-9 filed on June 18, 2004).31.1
    
    Certification by the Chief Executive Officer Pursuant to Rule13a-14(a)/15d-14(a) under the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Certification by the Chief Financial Officer Pursuant to Rule13a-14(a)/15d-14(a) under the
Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.32.1
    
    Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 56