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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2003



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934
|- |  | -----------------------------------------------------------------------------------------



For the transition period from
 to



Commission File Number 000-25683



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MARIMBA, INC.

(Exact name of registrant as specified in its charter)



|Delaware (State of incorporation) |  | 77-0422318 (IRS Employer Identification No.)
|--------------------------------- |  | --------------------------------------------



440 Clyde Avenue,
Mountain View, California 94043

(Address of principal executive offices, including ZIP code)



(650) 930-5282

(Registrants telephone number, including area code)



None

(Former name, former address
and former fiscal year, if changed since last report)



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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 Rule12b-2 of the Securities Exchange Act of 1934).   Yes ̈No x.



The number of shares outstanding of the registrants
Common Stock as of June 30, 2003 was 25,613,399.



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MARIMBA, INC.



INDEX



|                              |  | Page No.                                                                                       
|----------------------------- |  | -----------------------------------------------------------------------------------------------
|Part I. Financial Information |  |                                                                                                
|                              |  |                                                                                                
|Item 1.                       |  | Financial Statements (Unaudited)                                                               
|                              |  |                                                                                                
|                              |  | Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002                          
|                              |  |                                                                                                
|                              |  | Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002
|                              |  |                                                                                                
|                              |  | Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002          
|                              |  |                                                                                                
|                              |  | Notes to the Consolidated Financial Statements                                                 
|                              |  |                                                                                                
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operation           
|                              |  |                                                                                                
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                     
|                              |  |                                                                                                
|Item 4.                       |  | Controls and Procedures                                                                        
|                             
|Part II. Other Information   
|                              |  |                                                                                                
|Item 1.                       |  | Legal Proceedings                                                                              
|                              |  |                                                                                                
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                                      
|                              |  |                                                                                                
|Item 3.                       |  | Defaults Upon Senior Securities                                                                
|                              |  |                                                                                                
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                            
|                              |  |                                                                                                
|Item 5.                       |  | Other Information                                                                              
|                              |  |                                                                                                
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                               
|                              | 
|Signature                     |  | 26                                                                                             



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MARIMBA, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except par value data)



|                                                                                                                        |  | June 30, 2003 |         |   | December 31, 2002 |  
|----------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | -
|ASSETS                                                                                                                  |  | (unaudited)   |         |   | (*)               |  
|Current assets:                                                                                                         |  |               |         |   |                   |  
|Cash and cash equivalents                                                                                               |  | $             | 22,319  |   |                   | $
|Short-term investments                                                                                                  |  |               | 19,116  |   |                   |  
|Accounts receivable, net of allowances of $633 and $750, respectively                                                   |  |               | 7,746   |   |                   |  
|Prepaid expenses and other current assets                                                                               |  |               | 1,290   |   |                   |  
|                                                                                                                        |  |               |         |   |                   |  
|Total current assets                                                                                                    |  |               | 50,471  |   |                   |  
|Property and equipment, net                                                                                             |  |               | 1,962   |   |                   |  
|Long-term investments                                                                                                   |  |               | 9,735   |   |                   |  
|Acquired technology                                                                                                     |  |               | 1,365   |   |                   |  
|Other assets                                                                                                            |  |               | 375     |   |                   |  
|                                                                                                                        |  |               |         |   |                   |  
|                                                                                                                        |  | $             | 63,908  |   |                   | $
|                                                                                                                        |  |               |         |   |                   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                    |  |               |         |  
|Current liabilities:                                                                                                    |  |               |         |   |                   |  
|Accounts payable                                                                                                        |  | $             | 199     |   |                   | $
|Accrued liabilities                                                                                                     |  |               | 1,144   |   |                   |  
|Accrued compensation                                                                                                    |  |               | 2,272   |   |                   |  
|Deferred revenue                                                                                                        |  |               | 10,010  |   |                   |  
|                                                                                                                        |  |               |         |   |                   |  
|Total current liabilities                                                                                               |  |               | 13,625  |   |                   |  
|Deferred rent                                                                                                           |  |               | 160     |   |                   |  
|Deferred revenues non-current                                                                                           |  |               | 537     |   |                   |  
|                                                                                                                        |  |               |         |   |                   |  
|Total long-term liabilities                                                                                             |  |               | 697     |   |                   |  
|Stockholders equity:                                                                                                   |  |               |         |   |                   |  
|Preferred stock; $.0001 par value, 10,000 shares authorized, no shares designated, issued and outstanding               |  |               |        |   |                   |  
|Common stock; $.0001 par value, 80,000 shares authorized, 25,613 and 25,201 shares issued and outstanding,
respectively |  |               | 2       |   |                   |  
|Additional paid-in capital                                                                                              |  |               | 98,452  |   |                   |  
|Deferred compensation                                                                                                   |  |               |        |   |                   |  
|Accumulated other comprehensive income                                                                                  |  |               | 62      |   |                   |  
|Accumulated deficit                                                                                                     |  |               | (48,930 | ) |                   |  
|                                                                                                                        |  |               |         |   |                   |  
|Stockholders equity                                                                                                    |  |               | 49,586  |   |                   |  
|                                                                                                                        |  |               |         |   |                   |  
|                                                                                                                        |  | $             | 63,908  |   |                   | $
|                                                                                                                        |  |               |         |   |                   |  



(*) The balance sheet
at December 31, 2002 has been derived from the audited consolidated financial statements at that date, but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.



See accompanying notes.



2



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MARIMBA, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                                                          |  | Three Months Ended June 30, |        |      | Six Months Ended June 30, |       
|--------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------
|                                                                                                          |  | 2003                        |        | 2002 |                           |       
|                                                                                                          |  | (unaudited)                 |        |      | (unaudited)               |       
|Revenues:                                                                                                 |  |                             |        |      |                           |       
|License                                                                                                   |  | $                           | 6,030  |      | $                         | 5,050 
|Service                                                                                                   |  |                             | 4,199  |      |                           | 3,988 
|                                                                                                          |  |                             |        |      |                           |       
|Total revenues                                                                                            |  |                             | 10,229 |      |                           | 9,038 
|Cost of revenues:                                                                                         |  |                             |        |      |                           |       
|License                                                                                                   |  |                             | 130    |      |                           | 2,099 
|Service                                                                                                   |  |                             | 1,507  |      |                           | 1,407 
|                                                                                                          |  |                             |        |      |                           |       
|Total cost of revenues                                                                                    |  |                             | 1,637  |      |                           | 3,506 
|                                                                                                          |  |                             |        |      |                           |       
|Gross profit                                                                                              |  |                             | 8,592  |      |                           | 5,532 
|Operating expenses:                                                                                       |  |                             |        |      |                           |       
|Research and development                                                                                  |  |                             | 2,049  |      |                           | 2,042 
|Sales and marketing                                                                                       |  |                             | 4,915  |      |                           | 6,775 
|General and administrative General and administrative                                                     |  |                             | 1,086  |      |                           | 1,875 
|Amortization of deferred compensation                                                                     |  |                             | 57     |      |                           | 508   
|                                                                                                          |  |                             |        |      |                           |       
|Total operating expenses                                                                                  |  |                             | 8,107  |      |                           | 11,200
|                                                                                                          |  |                             |        |      |                           |       
|Income (loss) from operations                                                                             |  |                             | 485    |      |                           | (5,668
|Interest income                                                                                           |  |                             | 244    |      |                           | 376   
|Other income                                                                                              |  |                             | 41     |      |                           | 14    
|                                                                                                          |  |                             |        |      |                           |       
|Income (loss) before income taxes                                                                         |  |                             | 770    |      |                           | (5,278
|Provision for income taxes                                                                                |  |                             | 66     |      |                           | 4     
|                                                                                                          |  |                             |        |      |                           |       
|Net income (loss)                                                                                         |  | $                           | 704    |      | $                         | (5,282
|                                                                                                          |  |                             |        |      |                           |       
|Basic and diluted net income (loss) per share                                                             |  | $                           | 0.03   |      | $                         | (0.22 
|                                                                                                          |  |                             |        |      |                           |       
|Weighted-average shares of common stock outstanding used in computing basic net income (loss) per share   |  |                             | 25,496 |      |                           | 24,360
|                                                                                                          |  |                             |        |      |                           |       
|Weighted-average shares of common stock outstanding used in computing diluted net income (loss) per share |  |                             | 26,189 |      |                           | 24,360
|                                                                                                          |  |                             |        |      |                           |       



See accompanying notes.



3



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MARIMBA, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                   |  | Six Months Ended June 30, |        
|-------------------------------------------------------------------------------------------------- |  | ------------------------- | -------
|                                                                                                   |  | 2003                      |        
|                                                                                                   |  | (unaudited)               |        
|Operating activities:                                                                              |  |                           |        
|Net income (loss)                                                                                  |  | $                         | 1,047  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                           |        
|Depreciation                                                                                       |  |                           | 716    
|Amortization of deferred compensation                                                              |  |                           | 111    
|Amortization of acquired technology                                                                |  |                           | 170    
|Loss on disposal of property and equipment                                                         |  |                           |       
|Changes in operating assets and liabilities:                                                       |  |                           |        
|Accounts receivable, net                                                                           |  |                           | (1,200 
|Prepaid expenses and other current assets                                                          |  |                           | 26     
|Accounts payable                                                                                   |  |                           | (266   
|Accrued liabilities                                                                                |  |                           | (432   
|Accrued compensation                                                                               |  |                           | (75    
|Deferred revenue                                                                                   |  |                           | 1,581  
|Deferred rent                                                                                      |  |                           | (126   
|                                                                                                   |  |                           |        
|Net cash provided by (used in) operating activities                                                |  |                           | 1,552  
|                                                                                                   |  |                           |        
|Investing activities:                                                                              |  |                           |        
|Capital expenditures, net                                                                          |  |                           | (345   
|Purchases of investments                                                                           |  |                           | (13,262
|Proceeds from matured investments                                                                  |  |                           | 22,831 
|                                                                                                   |  |                           |        
|Net cash provided by (used in) investing activities                                                |  |                           | 9,224  
|                                                                                                   |  |                           |        
|Financing activities:                                                                              |  |                           |        
|Proceeds from issuance of common stock, net of repurchases                                         |  |                           | (148   
|Effect of exchange rate changes on cash                                                            |  |                           | (13    
|                                                                                                   |  |                           |        
|Net increase (decrease) in cash and cash equivalents                                               |  |                           | 10,615 
|Cash and cash equivalents at beginning of period                                                   |  |                           | 11,704 
|                                                                                                   |  |                           |        
|Cash and cash equivalents at end of period                                                         |  | $                         | 22,319 
|                                                                                                   |  |                           |        



See accompanying notes.



4



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Description of Business



Marimba, Inc. was incorporated in Delaware in February 1996. We develop,
market and support software change management and software configuration management solutions. Our products help customers reduce their total cost of information technology (IT) ownership and improve quality of IT service by streamlining
the distribution and management of software applications and content. Our customer base spans multiple vertical markets, including financial services, retail, healthcare, manufacturing and government entities. We market our products worldwide
through a combination of a direct sales force and resellers



2. Basis of
Presentation



The accompanying unaudited condensed
consolidated financial statements have been prepared by Marimba, Inc. (Marimba, we, our or us) and reflect all adjustments, consisting only of normal recurring accruals, which in the opinion of
management are necessary to present fairly the financial position and the results of operations for the interim periods. The balance sheet at December 31, 2002 has been derived from audited financial statements at that date. The financial statements
have been prepared in accordance with the regulations of the Securities and Exchange Commission (the SEC), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted
accounting principles. For further information, refer to the Consolidated Financial Statements and Notes thereto included in Marimbas Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC on March 28, 2003. Results
for the interim periods are not necessarily indicative of results for the fiscal year ending December 31, 2003 or for any future interim or full-year period.



Reclassification



Certain previously reported amounts have been reclassified to conform to the current presentation format with no impact on net income. All financial
information has been reclassified to conform to this presentation.



Net
Income (Loss) Per Share



Basic earnings per share is
computed using the weighted-average number of common shares outstanding. Diluted earnings per share includes the weighted-average number of common share equivalents outstanding during the period. Dilutive common share equivalents consist of employee
stock options and are calculated by using the treasury stock method. The following table presents the calculation of basic and diluted net income (loss) per share(in thousands, except per share data):



|                                                      |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                                                      |  | 2003                        |        |   | 2002                      |  
|Net income (loss)                                     |  | $                           | 704    |   |                           | $
|Weighted-average shares  Basic:                      |  |                             |        |   |                           |  
|Weighted-average shares of common stock outstanding   |  |                             | 25,566 |   |                           |  
|Less weighted-average shares subject to repurchase    |  |                             | (70    | ) |                           |  
|                                                      |  |                             |        |   |                           |  
|Weighted-average shares  Basic                       |  |                             | 25,496 |   |                           |  
|Effect of dilutive securities: Employee stock options |  |                             | 693    |   |                           |  
|                                                      |  |                             |        |   |                           |  
|Weighted average shares  Diluted                     |  |                             | 26,189 |   |                           |  
|                                                      |  |                             |        |   |                           |  
|Net income (loss) per share  Basic                   |  | $                           | 0.03   |   |                           | $
|                                                      |  |                             |        |   |                           |  
|Net income (loss) per share  Diluted                 |  | $                           | 0.03   |   |                           | $
|                                                      |  |                             |        |   |                           |  



5



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For the three months ended June 30, 2003 and 2002, 2,170,541 and 7,223,150 shares attributable to
outstanding stock options were excluded from the calculation of diluted earnings per share, because the effect was antidilutive. For the six months ended June 30, 2003 and 2002, 2,079,177 and 6,942,165 shares attributable to outstanding stock
options were excluded from the calculation of diluted earnings per share, because the effect was antidilutive.



Recent Accounting Pronouncements



In January 2003, FASB issued FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. Generally, a variable interest entity (VIE) is a corporation, partnership,
trust or any other legal structure used for business purposes that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires that a VIE be consolidated by a company if that company is subject to a majority of the VIEs risk of loss or entitled to receive a majority of the VIEs residual returns or both. A company that consolidates a
VIE is referred to as the primary beneficiary of that entity. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. The consolidation requirements apply to entities existing prior to January 31, 2003 in
the first fiscal year or interim period beginning after June 15, 2003. We have adopted the disclosure provisions and will adopt the consolidation requirements as of July 1, 2003. We do not believe the adoption of this statement will have a material
effect on our results of operation or financial position.



In
June 2003, FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement is effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We do not believe the adoption of this statement will have a material effect on our results of operation or financial position.



Guarantees



We enter into standard indemnification agreements with our customers and technology partners. Pursuant to these agreements,
we typically indemnify, hold harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any U.S. patent, copyright or other intellectual property infringement claim by any third
party with respect to our products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments that Marimba could be required to make under these
indemnification agreements is unlimited. We have, in the past, incurred costs to defend intellectual property lawsuits.



We generally warrant that our software products will perform in all material respects in accordance with our standard published specifications for a
specified period of time from the date of license. Additionally, we warrant that our maintenance and other services will be performed consistent with generally accepted industry standards through completion of the agreed upon services. Historically,
costs related to these warranties have not been significant. We maintain a warranty accrual in the event that we incur expenses associated with customer claims made under our warranty provisions.



We have agreements in place with our directors and officers whereby we
indemnify them for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements
is unlimited; however, we have a director and officer insurance policy that may enable us to recover a portion of any future amounts paid.



Accounting for Stock-Based Compensation



The following table summarizes relevant information as to reported results under Marimbas intrinsic value method of accounting for stock awards,
with supplemental information as if the fair value recognition provisions of FASB Statement 123 had been applied (in thousands, except per share data):



6



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|                                                                                                                                                                                                                                                                                            |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | -
|                                                                                                                                                                                                                                                                                            |  | 2003                        |      |   | 2002                      |  
|Net income (loss) as reported                                                                                                                                                                                                                                                               |  | $                           | 704  |   |                           | $
|Add: Stock-based compensation included in reported net income (loss)                                                                                                                                                                                                                        |  |                             | 57   |   |                           |  
|Deduct: Total stock-based compensation (expense) under SFAS 123                                                                                                                                                                                                                             |  |                             | (733 | ) |                           |  
|                                                                                                                                                                                                                                                                                            |  |                             |      |   |                           |  
|Pro forma net income (loss)                                                                                                                                                                                                                                                                 |  | $                           | 28   |   |                           | $
|Basic and diluted net income (loss) per share:                                                                                                                                                                                                                                              |  |                             |      |   |                           |  
|Reported net income (loss) per common share                                                                                                                                                                                                                                                 |  | $                           | 0.03 |   |                           | $
|                                                                                                                                                                                                                                                                                            |  |                             |      |   |                           |  
|Pro forma net income (loss) per common share                                                                                                                                                                                                                                                |  | $                           | 0.00 |   |                           | $
|                                                                                                                                                                                                                                                                                            |  |                             |      |   |                           |  
|3. Comprehensive Income (Loss)
 Comprehensive income (loss) is comprised of net income (loss),
foreign currency translation gains or losses and unrealized gains or losses on available-for-sale marketable securities. Our total comprehensive income (loss) is as follows (in thousands):
|                                                                                                                                                                                                                                                                                            |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                                                                                                                                                                                                                                                            |  | 2003                        |      |   | 2002                      |  
|Net income (loss)                                                                                                                                                                                                                                                                           |  |                             | $704 |   |                           |  
|Other comprehensive income (loss):                                                                                                                                                                                                                                                          |  |                             |      |   |                           |  
|Change in unrealized gains and losses on available-for-sale securities                                                                                                                                                                                                                      |  |                             | (69  | ) |                           |  
|Foreign currency translation adjustment                                                                                                                                                                                                                                                     |  |                             | (7   | ) |                           |  
|                                                                                                                                                                                                                                                                                            |  |                             |      |   |                           |  
|Comprehensive income (loss)                                                                                                                                                                                                                                                                 |  |                             | $628 |   |                           |  
|                                                                                                                                                                                                                                                                                            |  |                             |      |   |                           |  



4. Legal Matters



Beginning in April 2001, a number of substantially identical class action
complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern District of New York naming Marimba, Inc., certain of its officers and directors, and certain underwriters of the
companys initial public offering (Morgan Stanley & Co., Inc., Credit Suisse First Boston Corp. and Bear Stearns & Co., Inc.) as defendants. The complaints have since been consolidated into a single action, and a consolidated amended
complaint was filed in April 2002. The complaint alleges, among other things, that the underwriters of our initial public offering violated the securities laws by failing to disclose certain alleged compensation and tie-in arrangements (such as
undisclosed commissions or stock stabilization practices) in the registration statement filed in connection with the offering. Marimba and certain of its officers and directors were named in the complaint pursuant to Section 11 of the Securities Act
of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The complaint seeks unspecified damages, attorney and expert fees, and other unspecified litigation costs. Similar complaints have been filed against over 300 other
issuers that had initial public offerings since 1998 and all such actions have been included in a single coordinated proceeding. In July 2002, the defendants in the consolidated actions filed motions to dismiss all of the cases in the litigation
(including the case involving Marimba). On February 19, 2003, the court ruled on the motions and granted Marimbas motion to dismiss the claims against it under Section 10(b) and Rule 10b-5. The motions to dismiss the claims under Section 11
were denied as to virtually all of the defendants in the consolidated cases, including Marimba. In addition, the Marimba individual defendants in the litigation each signed a tolling agreement and were dismissed from the action without prejudice on
October 9, 2002. On June 30, 2003, a special committee of our Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of Marimba and
Marimbas individual defendants for the conduct alleged in the action to be wrongful. Marimba would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert and release certain
potential claims Marimba may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by Marimbas insurers. The special committee agreed to approve the settlement subject to a



7



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number of conditions, including the participation of a substantial number of other issuer defendants in the proposed
settlement, the consent of Marimbas insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the court overseeing the
litigation. In the event the settlement is not consummated, the defense of the litigation may increase our expenses and divert our managements attention and resources. Due to the inherent uncertainties of litigation, we cannot accurately
predict the ultimate outcome of the litigation, and any unfavorable outcome could have a material adverse impact on our business, financial condition and operating results.



8



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|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|------- |  | ------------------------------------------------------------------------------------



The information in this report contains forward-looking statements, which are subject to safe harbors created under the U.S. federal securities laws.
Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements, including statements that refer to
projections of our future financial performance, anticipated revenue growth, profitability, expenses, cash flows, capital needs, competition and market share growth, the development of new products and technologies and market acceptance of such
products or technologies, business and sales strategies, developments in our target markets, matters relating to distribution channels and partnerships, proprietary rights, litigation, and other trends in our businesses. In addition, the words
believes, anticipates, plans, expects, intends and similar expressions are intended to identify forward-looking statements. Marimbas actual results and the timing of certain events
may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in Other Factors Affecting Operating Results, Liquidity and
Capital Resources below, and in other reports or submissions filed with the SEC. All forward-looking statements in this report are based on information available to Marimba as of the date hereof, and Marimba undertakes no obligation to release
publicly any updates or revisions to any such forward-looking statements.



Overview



Marimba, Inc. was incorporated in
Delaware in February 1996. We develop, market and support software change management and software configuration management solutions. Our products help customers reduce their total cost of information technology (IT) ownership and
improve quality of IT service by streamlining the distribution and management of software applications and content. Our customer base spans multiple vertical markets, including financial services, retail, healthcare, manufacturing and government
entities. We market our products worldwide through a combination of a direct sales force and resellers.



Revenues to date have been derived from the license of our products and from support and maintenance, consulting and training services. Customers who
license our products generally purchase maintenance contracts, typically covering a 12 month period. Additionally, customers may purchase consulting services, which are customarily billed at a fixed daily rate plus out-of-pocket expenses. We also
offer training services that are billed on a per student or per class session basis.



Since inception, we have made substantial investments in sales, marketing and research and development to expand and enhance our product lines and increase the market awareness of Marimba and our products. We have
incurred significant losses since inception and had an accumulated deficit of approximately $48.9 million at June 30, 2003. We believe that our future success depends in part on our ability to increase our customer base and on growth in our market
overall. Accordingly, over the long term, we intend to continue to invest heavily in sales, marketing and research and development.



In view of the rapidly changing nature of our business and our limited operating history, we believe that period-to-period comparisons of revenues and
operating results are not necessarily meaningful, and historical trends that may be drawn from these comparisons should not be relied upon as indications of future performance, growth or financial results.



Critical Accounting Policies and Estimates



We believe there have been no significant changes in our critical accounting
policies during the three and six months ended June 30, 2003 as compared to what was previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC on March 28, 2003.



9



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Results of Operation





The following table sets forth certain statements of operations data as a
percentage of total revenues for the three and six months ended June 30, 2003 and 2002:



|                                      |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |   
|------------------------------------- |  | --------------------------- | - |  | ------------------------- | --
|                                      |  | 2003                        |   |  | 2002                      |   
|Revenues:                             |  |                             |   |  |                           |   
|License                               |  | 59.0                        | % |  | 55.9                      | % 
|Service                               |  | 41.0                        |   |  | 44.1                      |   
|                                      |  |                             |   |  |                           |   
|Total revenues                        |  | 100.0                       |   |  | 100.0                     |   
|Cost of revenues:                     |  |                             |   |  |                           |   
|License                               |  | 1.3                         |   |  | 23.2                      |   
|Service                               |  | 14.7                        |   |  | 15.6                      |   
|                                      |  |                             |   |  |                           |   
|Total cost of revenues                |  | 16.0                        |   |  | 38.8                      |   
|                                      |  |                             |   |  |                           |   
|Gross margin                          |  | 84.0                        |   |  | 61.2                      |   
|Operating expenses:                   |  |                             |   |  |                           |   
|Research and development              |  | 20.0                        |   |  | 22.6                      |   
|Sales and marketing                   |  | 48.0                        |   |  | 75.0                      |   
|General and administrative            |  | 10.7                        |   |  | 20.7                      |   
|                                      |  |                             |   |  |                           |   
|Amortization of deferred compensation |  | 0.6                         |   |  | 5.6                       |   
|                                      |  |                             |   |  |                           |   
|Operating expenses                    |  | 79.3                        |   |  | 123.9                     |   
|                                      |  |                             |   |  |                           |   
|Income (loss) from operations         |  | 4.7                         |   |  | (62.7                     | ) 
|Net income (loss)                     |  | 6.9                         | % |  | (58.4                     | )%
|                                      |  |                             |   |  |                           |   



The data presented
above and elsewhere in this section has been derived from the unaudited consolidated financial statements contained in this report which, in the opinion of management include all adjustments, consisting only of normal recurring accruals for 2003 and
a $1.9 million non-recurring expense in the second quarter of 2002 related to a legal settlement involving a patent license. These adjustments are necessary to present fairly the financial position and results of operations for the interim periods.
The operating results for any quarter should not be considered indicative of results of any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2002 filed with the SEC on March 28, 2003.



Revenues



The following table presents
selected revenue data for the periods indicated (in thousands except for percentages):



|                              |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|----------------------------- |  | --------------------------- | ------ | - | ------------------------- | -
|                              |  | 2003                        |        |   | 2002                      |  
|Revenues:                     |  |                             |        |   |                           |  
|License                       |  | $                           | 6,030  |   |                           | $
|Service                       |  |                             | 4,199  |   |                           |  
|                              |  |                             |        |   |                           |  
|Total revenues                |  | $                           | 10,229 |   |                           | $
|Percentage of total revenues: |  |                             |        |   |                           |  
|License                       |  |                             | 59     | % |                           |  
|Service                       |  |                             | 41     |   |                           |  



Total revenues
increased $1.2 million or approximately 13%, to $10.2 million in the second quarter of 2003 from $9.0 million in the second quarter of 2002. For the six months ended June 30, 2003, total revenue increased $3.3 million or approximately 19% to $20.4
million from $17.1 million in the comparable period.



10



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The increase in total revenues was due primarily to an increase in license revenues. Our quarterly
revenues often depend on a small number of relatively large transactions. In the second quarter of 2003, three customers accounted for approximately 15%, 11% and 10% of total revenues. In the second quarter of 2002, two customers accounted for
approximately 19% and 11% of total revenues.



License
Revenues. License revenues increased $1.0 million, or approximately 20%, to $6.0 million in the second quarter of 2003 from $5.0 million in the second quarter of 2002. License revenue in the six months ended June 30, 2003 increased $3.6 million
or approximately 40% to $12.6 million from $9.0 million in the comparable period in 2002. As a percentage of total revenues, license revenues increased to 59% of total revenues in the three month period ended June 30, 2003, from 56% in the
comparable period of 2002. As a percentage of total revenues, license revenues increased to 62% of total revenues for the six month period ended June 30, 2003, from 53% of total revenues in comparable period of 2002. The increase in license revenues
for the second quarter of 2003 was due to a few large license transactions resulting in an increased average deal size. The mix of products sold each quarter can vary significantly. The following table presents the license revenues derived from each
of our product lines as a percentage of total license revenues for the periods indicated:



|                                      |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|------------------------------------- |  | --------------------------- | - |  | ------------------------- | -
|                                      |  | 2003                        |   |  | 2002                      |  
|Percentage of total license revenues: |  |                             |   |  |                           |  
|Desktop/Mobile Management             |  | 85                          | % |  | 86                        | %
|Server Management                     |  | 15                          |   |  | 14                        |  
|Embedded Management                   |  |                            |   |  |                          |  



Service Revenues.Service revenues include support and maintenance, consulting and training. Service revenues in the second quarter of 2003 increased $0.2 million, or approximately 5% to $4.2 million, from $4.0 million in the second quarter of 2002. The majority
of this increase was the result of higher support and maintenance revenues. Service revenues for the six months ended June 30, 2003 decreased $0.3 million, or approximately 4%, to $7.8 million from $8.1 million in the comparable period of 2002. The
majority of the decrease was due to lower consulting and training revenues. As a percentage of total revenues, service revenues decreased to 41% of total revenues in the second quarter of 2003, from 44% in the comparable period of 2002. As a
percentage of total revenues, services revenues decreased to 38% of total revenue for the period ended June 30, 2003, from 47% for the comparable period in 2002. The decrease in service revenues as a percentage of total revenues was due primarily to
the increase in license revenues in the three and six month period ended June 30, 2003. The following table presents the components of service revenues as a percentage of service revenues for the periods indicated:



|                                      |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|------------------------------------- |  | --------------------------- | - |  | ------------------------- | -
|                                      |  | 2003                        |   |  | 2002                      |  
|Percentage of total service revenues: |  |                             |   |  |                           |  
|Consulting                            |  | 15                          | % |  | 14                        | %
|Support and maintenance               |  | 80                          |   |  | 81                        |  
|Training                              |  | 5                           |   |  | 5                         |  



International.International revenues represented approximately 13% and 15% of total revenues for the three month period ended June 30, 2003 and 2002, respectively. Revenues outside the United States represented approximately 12% and 15% of total revenues for
the six months ended June 30, 2003 and 2002, respectively. The decrease in revenues outside the United States, as a percentage of total revenues, was due primarily to the increase in domestic revenues. Domestic revenues increased by $1.2 million, or
16%, to approximately $8.9 million in the second quarter of 2003 from $7.7 million in the second quarter in 2002. International revenues were essentially unchanged, at approximately $1.3 million for both the second quarter of 2003 and 2002.
International revenues for the six month period ended June 30, 2003 decreased by $233,000, or 9% to $2.4 million from $2.6 million compared to the same period in 2002. The following table presents our revenues by region as a percentage of total
revenues:



11



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|              |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |  
|------------- |  | --------------------------- | - |  | ------------------------- | -
|              |  | 2003                        |   |  | 2002                      |  
|Revenues:     |  |                             |   |  |                           |  
|United States |  | 87                          | % |  | 85                        | %
|Europe        |  | 12                          |   |  | 11                        |  
|Other regions |  | 1                           |   |  | 4                         |  



Costs of Revenues and Gross Profit



Cost of License Revenues and Related Gross Profit.
Cost of license revenues consists primarily of the cost of third-party software technology that was either integrated into our products or resold by us. Cost of license revenues in the second quarter of 2003 was $1.9 million less than in the second
quarter of 2002. The second quarter of 2002 included a one-time charge of $1.9 million related to a legal settlement involving a patent license. Also as a result of this settlement, we have included an additional charge of approximately $85,000 for
amortization of acquired technology every quarter beginning in the third quarter of 2002, up to and including the most recent quarter. We expect to record similar quarterly amortization charges through June 2007. The following table presents our
gross profit on license revenues (in thousands except for percentages):



|                                                                     |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|-------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | -
|                                                                     |  | 2003                        |       |   | 2002                      |  
|License revenues                                                     |  | $                           | 6,030 |   |                           | $
|Cost of license revenues                                             |  |                             | 130   |   |                           |  
|                                                                     |  |                             |       |   |                           |  
|Gross profit on license revenues                                     |  | $                           | 5,900 |   |                           | $
|Gross profit on license revenues as a percentage of license revenues |  |                             | 98    | % |                           |  



Cost of Service
Revenues and Related Gross Profit. Cost of service revenues includes salaries and related expenses of our customer service and training organizations, consultants and third parties for billable consulting arrangements, and an allocation of
certain overhead expenses. Cost of service revenues during the second quarter of 2003 increased by approximately 7% compared to the same period in 2002, primarily the result of increased service revenues. Cost of service revenue for the six month
period ended June 30, 2003 increased marginally compared to the same period in 2002. The following table presents our gross profit on service revenues (in thousands except for percentages):



|                                                                     |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|-------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | -
|                                                                     |  | 2003                        |       |   | 2002                      |  
|Service revenues                                                     |  | $                           | 4,199 |   |                           | $
|Cost of service revenues                                             |  |                             | 1,507 |   |                           |  
|                                                                     |  |                             |       |   |                           |  
|Gross profit on service revenues                                     |  | $                           | 2,692 |   |                           | $
|Gross profit on service revenues as a percentage of service revenues |  |                             | 64    | % |                           |  



Operating Expenses



Research and Development.Research and development expenses were
essentially unchanged, at $2.0 million in both the second quarter of 2003 and the comparable period of 2002, and at $4.1 million for the six month period ended June 30, 2003 and the comparable period in 2002.



12



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Sales and Marketing.Sales and marketing expenses decreased $1.9 million, or approximately 28%, to
$4.9 million in the second quarter of 2003 from $6.8 million in the second quarter of 2002. Sales and marketing expenses decreased $3.2 million, or approximately 24%, to $10.2 million for the six month period ended June 30, 2003, compared to $13.4
million in the comparable period in 2002. The decrease was primarily due to fewer promotional activities during the first and second quarter of 2003, as well as headcount and other ongoing cost reductions.



General and Administrative.General and administrative expenses
decreased $789,000, or 42%, to $1.1 million in the second quarter of 2003 from $1.9 million in the second quarter of 2002. General and administrative expenses decreased $1.2 million, or 34%, to $2.3 million for the six month period ended June 30,
2003 compared to $3.4 million in the comparable period in 2002. These decreases were due to the restructuring that took place in the third quarter of 2002, a reduction in outside legal fees, and ongoing general cost cutting measures.



Deferred Compensation.We amortized deferred compensation, net of
credits resulting from the forfeiture of stock options and repurchase of shares due to employee departures, of $57,000 and $111,000 for the three and six months ended June 30, 2003 and $508,000 and $1.1 million for the three and six months ended
June 30, 2002. Our deferred compensation charges resulted primarily from stock options granted prior to our initial public offering in April 1999 and restricted stock grants made in 2001 and 2002. All of these stock options and restricted shares
have now either fully vested or have been cancelled, which is the primary cause of the large decline in deferred compensation charges. We anticipate having no further deferred compensation charges unless we grant additional restricted shares or
non-employee stock options in the future.



Interest
Income and Other Income, Net.Interest income and other income, net, was $285,000 and $605,000 for three and six months ended June 30, 2003 and $390,000 and $823,000 for three and six months ended June 30, 2002. The decrease in interest income
was due primarily to lower invested cash balances and lower interest rates.



Provision for Income Taxes. Marimbas provision for income taxes for the second quarters of 2003 and 2002 consists of state income, franchise taxes, foreign taxes, and with respect to 2003 only, a
provision for Federal alternative minimum tax after utilization of available net operating loss carryforwards. No provision for Federal taxes was recorded for the three and six month period ended June 30, 2002, because we had experienced losses and
did not anticipate paying Federal taxes.



Liquidity and Capital Resources



As of June 30, 2003, our principal sources of liquidity
included approximately $22.3 million of cash and cash equivalents, and $19.1 and $9.7 million of short-term and long-term investments in marketable securities, respectively.



Cash equivalents consisted of financial instruments, which are readily convertible to cash and have maturities of three
months or less at the time of acquisition. Investments with remaining maturities of less than one year are considered short-term, and investments with maturities longer than one year are considered long-term investments. Investments are reported at
fair market value and are managed by professional investment managers.



Net cash generated by operating activities was approximately $1.6 million for the six months of 2003. The increase in cash is primarily as a result of net income for the period and an increase in deferred revenue, offset by increase in
accounts receivable. The net cash provided by investing activities of $9.2 million for the first six months of 2003 was primarily related to lower purchases of short-term and long-term investments and to sales and maturities of previous investments.
The net cash used in financing activities of $148,000 was due to the repurchase of common stock, offset by employee stock purchases.



We currently anticipate that our current cash, cash equivalents and investments will be sufficient to meet our anticipated cash needs for working capital
and capital expenditures for at least the next 12 months. However, it is possible that we could experience unexpected cash requirements that would force us to seek financing, or at some point in the future we may otherwise seek financing to support
our long-term operations. In any such event, we may seek to sell additional equity or debt securities or obtain a credit facility. Any additional financings, if needed, might not be available on reasonable terms or at all. Failure to raise capital
when needed could seriously harm our



13



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business and operating results. If additional funds were raised through the issuance of equity securities, the percentage
of ownership of our existing stockholders would be reduced.



Commitments



Our contractual obligations consist of noncancellable
operating lease agreements. As of June 30, 2003, future minimum lease payments under noncancellable operating leases are expected to be approximately $4.6 million, and become due as presented in the table below:



|                             |  | Operating Leases
|---------------------------- |  | ----------------
|                             |  | (in thousands)  
|Less than 1 year             |  | $               
|1 to 3 years                 |  |                 
|4 years and thereafter       |  |                 
|                             |  |                 
|Total minimum lease payments |  | $               
|                             |  |                 



In May 2003, we
renegotiated our lease commitment for our Mountain View headquarters, and in exchange for extending our lease commitment by an additional two years to June 2007, we reduced our monthly rent payment by approximately 40%.



Other Factors Affecting Operating Results, Liquidity and Capital Resources



The factors discussed below are cautionary statements that identify
important factors that could cause actual results to differ materially from those anticipated by the forward-looking statements contained in this report. These risks are not the only ones facing our company. Additional risks not presently known to
us, or that we currently deem immaterial, may also impair our business operations. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph to Item 2 of this report.



We Have Incurred Losses and May Incur Future Losses



There is no assurance that we will be able to sustain or increase
profitability or cashflow in the long run. As of June 30, 2003, we had an accumulated deficit of approximately $48.9 million. Our history of losses may cause some of our potential and/or actual customers to question our viability, which may in turn
hamper our ability to sell some of our products or collect receivables.



Fluctuations in Our Quarterly Operating Results Could Adversely Affect Our Stock Price



Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future. As a result, we believe that
period-to-period comparisons of our operating results should not be relied upon as indicators of our future performance. Our operating results have been below the expectations of securities analysts and investors in the past and could be so in the
future. Our failure to meet these expectations would likely result in a decrease in the market price of our common stock. Operating results vary depending on a number of factors, many of which are outside our control.



A substantial portion of our revenues for most quarters has been recorded in
the last month of the quarter and the magnitude of quarterly fluctuations in operating results may not become evident until late in or towards the end of a particular quarter. At the same time, our expense levels are relatively fixed for a
particular quarter and are based, in part, on expectations as to future revenues. As a result, if revenue levels fall below our expectations for a particular quarter, our operating results will be adversely affected as only a small portion of our
expenses vary with our revenues. A delay in recognizing revenue, even from a single account, could seriously harm our operating results.



14



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Our Revenues in Any Quarter Depend on a Small Number of Relatively Large Orders



Our quarterly revenues are especially subject to fluctuation, because they
normally depend on the completion of relatively large license transactions. For example, three transactions accounted for approximately 36% of our revenues during the second quarter of 2003. This dependence on large orders makes our net revenue and
operating results more likely to vary from quarter to quarter, and more difficult to predict, because the loss of any particular large order is significant. As a result, our operating results could suffer if any large orders are delayed or canceled
in any future period.



We Are Subject to the Effects of General
Economic and Geopolitical Conditions and Reductions in Corporate IT Spending, and the Current Economic Downturn May Continue to Adversely Impact Our Business



Our business is subject to the effects of general economic conditions and, in particular, market conditions in the
industries that we serve. We believe that our operating results are being adversely impacted by recent unfavorable general economic and geopolitical conditions, as well as reductions in corporate IT spending. Recent political turmoil in many parts
of the world, including terrorist and military actions, may continue to put pressure on global economic conditions. Our customers decisions to purchase our products are discretionary and subject to their internal budget and purchasing
processes, which may be impacted by the above factors. In addition, since many of our customers may be suffering adverse effects from the general economic slowdown, we may find that collecting accounts receivable from existing or new customers will
take longer than we expect or that some accounts receivable will become uncollectible. If these conditions do not improve, or if they deteriorate further, our business and operating results are likely to continue to be adversely impacted.



Our Success Depends on Our Desktop/Mobile Management Product Line



We expect to continue to derive a substantial portion of
our revenues from our Desktop/Mobile Management product line and related services. A decline in the price of our Desktop/Mobile Management products or our inability to increase sales of these products would seriously harm our business and operating
results. We cannot predict the success of our Desktop/Mobile Management products. We periodically update our Desktop/Mobile Management products to make improvements and provide additional enhancements. New versions of this product line may not
provide the benefits we expect and could fail to meet customers requirements or achieve widespread market acceptance.



We Need to Continue to Enhance and Develop Our Server Management and Embedded Management Product Lines and Develop New Products and Services



There can be no assurance that the revenues from our newer Server Management
and Embedded Management product lines will grow in absolute amount or as a percentage of total license revenues. In addition, we cannot assure you that our Server Management products and Embedded Management products will meet customer expectations
or gain widespread market acceptance. We have sold a limited amount of Embedded Management products in the first six months of 2003.



To provide comprehensive software change management solutions, we will need to develop and introduce new products and services, which offer functionality
that we do not currently provide. We may not be able to develop these technologies, and therefore, we may not be able to offer a comprehensive software change management solution. In addition, we have in the past experienced delays in new product
releases, and we may experience similar delays in the future. If we fail to release new products on a timely basis, our business and operating results could be seriously harmed.



We Depend on the Growth of Our Customer Base and Increased Business from Our Current Customers



Our success is substantially dependent on the continued growth of our
customer base. If we fail to increase our customer base, our business and operating results would be seriously harmed. Our ability to attract new customers will depend on a variety of factors, including the reliability, security, scalability and
cost-effectiveness of our products and services, as well as our ability to effectively market our products and services.



15



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If we fail to generate repeat and expanded business from our current customers, our business and
operating results would be seriously harmed. Many of our customers initially make a limited purchase of our products and services for pilot programs. These customers may not choose to purchase additional licenses to expand their use of our products.
In addition, as we deploy new versions of our products or introduce new products, our current customers may not require the functionality provided by our new products and may not ultimately license these products.



Our Ability to Grow and Sustain Service Revenues Depends on New License Customers and
Support Contract Renewals



Because the total amount of
maintenance and support fees we receive in any period depends in large part on the size and number of license orders that we have previously sold, any downturn in our software license revenues negatively impacts our future service revenues. Our
license revenues decreased during 2002, which could contribute to a decrease in service revenues in 2003 and beyond.



Our support and maintenance programs are sold on an annual basis. Renewal of annual support and maintenance is generally at the customers election.
If customers elect not to renew their support and maintenance agreements, our service revenues could be significantly adversely impacted. If support and maintenance revenues were to decline, or not grow as rapidly as expected, we would need to
increase our license revenues and other service revenues in order to make up for the decline in support and maintenance revenues.



Failure to Further Develop and Sustain Our Indirect Sales Channel and Third-Party Distribution Relationships Could Limit or Prevent Future Growth



We have a limited number of distribution relationships for our products with
systems integrators and other resellers, and we may not be able to increase the number of distribution relationships or maintain our existing relationships. We are relying in part on the growth of our indirect sales channel for future revenue
growth, and if this does not continue to develop, our ability to grow revenues may be materially harmed.



Our current agreements with our distribution partners typically do not prevent these companies from selling products of other companies (including
products that may compete with our products), and they do not generally require these companies to purchase minimum quantities of our products. Some of these relationships are governed by agreements that can be terminated by either party with little
or no prior notice. These distributors could give higher priority to the products of other companies or to their own products than they give to our products. In addition, sales through these channels generally result in lower fees to Marimba than
direct sales. The loss of, or significant reduction in, sales volume to any of our current or future distribution partners as a result of any of these or other factors could seriously harm our revenues and operating results.



Our Markets are Highly Competitive and are Experiencing Consolidation



The markets for our products are highly competitive, and we expect this
competition to persist and intensify in the future. We compete against both new entrants into our markets as well as existing companies. Our failure to maintain and enhance our competitive position could seriously harm our business and operating
results. We encounter competition from a number of sources, including:



| |  |  | Sellers of enterprise-wide management systems, which include electronic software distribution;
| | - |  | ----------------------------------------------------------------------------------------------

| |  |  | Companies that market products that support the distribution of software applications and content;
| | - |  | --------------------------------------------------------------------------------------------------

| |  |  | Desktop software management products;
| | - |  | -------------------------------------

| |  |  | Application server vendors and others that have introduced software distribution capabilities into their products;
| | - |  | ------------------------------------------------------------------------------------------------------------------

| |  |  | Hardware suppliers that offer or bundle software management capabilities in conjunction with their hardware offerings; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | Our potential customers own information technology departments and internal development efforts.
| | - |  | -------------------------------------------------------------------------------------------------



Many of our competitors have longer operating histories and significantly greater financial, technical, marketing and other
resources than we do. Many of these companies have more extensive customer bases and broader



16



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customer relationships that they could leverage, including relationships with many of our current and potential
customers. Many also have significantly more established customer support and professional service organizations than we do. In addition, these companies may adopt aggressive pricing policies, which we are unable to match. In the past, we have lost
potential customers to competitors for various reasons, including lower prices. Furthermore, these companies may have greater brand name recognition than we do. To achieve widespread market acceptance, we will need to further establish the Marimba
brand and be able to differentiate our product and service offerings from those of our competitors.



Contributing to these challenges, our industry has been subject to consolidation, which subjects us to competition with larger companies offering
integrated solutions and a wider breadth of products. Potential competitors may bundle their products or incorporate additional components into existing products in a manner that discourages users from purchasing our products. Alliances among
competitors or between competitors and other large software companies present similar competitive challenges. As a result of consolidation or alliances, these competitors may also be able to respond more quickly to new or emerging technologies and
changes in customer requirements than we can.



If Microsoft Successfully
Expands Its Systems Management Software Offerings that Compete with Our Products, the Demand for Our Products May Suffer



Microsoft has publicized its intentions to expand its offerings in the systems management software market that may compete with our products. Microsoft
has substantially greater financial, technical and marketing resources, a larger customer base, a longer operating history, greater name recognition and more established relationships in the industry than we do. If Microsoft were to grow their
market share in the systems management market with competing products, the demand for our products and our ability to increase or sustain our market share may be harmed. In addition, the possible perception among our customers and potential
customers that Microsoft is going to be successful in marketing expanded systems management software offerings that may compete with our products may delay their buying decisions and harm our ability to market our products and services to them.



We Rely on Third-Party Marketing and Technology Relationships For Future
Sales Growth



We currently have several marketing and
technology relationships. These relationships include joint sales and marketing relationships that provide us access to potential sales to large enterprises that we might not otherwise have access to, as well as product integration and other
relationships. If we cannot maintain successful marketing and technology relationships or if we fail to enter into additional marketing and technology relationships, we could have difficulty expanding the sales of our products and our growth might
be limited. Our marketing and technology relationships are generally not documented in writing, or are governed by agreements that can be terminated by either party with little or no prior notice. In addition, companies with which we have marketing
or technology relationships may promote products and services of several different companies, including those of our competitors. If these companies choose not to promote our products or if they develop, market or recommend products or services that
compete with our products, our business would be harmed.



Implementation of Our Products by Large Customers May Be Complex and Customers Could Become Dissatisfied if Implementation Proves Difficult, Costly or Time Consuming



Our products must integrate with many existing computer systems and software programs used by our customers. Integrating
with many other computer systems and software programs can be complex, costly and time consuming, and can cause delays in the deployment of our products for such customers. Customers could become dissatisfied with our products if implementations
prove to be difficult, costly or time consuming, and this could negatively impact our ability to sell our products.



Our Business and Financial Performance Depends on Our Ability to Retain and Attract Key Personnel



Our success depends largely on the skills, experience and performance of the members of our senior management and other key
personnel. We have recently had changes in our senior management, in particular within our sales organization. Several members of our senior management are relatively new to Marimba, and our success will depend in part on the successful assimilation
and performance of these individuals.



17



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We may not be successful in attracting qualified senior management personnel or be able to attract,
assimilate and retain other key personnel in the future. None of our senior management or other key personnel in the U.S. is bound by an employment agreement. In addition, our future success will depend largely on our ability to continue attracting
and retaining highly skilled personnel. Like other companies in the software industry, we face competition for qualified personnel. If we lose senior management or key employees and are unable to replace them with qualified individuals, our business
and operating results could be seriously harmed.



If Requirements Relating
to Accounting Treatment For Employee Stock Options Are Changed, We May Be Forced to Change Our Business Practices



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



We Have a Long Sales Cycle and Our
Products Require a Sophisticated Sales Effort



A
customers decision to license our products typically involves a significant commitment of resources and is influenced by the customers budget cycles and internal approval procedures for IT purchases. In addition, selling our products
requires us to educate potential customers on our products uses and benefits. As a result, our products have a long sales cycle, which can take over six months, and sales cycles have generally lengthened during the current economic slowdown.
We face difficulty predicting the quarter in which sales to expected customers may occur. The sale of our products is also subject to delays from the lengthy budgeting, approval and competitive evaluation processes of our customers that typically
accompany significant capital expenditures. For example, customers frequently begin by evaluating our products on a limited basis and devote time and resources to test our products before they decide whether to purchase a license for deployment.
Customers may also defer orders as a result of anticipated releases of new products or enhancements by our competitors or us.



Our products and services require a sophisticated sales effort targeted at senior management of our prospective customers. New hires require extensive
training and typically take at least six months to achieve full productivity. There is no assurance that new sales representatives will ultimately become productive. In prior quarters, a large portion of our license revenues has often resulted from
contracts closed by just a few sales representatives. If we were to lose qualified and productive sales personnel, our revenues could be adversely impacted.



Protection of Our Intellectual Property Is Limited



We rely on a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our
technology. These legal protections afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use our proprietary information. Litigation
may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. To the extent that we have sufficient resources to pursue such litigation, it
could result in substantial costs and diversion of resources and could significantly harm our business and operating results. In addition, we sell our products internationally, and the laws of many countries do not protect our proprietary
rights as well as the laws of the United States.



We May Be Found to
Infringe Proprietary Rights of Others



Other companies,
including our competitors, may obtain patents or other proprietary rights that could prevent, limit or interfere with our ability to make, use or license our products. As a result, we may be found to infringe the proprietary rights of others.
Furthermore, companies in the software market are increasingly bringing suits alleging



18



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infringement of their proprietary rights, particularly patent rights. We have been involved in two such patent
infringement suits in the past.



We could incur substantial
costs to defend any intellectual property litigation, and any such litigation could result in one or more of the following:



| |  |  | Our paying monetary damages, which could be tripled if the infringement is found to have been willful;
| | - |  | ------------------------------------------------------------------------------------------------------

| |  |  | The issuance of a preliminary or permanent injunction requiring us to stop selling one or more of our products in their current forms;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our having to redesign one or more of our products, which could be costly and time-consuming and could substantially delay shipments, assuming that a redesign is feasible;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our having to reimburse the holder of the infringed intellectual property for some or all of its attorneys fees and costs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

| |  |  | Our having to obtain from the holder licenses to its intellectual property, which licenses might not be made available to us on reasonable terms; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our having to indemnify our customers against any losses they may incur due to the alleged infringement.
| | - |  | --------------------------------------------------------------------------------------------------------



In the event of a successful claim of infringement against us and our failure or inability to license the infringed
technology, our business and operating results would be significantly harmed. Regardless of the merits, these claims could be time-consuming and divert our managements attention from the operation of our business.



Our Operating Results and Financial Condition May be Materially Harmed if We Are Not
Successful At Expanding Internationally



We plan to
increase our international sales force and operations over the long term. Expanding internationally requires significant management attention and financial resources, and we may not grow our revenues enough to cover these expenses. For any such
expansion, we will also need to, among other things, expand our international sales channel management and support organizations and develop relationships with international service providers and additional distributors and system integrators. In
addition, as international operations become a larger part of our business, we could encounter, on average, greater difficulty with collecting accounts receivable, longer sales cycles and collection periods, greater seasonal reductions in business
activity and increased tax rates. Furthermore, products may need to be localized or customized to meet the needs of local users, before they can be sold in particular foreign countries. Developing localized versions of our products for foreign
markets is difficult and could take longer than we anticipate.



In addition, our international business activities are subject to a variety of risks, including the adoption of or changes in laws, currency fluctuations and political and economic conditions that could restrict or eliminate our ability to
do business in foreign jurisdictions. To date, we have not adopted a hedging program to protect us from risks associated with foreign currency fluctuations.



Export clearances, and in some cases, import clearances must be obtained before our products can be distributed internationally. Current or new government
laws and regulations, or the application of existing laws and regulations, could expose us to significant liabilities, significantly slow our growth and seriously harm our business and operating results.



We Rely on Third-Party Software and Applications



We integrate third-party software and digital certificates as a component of
our software. There are inherent limitations in the use and capabilities of much of the technology that we license from third parties. As a result, we face a number of challenges in integrating these technologies into our products. We would be
seriously harmed if the providers from whom we license software ceased to deliver and support reliable products, enhance their current products or respond to emerging industry standards. In addition, the third-party software may not continue to be
available to us on commercially reasonable terms or at all. The loss of, or inability to maintain or obtain, this software could result in shipment delays or reductions. Furthermore, we might be forced to limit the features



19



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available in our current or future product offerings. Either alternative could seriously harm our business and operating
results.



Almost all of our products are written in Java and
require a Java virtual machine in order to operate. Vendors offering these Java virtual machines may not continue to make these implementations of the Java virtual machines available at commercially reasonable terms or at all. Furthermore, if Sun
Microsystems were to make significant changes to the Java language, if significant changes were to be made to Java virtual machine implementations of Sun Microsystems and other vendors or if they fail to correct defects and limitations in these
products, our ability to continue to improve and ship our products could be impaired. In the future, our customers may also require the ability to deploy our products on platforms for which technically acceptable Java implementations either do not
exist or are not available on commercially reasonable terms. Our customers may also use particular implementations of the Java virtual machines that may not be technically or commercially acceptable for integration into our products.



Software Defects in Our Products Would Harm Our Business



Complex software products like ours often contain errors or defects,
including errors relating to security, particularly when first introduced or when new versions or enhancements are released. Our products extensively utilize digital certificates and other complex technology. Our use of this technology has in the
past and may in the future result in product behavior problems, which may not be anticipated by our customers or us. Defects or errors in our current or future products or in products comparable to ours could result in lost or delayed revenues or
harm to the reputation of our business, either of which would seriously harm our business and operating results.



We offer performance warranties with the purchase of a license for our software products. Such warranties typically require us to repair or replace a
defective or non-conforming product reported to us during the applicable warranty period, or if repairing or replacing the product is commercially impracticable, to return the license fees paid for the defective or non-conforming product. We do not
currently reserve for possible products returns. Because of this, any future product returns that require us to return amounts paid to us, especially from large customers or with respect to large transactions, could have a material adverse effect on
our business and operating results.



In addition, since many of
our customers use our products for business-critical applications, errors, defects or other performance problems could result in financial or other harm to our customers and could significantly impair their operations. Our customers could seek
damages for losses related to any of these issues. A product liability claim or warranty claim brought against us, even if not successful, would likely be time consuming and costly to defend and could adversely affect our marketing efforts.



Our Stock Price Is Likely to Continue to be Volatile



The market price of our common stock has been and is likely to continue to
be volatile. The market price of our common stock may be significantly affected by factors such as actual or anticipated fluctuations in our operating results, announcements of technological innovations, new products or new contracts by us or our
competitors, developments with respect to patents or proprietary rights and related litigation, other material litigation involving Marimba, changes in our management or other key employees, adoption of new accounting standards affecting the
software industry, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market price for the common stock of
technology companies. Furthermore, our common stock is thinly traded, which contributes significantly to the volatility of our stock price. Due to the low trading volume of our stock, stockholders may not be able to purchase or sell shares,
particularly large blocks of shares, as quickly and as inexpensively as if the trading volume were higher. Volatility in the price of our common stock may adversely affect its market price.



We May Have Difficulty Collecting Amounts Owed to Us



Certain of our existing and proposed customers have experienced
credit-related issues. Because a small number of customers account for a large portion of our revenue and cash flow in any given quarter, the credit-worthiness of our largest customers is critical to our business. At June 30, 2003, two customers
represented 26% and 17% of net accounts receivable, and at June 30, 2002, four customers represented 13%, 12%, 12%, and 12% of net accounts



20



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receivable. We wrote off $1.0 million in uncollectible accounts during fiscal 2002, which had been previously reserved in
2001. We perform ongoing credit evaluations of customers, but do not generally require collateral. We grant credit terms to most customers ranging from 30 to 90 days, however in some instances we may provide longer payment terms. Should we have more
customers than we anticipate with liquidity issues, or if payment is not received on a timely basis, our business, operating results and general financial condition could be seriously harmed.



We Are Involved in a Securities Class Action Litigation and Are At Risk of Additional
Similar Litigation



We are a party to the securities class
action litigation described in Part II, Item 1Legal Matters of this report. We have entered into a settlement agreement with the plaintiffs in this action. However, the settlement is subject to several conditions, including a
hearing on fairness and approval by the court overseeing the litigation, and we cannot assure you that the settlement will be consummated. In the event the settlement is not consummated, the defense of this litigation may increase our expenses and
divert our managements attention and resources, and any unfavorable outcome could have a material adverse effect on our business and results of operations.



In addition, we may in the future be the target of other securities class action or similar litigation.



We Must Respond to Rapid Technological Change and Evolving Industry Standards



The markets for our software change and configuration
management solutions are characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. New solutions based on new
technologies or new industry standards can quickly render existing solutions obsolete and unmarketable. Any delays in our ability to develop and release enhanced or new solutions could seriously harm our business and operating results. Our
technology is complex, and new products, enhancements and services can require long development and testing periods. Our failure to conform to prevailing standards could have a negative effect on our business and operating results.



We Face Risks Associated with Potential Acquisitions



We may make acquisitions in the future. Acquisitions of companies, products
or technologies entail numerous risks, including an inability to successfully assimilate acquired operations and products, diversion of managements attention, loss of key employees of acquired companies and substantial transaction costs. Some
of the products acquired may require significant additional development before they can be marketed and may not generate revenue at anticipated levels. Moreover, future acquisitions by us may result in dilutive issuances of equity securities, the
use of a substantial portion of our cash and investment balances, the incurrence of additional debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in significant impairment charges or
amortization expense. Any of these problems or factors could seriously harm our business, financial condition and operating results.



Provisions in Our Charter Documents and in Delaware Law May Discourage or Delay Potential Acquisition Bids for Marimba and Prevent Changes in Our Management



Our charter documents authorize us to issue shares of
preferred stock with rights, preferences and privileges designated by our Board of Directors, without further stockholder approval. While this provides desirable flexibility in connection with possible acquisitions and other corporate purposes, any
issued preferred stock could have the effect of delaying, deferring or preventing a change in control of our company. As a result, the market price of our common stock and the voting and other rights of the holders of our common stock may be
adversely affected. The issuance of preferred stock may result in the loss of voting control to others.



In addition, provisions in our charter documents eliminate the right of stockholders to act by written consent without a meeting and limit the right of
stockholders to call, and present items of business at, a special meeting of stockholders. These provisions are intended to increase the likelihood of continuity and stability in the composition of our Board of Directors and in the policies set by
the Board. These provisions also discourage certain types of transactions that may involve an actual or threatened change of control transaction, and are designed to reduce our vulnerability to an unsolicited acquisition proposal. As a result, these
provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. These provisions are also intended



21



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to discourage certain tactics that may be used in proxy fights. However, they could have the effect of discouraging
others from making tender offers for outstanding shares of our stock, and may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover attempts. These provisions may also have the effect of preventing
changes in the management of our company.



22



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|ITEM 3. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- |  | ----------------------------------------------------------



We are generally subject to market risks associated with changes in interest rates and foreign currency exchange rates. A brief summary of these risks
follows below. For more information, please see our annual report on Form 10-K. We believe there have been no significant changes in our market risk exposure during the three and six months ended June 30, 2003 as compared to what was previously
disclosed in our Form 10-K for the year ended December 31, 2002.



Interest
Rate Sensitivity



Our interest income is sensitive to
changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Our investment policy requires us to invest funds in excess of current operating requirements in:



| |  |  | obligations of the U.S. government and its agencies;
| | - |  | ----------------------------------------------------

| |  |  | investment grade state and local government obligations;
| | - |  | --------------------------------------------------------

| |  |  | securities of U.S. corporations that, when purchased, are rated A1 or AA by Standard and Poors or the Moodys equivalent; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------

| |  |  | money market funds, deposits or notes issued or guaranteed by U.S. and non-U.S. commercial banks meeting particular credit rating and net worth requirements with maturities of less
than two years.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Exchange Rate Sensitivity



We develop products in the United States, and sell our products and services
primarily in North America, Europe and Asia. As a result, our financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic conditions in foreign markets. Portions of our sales are
currently transacted in British Pounds and Euros, thereby potentially affecting our financial position, results of operations and cash flows due to fluctuations in exchange rates. Near-term changes in exchange rates may have a material impact on our
future revenues, earnings, fair values or cash flows. We have not engaged in foreign currency hedging transactions. There can be no assurance that a sudden and significant change in the value of the British Pound or Euro would not seriously harm our
financial condition and results of operations.



|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



Evaluation of Disclosure Controls and Procedures



The SEC defines the term disclosure controls and procedures to mean a companys controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Our chief executive officer and our chief financial officer, based on their evaluation of
our disclosure controls and procedures as of the end of the quarterly period covered by this report, concluded that our disclosure controls and procedures were effective for this purpose.



Changes in Internal Controls



There were no significant changes in our internal control over financial reporting or, to our knowledge, in other factors during our last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



|ITEM 1. |  | LEGAL PROCEEDINGS
|------- |  | -----------------



Beginning in April 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern District of New York naming Marimba,
Inc., certain of its officers and directors, and certain underwriters of the companys initial public offering (Morgan Stanley & Co., Inc., Credit Suisse First Boston Corp. and Bear Stearns & Co., Inc.) as defendants. The complaints
have since been consolidated into a single action, and a consolidated amended complaint was filed in April 2002. The complaint alleges, among other things, that the underwriters of our initial public offering violated the securities laws by failing
to disclose certain alleged compensation and tie-in arrangements (such as undisclosed commissions or stock stabilization practices) in the registration statement filed in connection with the offering. Marimba and certain of its officers and
directors were named in the complaint pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The complaint seeks unspecified damages, attorney and expert fees, and other
unspecified litigation costs. Similar complaints have been filed against over 300 other issuers that had initial public offerings since 1998 and all such actions have been included in a single coordinated proceeding. In July 2002, the defendants in
the consolidated actions filed motions to dismiss all of the cases in the litigation (including the case involving Marimba). On February 19, 2003, the court ruled on the motions and granted Marimbas motion to dismiss the claims against it
under Section 10(b) and Rule 10b-5. The motions to dismiss the claims under Section 11 were denied as to virtually all of the defendants in the consolidated cases, including Marimba. In addition, the Marimba individual defendants in the litigation
each signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002. On June 30, 2003, a special committee of our Board of Directors conditionally approved a proposed partial settlement with the plaintiffs in this
matter. The settlement would provide, among other things, a release of Marimba and Marimbas individual defendants for the conduct alleged in the action to be wrongful. Marimba would agree to undertake other responsibilities under the partial
settlement, including agreeing to assign away, not assert and release certain potential claims Marimba may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by Marimbas insurers. The
special committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants in the proposed settlement, the consent of Marimbas insurers to the
settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the court overseeing the litigation. In the event the settlement is not consummated, the
defense of the litigation may increase our expenses and divert our managements attention and resources. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation, and any unfavorable
outcome could have a material adverse impact on our business, financial condition and operating results.



|ITEM 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS
|------- |  | -----------------------------------------



None.



|ITEM 3. |  | DEFAULT UPON SENIOR SECURITIES
|------- |  | ------------------------------



None.



|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- |  | ---------------------------------------------------



None.



|ITEM 5. |  | OTHER INFORMATION
|------- |  | -----------------



Effective July 11, 2003, Todd D. Riesterer resigned as Vice President, Corporate Services of Marimba.



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|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.
|------- |  | ---------------------------------



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



The exhibits listed in the Exhibit Index appearing at the end of this Form 10-Q are filed as part of this report.



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



On April 29, 2003, we furnished a report on Form 8-K to report under Item 12 our issuance of a press release announcing our financial results for the
quarter ended March 31, 2003 and the holding of a conference call regarding those financial results.



|
|



25



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SIGNATURE



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.



|                    |  |  |  | MARIMBA, INC.
|------------------- |  |  |  | -------------
|                    |  |  | 
|Date: July 29, 2003 |  |  |  | By:          
|                    |  |  |  |              



26



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EXHIBIT INDEX





|Exhibit Number |  | Description                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------------------
|10.1+          |  | 2003 Officers Incentive Plan.                                                                          
|10.2+          |  | 2003 Officers Incentive Plan  Sales Vice Presidents.                                                  
|10.3           |  | Addendum 1 dated June 4, 2003 to Lease between ilicon, Inc. and the registrant dated February 27, 2000.
|31.1           |  | Section 302 Certification of Principal Executive Officer.                                              
|31.2           |  | Section 302 Certification of Principal Financial Officer.                                              
|32.1           |  | Section 906 Certification of Chief Executive Officer and President.                                    
|32.2           |  | Section 906 Certification of Vice President, Finance and Chief Financial Officer.                      



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|+ |  | Indicates a management contract or compensatory plan or arrangement.
|- |  | --------------------------------------------------------------------