**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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FORM 10-K

**FOR ANNUAL AND TRANSITION REPORTS**

**PURSUANT TO SECTIONS 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF1934**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 2005

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM               TO               

**COMMISSION FILE NUMBER000-26565**

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LIBERATE TECHNOLOGIES

(Exact Name of Registrant as Specified in Its Charter)

| **DELAWARE**                                                     | ** ** | **94-3245315**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |

 

**310 University Avenue, Suite 201**

**Palo Alto, California 94301**

(Address of Principal Executive Offices) (Zip Code)

**(650) 330-8960**

(Registrant’s Telephone Number, Including Area Code)

**Securities registered pursuant to Section 12(b) ofthe Act: None**

**Securities registeredpursuant to Section 12(g) of the Act: Common Stock, $0.01 par valueper share**

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Indicate by check mark whetherthe Company (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Company was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x    No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of the Company’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x    No o

As of November 30,2004, the last business day of the Registrant’s second fiscal quarter, theaggregate market value of the voting stock held by non-affiliates of theCompany was approximately $211.6 million based on the last reported saleprice of the Company’s common stock on that date. As of August 1, 2005, therewere 110,934,837 shares of common stock outstanding (including shares held byaffiliates).

**DOCUMENTSINCORPORATED BY REFERENCE**

**Portions of the Registrant’sProxy Statement to be filed in connection with the Annual Meeting ofStockholders are incorporated by reference in Items 10, 11, 12, 13, and 14 of Part IIIof this Report.**

 

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**LIBERATETECHNOLOGIES**

**Annual Report on Form 10-K**

**For The Fiscal YearEnded May 31, 2005**

**TABLEOF CONTENTS**
|               | ** **                                                                                                               | ** ** |        | **Page** | ** ** |
|---------------|--------------------------------------------------------------------------------------------------------------------------|------------|--------|----------|------------|
| PART I   |                                                                                                                     |       |   |     |
| Item 1.       | Business                                                                                                                 |       | 1      |     |
| Item 2.       | Properties                                                                                                               |       | 10     |     |
| Item 3.       | Legal  Proceedings                                                                                                       |       | 10     |     |
| Item 4.       | Submission of Matters to a Vote of Security Holders                                                                      |       | 14     |     |
| PART II  |                                                                                                                     |       |   |     |
| Item 5.       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of  Equity Securities |       | 15     |     |
| Item 6.       | Selected  Financial Data                                                                                                 |       | 16     |     |
| Item 7.       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                              |       | 19     |     |
| Item 7A.      | Quantitative  and Qualitative Disclosures About Market Risk                                                              |       | 40     |     |
| Item  8.      | Financial Statements and  Supplementary Data                                                                             |       | 41     |     |
| Item 9.       | Changes in and Disagreements  With Accountants on Accounting and Financial Disclosure                                    |       | 89     |     |
| Item 9A.      | Controls  and Procedures                                                                                                 |       | 89     |     |
| PART III |                                                                                                                     |       |   |     |
| Item 10.      | Directors  and Executive Officers of the Registrant                                                                      |       | 90     |     |
| Item 11.      | Executive  Compensation                                                                                                  |       | 90     |     |
| Item 12.      | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters                          |       | 90     |     |
| Item 13.      | Certain  Relationships and Related Transactions                                                                          |       | 90     |     |
| Item 14.      | Principal  Accountant Fees and Services                                                                                  |       | 90     |     |
| PART IV  |                                                                                                                     |       |   |     |
| Item 15.      | Exhibits  and Financial Statement Schedules                                                                              |       | 91     |     |
| SIGNATURES    |                                                                                                                     | 98         |   |

 

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**PART I.**

**ITEM 1. BUSINESS**

The discussion in this report, which is filed onbehalf of Liberate Technologies (“Liberate,” “we,” “us,” or “our”) and itswholly owned subsidiaries, contains statements that involve expectations orintentions (such as those relating to future business or financial results, newproducts or features, anticipated deployments, management strategies or theoutcome of legal proceedings). These statements are forward-looking andare subject to risks and uncertainties, actual results may vary materially.These risks and uncertainties include the emerging nature of our market,unknown revenue potential, limited number of potential customers, shareholderand patent litigation and the other risks discussed below under “Risk Factors.”Other factors and assumptions not identified above were also involved in thederivation of these forward-looking statements, and the failure of suchother assumptions to be realized as well as other factors may also cause actualresults to differ materially from those projected. Most of these factors aredifficult to predict accurately and are generally beyond our control. We assumeno obligation to update any forward-looking statements. You shouldconsider our forward-looking statements in light of the risks discussedbelow, our consolidated financial statements, related notes, and the otherfinancial information appearing elsewhere in this report and our other filingswith the Securities and Exchange Commission (“SEC”).

In this report, wesometimes use the words “fiscal” or “FY” followed by a year to refer to ourfiscal years, which end on May 31 of the specified year. We also sometimesuse “Q1,” “Q2,” “Q3,” and “Q4” to refer to our fiscal quarters, which end on August 31,November 30, the last day of February, and May 31 of each fiscalyear.

**Corporate Background**

Liberate began its operations in late 1995 as adivision of Oracle Corporation, developing client and server software for theconsumer, enterprise, and educational markets. Liberate was incorporated inDelaware in April 1996 when Oracle spun off the division as NetworkComputer, Inc. (“NCI”). NCI’s initial focus was selling software tooriginal equipment manufacturers of network computer products for enterprisecustomers. In August 1997, NCI merged with a Netscape backed company,Navio Communications, Inc., which was developing internet application andserver software for the consumer market. NCI, the surviving entity in themerger, changed its strategic direction and restructured its operations tofocus development and marketing efforts on products targeted primarily at theconsumer device market, targeting sales to a limited number of large networkoperators and consumer device manufacturers. In May 1999, the companychanged its name from Network Computer, Inc. to Liberate Technologies.

Between our incorporation and our initial publicoffering, we raised a significant amount of capital by selling small equitypositions to a number of investors, including some major network operators. Inorder to continue funding our operations, we issued shares of our stock to thepublic in July 1999. In January 2000, we effected a two-for-one splitof our stock. We raised additional capital in February 2000 through asecondary public offering, and again in July 2000 when Cisco Systemsinvested $100.0 million through a private placement of 3,963,780 shares ofcommon stock. In July 2002, we repurchased all of these shares from CiscoSystems for $10.0 million.

We have made three acquisitions since becoming apublicly traded company: in March 2000, we acquired the VirtualModemassets of SourceSuite LLC, a company based in Canada; in June 2000,we acquired MoreCom, Inc, a company based in Horsham, Pennsylvania; and in August 2002,we acquired Sigma Systems Group (Canada). In May 2003, we sold ourBill-Care business and in November 2003 we sold our Operations SupportSystems (OSS) business and related assets, both of which we had acquired in theSigma Systems acquisition in August 2002.

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On January 10, 2005, Liberate announced that it hadreached an agreement to sell substantially all of the assets of its NorthAmerica business to Double C Technologies, LLC, a joint venture majority ownedand controlled by Comcast Corporation with a minority investment by CoxCommunications, Inc. Under the terms of the agreement, the joint venturereceived substantially all of the assets, including patents and otherintellectual property, and assumed certain limited liabilities related toLiberate’s North America business. Liberate received cash consideration ofapproximately $82 million. The asset sale closed on April 7, 2005.

On March 25, 2005, the Board of Directors ofLiberate Technologies declared a one-time special dividend of $2.10 per commonshare. The special dividend was payable to the holders of record onApril 4, 2005 upon the closing of the sale of Liberate’s North Americabusiness to Double C Technologies, LLC (the “Double C”) pursuant to the AssetPurchase Agreement with Double C. The Double C transaction closed onApril 7, 2005. The special dividend, which was approximately $223.0million, was paid on April 8, 2005. Liberate made equitable adjustments tooutstanding awards under its existing equity based incentive plans in order totake account of the special dividend.

On April 15, 2005, Liberate entered into an assetpurchase agreement to sell substantially all of the assets of its Non-NorthAmerica business (including certain customer contracts, patents andintellectual property) to SeaChange International, Inc. Under the terms ofthe agreement, SeaChange received substantially all of the assets, includingpatents and other intellectual property, and assumed certain limitedliabilities related to Liberate’s Non-North America business. Liberate receivedcash consideration of approximately $23.5 million. The asset sale closed on July 12,2005. As a result of the asset sales to Double C and SeaChange (collectively,the “Asset Sales”), we have no significant operating product or servicesbusiness.

Through May 31, 2005,we operated in one segment, providing digital infrastructure software andservices for cable networks, and generated revenues from licenses, royalties,and services. Our 2005 fiscal year started on June 1, 2004 and ended on May 31,2005.

**Completionof Restatement of Liberate’s Financial Statements**

In late 2002, our audit committee, composed ofindependent outside directors, retained independent counsel to review therevenue reported during our fiscal year ended May 31, 2002. On November 21,2002, we announced that we had discovered facts that called into question theappropriateness and timing of revenue recognition for various transactions thataccounted for a total of approximately $10 million in revenue duringfiscal 2002. While our audit committee’s investigation was pending, we were notable to file our quarterly reports on Form 10-Q, and as a result wewere delisted from Nasdaq on January 16, 2003.

Our audit committeecompleted its investigation in September 2003, and we restated ourfinancial statements for the fiscal year ended May 31, 2002 and for thequarters ended November 30, 2001, February 28, 2002, and May 31,2002. We also revised our financial statements for the quarter ended August 31,2002, which had been previously announced in a press release. In September 2003,two members of the audit committee resigned and were replaced on the committeeby two other independent directors. The financial statements and relatedinformation contained in this report include the effects of the restatement ofthose historical financial statements. For further information regarding therestatement, see our amended annual report on Form 10-K/A for ourfiscal year ended May 31, 2002.

**Filingand Dismissal of Voluntary Petition for Reorganization Under Chapter 11 of U.S.Bankruptcy Code**

On April 30, 2004,Liberate filed a voluntary petition for reorganization under Chapter 11 of theUnited States Bankruptcy Code. The landlord of Liberate’s former headquartersin San Carlos, California filed a motion to dismiss the case, and on September 8,2004, the bankruptcy court issued a ruling dismissing Liberate’s bankruptcycase. The bankruptcy court ruled that Liberate had cash well in excess of 

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itsliabilities and did not need bankruptcy protection to avoid wastefulliquidation of its assets. Liberate appealed this ruling in the United StatesDistrict Court for the Northern District of California, but later stipulated toa voluntary dismissal of the appeal. The Court granted the stipulation ofdismissal and dismissed the appeal with prejudice on January 14, 2005.Accordingly, Liberate will not be able to realize the savings or other benefitsof a Chapter 11 proceeding.

**Filingof Going Private Proxy Statement**

On June 23, 2005, Liberate filed with theSecurities and Exchange Commission a preliminary Schedule 13E-3Transaction Statement with respect to a going private transaction and apreliminary Schedule 14A Proxy Statement soliciting stockholders to vote on a 1-for-250,000reverse stock split immediately followed by a 250,000-for-1 forwardstock split of Liberate’s common stock (the “Reverse/Forward Stock Split”). Ifapproved, the Reverse/Forward Stock Split should enable Liberate to completethe going private transaction provided there will be fewer than 300 registeredholders of common stock. This will permit Liberate to discontinue theobligations of filing annual and periodic reports and make other filings withthe SEC.

Once the Schedule 13E-3Transaction Statement and Schedule 14A Proxy Statement are approved in adefinitive form by the SEC, Liberate will mail copies to all of itsstockholders, describing all of the material terms of the Reverse/Forward StockSplit. Liberate currently intends to effect the Reverse/Forward Stock Split assoon as possible thereafter. 

**Business Overview**

Prior to the Asset Sales,Liberate was a provider of software for digital cable television systems. Basedon industry standards, Liberate’s software enabled cable operators to runmultiple services, including high-definition television, interactiveprogramming guide, video on demand, personal video recorders and games, onmultiple platforms. As a result of the Asset Sales, Liberate has no significantoperating product or services business. 

**Clientand Server Products for Digital Television**

Prior to the Asset Sales,we provided software and services for digital cable systems. We offered clientsoftware products and server software products collectively called Liberate TVNavigatorÔ. Our productsenabled cable operators to run multiple applications and services—includinghigh-definition television, interactive programming guide, video on demand,personal video recorders and games—on multiple platforms. Our software, couldrun on digital set-top boxes of various types—such as cable, digitalterrestrial broadcast, and digital subscriber lines (DSL)—enabling interactiveand enhanced services. These products were deployed primarily in digital cablenetworks.

**Professional Services**

Our Professional Servicesgroup provided deployment, integration, and support services to networkoperators. The Professional Services group worked closely with our productdevelopment and technical support teams to integrate and install appropriatesystem elements. We also relied on technology partners and system integratorsto provide our customers with products and technologies from others in theindustry. Following the Asset Sales, we no longer have a professional servicesfunction. Personnel previously employed with Liberate in the professionalservices function were offered employment with the respective acquirer.

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**Trademark Notice**

Liberate®, theLiberate logo, and the various Liberate products and programs described aboveare registered trademarks and trademarks of Liberate Technologies. All othertrademarks are the property of their respective owners.

**Research and Development**

As of May 31, 2005,we had a development office in San Mateo, California. Our total research anddevelopment expenses were $6.0 million in fiscal 2005, $6.9 millionin fiscal 2004, and $21.1 million in fiscal 2003. These amounts excludeexpenses that were reclassified to discontinued operations. As a result of theAsset Sales, personnel previously employed with Liberate in the research anddevelopment function were offered employment with the respective acquirer.Liberate no longer has any employees in research and development functions. Aspart of the sale of our Non-North America business, SeaChange assumed the leasefor the San Mateo, California office where the research and developmentemployees were located.

**Sales and Marketing**

Prior to the Asset Sales,we licensed our software directly to cable operators in North America andEurope. In late fiscal 2003, we substantially reduced our sales force to focusprimarily on the U.S. and U.K. cable markets. As of May 31, 2005, we hadone employee in sales and marketing. Following the Asset Sales we have noemployees in sales and marketing.

**Customers**

Prior to the Asset Sales,our customers were typically large cable network operators who introduce,market, and promote products and services based on our technology. As a resultof the Asset Sales, we have no significant operating product or servicesbusiness. Our active customer contracts were transferred pursuant to the AssetSales.

**Competition**

Prior to the AssetSales, we faced intense competition in licensing software. Our principalcompetitors in the interactive television software market include Gemstar-TVGuide, Microsoft, OpenTV, including Liberty Broadband Interactive Technologies,its controlling shareholder, and NDS Group, a subsidiary of NewsCorp. Otherestablished and emerging companies in the television, computer software, andtelecommunications sectors were potential competitors. The principalcompetitive factors in our industry included:

·       Thequality and breadth of product and service offerings;

·       Thespeed of product integration and deployment into existing customers networks;

·       Theability of products to operate in large-scale digital cable networks;

·       Theadequacy of financial resources and corporate stability;

·       Thecompetitiveness of product pricing;

·       Thepossession of patents relating to important technologies; and

·       Theeffectiveness of sales and marketing efforts.

**IntellectualProperty Rights and Proprietary Information**

Prior to the Asset Sales,we had a portfolio of technologies and intellectual property that addressedvarious features of interactive networks and devices. We sought to safeguardour proprietary information 

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and ourother intellectual property through a combination of domestic and internationalcopyrights, trademarks, patents, and trade secret protection, as well asthrough contractual protections such as proprietary information agreements andnondisclosure agreements. However, we cannot guarantee that these stepsprevented misappropriation of our proprietary information, and we may not havedetected unauthorized use and took appropriate steps to enforce ourintellectual property rights.

As of May 31, 2005,we had 11 international patents and 31 international patent applications in thegeneral area of interactive networking technologies. Following the close of theSeaChange Asset Sale, we have no issued patents or pending patent applications.

We have registered “Liberate”and the Liberate logo in the United States and extensively throughout theworld, and use our other product trademarks in association with these marks.

**Employees**

As of May 31, 2005,we had 29 employees, of whom 25 were based in the U.S. and 4 were based inEurope. Following the close of the SeaChange Asset Sale, we have 11 employeesin the general and administrative function. Our employees are not representedby any collective bargaining agreement and we have never experienced a workstoppage. We consider our employee relations to be good.

**AvailableInformation**

We make available free ofcharge on or through our Internet website our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and all amendments to those reports as soon as reasonably practicable afterthey are electronically filed with, or furnished to, the SEC. Our Internetwebsite address is www.liberate.com. Information contained on our website isnot part of this report. We are subject to the informational requirements ofthe Securities Exchange Act of 1934. We therefore file periodic reports, proxystatements and other information with the Securities and Exchange Commission.Such reports may be obtained by visiting the Public Reference Room of theSEC at 450 Fifth Street, NW, Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330.In addition, the SEC maintains an internet site (*http://www.sec.gov*) that contains reports, proxy andinformation statements and other information regarding issuers that fileelectronically.

**Risk Factors**

*In evaluating Liberate and our business, you shouldconsider the following factors in addition to the other information in this*annual report on Form 10-K. Forward-looking statements in this reportare subject to risks and uncertainties that could cause our actual results todiffer materially from the results contemplated. Any of the following riskscould seriously harm our business, financial condition, and results ofoperations, causing the price of our stock to decline. Additional risks anduncertainties not presently known to us or that we currently deem immaterialalso may impair our business operations.

**Followingthe Asset Sales, we will have no current operating product or servicesbusiness.**

On July 12, 2005, wecompleted the sale of substantially all of the assets relating to our businessoutside of North America to SeaChange International, Inc. Following thetransaction, we have no current operating product or services business. We willcontinue to operate Liberate to resolve existing liabilities, prosecute anddefend pending litigation and pursue other claims as appropriate that we mayhave against third parties, and dispose of non-operating assets to maximizeshareholder interests. Although our board of directors has not yet made anydetermination, we also will continue from time to time to evaluate andpotentially explore all available alternatives including a dissolution andliquidation of Liberate, a share repurchase, an extraordinary dividend or othertransactions to maximize stockholder value. We believe that our cash, togetherwith proceeds from the Asset Sales, will be sufficient to meet our workingcapital 

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requirementsfor the next twelve months. In fiscal 2006, we expect to continue to use cashto fund our operating activities.

**Ourefforts to manage outstanding liabilities and non-operating assets may not havefavorable results.**

Although we will strive toresolve outstanding liabilities, prosecute and defend pending litigations andclaims, and dispose of non-operating assets to achieve favorable results in thebest interests of shareholders, the actual resolution of such liabilities,litigations and assets are uncertain and we may not be able to achievefavorable results. 

**Ifthe stockholders do not approve, or we fail to complete, the Reverse/ForwardStock Split as part of a going private transaction, we will be unable to eliminatethe costs associated with being a public company and the market price of ourcommon stock may decrease.**

On June 16, 2005,Liberate’s Board of Directors approved a reverse 1-for-250,000split of Liberate common stock to be followed immediately by a forward 250,000-for-1split, subject to stockholder approval at an upcoming special meeting ofstockholders, as part of a “going private” transaction. If the transaction isapproved by Liberate’s stockholders and implemented, Liberate expects to havefewer than 300 stockholders of record, which would enable Liberate tovoluntarily terminate the registration of its common stock under the SecuritiesExchange Act of 1934, as amended, and become a non-reporting company. As aprivate company, Liberate would no longer be required to file periodic reportsand other information with the SEC. The proposed transaction is subject to theapproval of Liberate’s stockholders at a special meeting of shareholders. Wecannot predict whether we will succeed in obtaining the approval of ourstockholders and we cannot insure that the Reverse/Forward Stock Split will becompleted. If we are unable to complete such transaction, we will not savesignificant costs and expenses associated with being a public company and themarket price of our common stock may decline.

**Weare unable to compete with the North America business for five years from thedate of the closing.**

In connection with theasset sale to Double C, we have agreed that we and our affiliates will notdevelop, market, license, grant forbearances not to sue or grant any rights toor authorize the use of any Non-North America intellectual property forcommercial use or deployment in the United States, Canada and Mexico for aperiod of five years from the date of the closing of the asset sale to Double C.We have agreed that this covenant not to compete will be binding on anypurchaser of our Non-North America business (such as SeaChange) or othersuccessor to that business and its affiliates. We have further agreed that wewill require any such purchaser to agree to be bound by this covenant for theremainder of the five year period and that the covenant not to compete may beenforced by Double C. In Connection with the asset sale to SeaChange, we agreednot to induce any customer of the Non-North America business to refrain from ordiscontinue its relationship with SeaChange for a period of five years from thedate of the closing of the asset sale to SeaChange.

**IfLiberate becomes a privately held company, stockholders will own shares in aprivate company and may not have the ability to sell their shares in the publicmarket.**

Should Liberate consummatethe Reverse/Forward Stock Split, some stockholders may have shares in Liberatefor which there would be no public market and their ability to sell the shareswould be impeded. Furthermore, Liberate would not file current, quarterly orannual reports or be subject to the proxy requirements of the federalsecurities laws. Stockholders may therefore find it more difficult to obtaininformation about Liberate and its financial performance. Liberate expects toincur substantial expenses in connection with the going private transaction andmay not be able to realize sufficient cost savings to recover those expenses.

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**Litigationrelated to the restatement of our financial statements could continue togenerate substantial costs and harm our financial condition.**

Liberate and certain of its former officers andcurrent or former directors are the subject of a consolidated shareholderderivative lawsuit in state court relating to the restatement of our financialresults. In April 2005, we entered into a written stipulation to settlethe derivative litigation. However, the proposed settlement is subject tocertain conditions and will be effective only if and when, among other things,the parties obtain final approval from the court. The court has scheduled ahearing on August 16, 2005 to consider approval of the settlement. If theproposed settlement does not become effective, the litigation will continue.The cost of participating and defending against this action is substantial andwould continue to require management’s attention and corporate resources.

In addition, while the SEC staff has terminated itsinvestigation into the events and circumstances that led to the restatement andhas recommended no enforcement action against Liberate at this time, the SEC isnot precluded from any future action.

We have agreed to indemnify our directors and officersto the fullest extent allowed by Delaware law. As a consequence, we areadvancing expenses (including reasonable attorneys’ fees) incurred by directorsand officers in connection with the shareholder derivative action and the SECinvestigation, although these payments are subject to reimbursement if suchexpenses are ultimately found to be non-indemnifiable. Additionally, we mayultimately be obligated to pay indemnifiable judgments, penalties, fines, andamounts paid in settlement in connection with these proceedings.

We have notified ourvarious insurance carriers of the litigation and the SEC investigation. Ourprimary carrier and one of our excess carriers have disputed whether certaincosts incurred in connection with the restatement-related litigation and theSEC investigation, are covered under their respective policies. On March 1,2005, Liberate filed a complaint against the primary carrier and one of theexcess carriers alleging that the carriers failed to perform any of theirobligations under their respective policies and applicable law on behalf ofLiberate or its directors and officers in connection with the securities classaction, the shareholder derivative action, and the SEC investigation. Liberateintends to prosecute its rights under its insurance policies vigorously. However,litigation is by its nature uncertain and there can be no assurance thatLiberate will be successful in securing coverage under the policies. Ourinsurance may not cover all or portions of our defense costs, any settlement,judgment rendered against us, or amounts we are required to pay to anyindemnified person in connection with the litigation, the SEC investigation, orany other matter. These costs and liabilities, if not covered by insurance,could harm our financial condition, results of operations, and cash flows.

**Litigationrelated to the lease of our former offices could generate substantial costs,divert management attention and resources and harm our financial condition.**

In September and December 2004and in May 2005, Circle Star Center Associates, L.P., the landlord of ourformer offices in San Carlos, California, filed complaints in California statecourt alleging, among other things, that Liberate had breached the office lease.The cost of participating and defending against these actions could besubstantial and will require management’s attention and corporate resources. Thepossible resolution of these proceeding could include a judgment againstLiberate or settlement that could require substantial payments, which couldharm our financial condition, results of operations, or cash flows.

**If weare unable to terminate leases on excess facilities or sublease excess officespace, our net loss could increase and our financial condition could be harmed.**

Liberate is a party toreal property leases in San Carlos, California and London, England that includespace significantly in excess of our needs for the foreseeable future. We havevacated these premises and 

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havesought to sublease the excess space or, alternatively, to****terminate these leases upon acceptableterms. If we are unable to terminate or settle these leases on favorable terms,we may remain liable for the full amounts due under the leases. In the past, wehave recorded significant excess facilities charges in our statements ofoperations, and we anticipate that we may record additional charges in thefuture if actual lease exit costs or sublease income differ from amountscurrently expected. Our inability to sublease significant portions of our excessoffice space or to terminate or otherwise settle these leases upon favorableterms could cause our net losses to increase and could harm our financialcondition or results of operations.

**Wehave been named in securities class-action litigation involving theunderwriters to our public offerings, which may result in substantial costs andoccupy management attention and resources.**

Beginning on May 16,2001, a number of class-action lawsuits seeking monetary damages were filed infederal court in New York against several of the firms that underwrote ourinitial public offering, naming Liberate and certain of our former officers andcurrent or former directors as co-defendants. The plaintiffs subsequently addedallegations regarding our secondary offering. While we deny allegations ofwrongdoing, we have agreed to enter into a global issuer settlement ofplaintiffs’ claims, which involves our insurers providing a guaranteed recoveryto the plaintiffs. The settlement is subject to a number of conditions,including court approval, and failure to resolve this litigation on favorableterms could result in substantial costs or otherwise harm our business.

**Asmall group of stockholders owns a majority of our outstanding shares and canexercise significant control over Liberate.**

As of May 31, 2005,to our knowledge, six stockholders, who are not affiliated with one another,beneficially owned a total of approximately 59% of our outstanding commonstock. As a result, these stockholders will be able to exercise control overall matters requiring stockholder approval, including the election of directorsand approval of significant corporate transactions. The concentration ofownership may have the effect of delaying or preventing a change in control ofLiberate.

**Expensesrelated to equity awards for our employees increase our net loss.**

As a result of our introduction, in fiscal year 2004of restricted stock units as a form of equity compensation for employees andnon-employee directors, we recorded an expense of approximately $2.5 millionin FY05, and we expect to record expenses in future periods related to stockunits. The continuation of granting of restricted stock units or other similarequity awards will increase our loss.

In addition, with theissuance of SFAS 123(R), when adopted may require us to record the value ofstock options or other equity awards granted to all or certain of our employeesusing a higher fair value. If we begin recording these amounts, our net losswould increase over the vesting period.

**Ourcompliance with the new regulatory requirements of Sarbanes-Oxley is untestedand will likely be costly and time-consuming.**

We are now subject to theongoing internal control provisions of Section 404 of the Sarbanes-OxleyAct of 2002 and identification of material weaknesses in the internal controlsover financial reporting, if identified in future periods, could indicate alack of proper controls to generate accurate financial statements. We may identifya material weakness in current and future periods, and our controls necessaryfor continued compliance may not continue to operate effectively at all times. Wealso may not be able to retain sufficient skilled financial accountingpersonnel, especially in light of increased demand for such personnel amongpublicly traded companies.

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**If werequire additional capital and cannot raise it, we may not be able to fund ouroperations.**

We believe that ourexisting cash balances will be sufficient to meet our working capital andcapital expenditure needs for at least the next twelve months. However if inthe future, we require additional capital we cannot be certain that we will beable to obtain additional financing on favorable terms, or at all. If we needadditional capital and cannot raise it on acceptable terms, we may not be ableto develop our products and services, acquire complementary technologies orbusinesses, hire and retain employees, or respond to competitive pressures ornew business requirements. Our inability to obtain additional financing onfavorable terms could have a material adverse effect on our company.

**Provisionsof our corporate documents and Delaware law could deter takeovers and preventstockholders from receiving a premium for their shares.**

Certain provisionsof our certificate of incorporation and bylaws may discourage, delay, orprevent a change in control of our company that a stockholder may considerfavorable. These include provisions that:

·       Authorizethe issuance of “blank check” preferred stock to increase the number ofoutstanding shares and thwart a takeover attempt;

·       Requiresuper-majority voting to make certain amendments to our certificate ofincorporation;

·       Limitwho may call special meetings of stockholders;

·       Prohibitstockholder action by written consent, which means that all stockholder actionmust be taken at a meeting of the stockholders; and

·       Establishadvance notice requirements for nominations of candidates for election to theboard of directors or for proposing matters that can be acted upon bystockholders at stockholder meetings.

In addition, Section 203 of the Delaware GeneralCorporation Law and provisions in our stock incentive plans may discourage,delay, or prevent a change in control of our company.

Our board of directors hasadopted a stockholder rights plan, which is designed to give the boardflexibility in responding to unsolicited acquisition proposals and discouragecoercive takeover offers. In general, the stockholder rights plan would provideour existing stockholders (other than an existing stockholder who becomes anacquiring person) with rights to acquire additional shares of our common stockat 50% of its trading price if a person or entity acquires 15% or more of theoutstanding shares of our common stock, unless our board of directors elects toredeem these rights.

**Ourexecutive officers** andkey employees arecritical to our business, and they may not remain with us in the future.

Our business substantiallydepends on the performance of our executive officers and key employees. Theloss of the services of any of our executive officers or key employees couldimpact the resolution of liabilities, the outcome of pending litigation andother claims that we may have against third parties, and the disposal ofnon-operating assets to maximize shareholder interests. We do not carry “keyperson” life insurance policies on any of our employees. Our future successalso depends on our continuing ability to retain, identify and hire highlyqualified personnel.

**If wedo not manage our operations effectively, our stock price could decline.**

Since our inception, wehave incurred significant losses, and we may never sustain profitability. Wemay continue to incur significant losses and negative cash flows in the future.If we cannot achieve 

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favorableresolution and disposition of liabilities, litigation and non-operating assets,our financial condition and results of operations will suffer and our stockprice is likely to decline.

**Acquisitionsor dispositions of businesses or product lines could be difficult to implementor integrate and could disrupt our business and dilute stockholder value.**

We have acquired anddisposed of businesses and assets in an effort to increase stockholder value,and we may do so in the future. With any acquisitions or dispositions, it maybe difficult to integrate or separate product lines, technologies, personnel,customers and widely dispersed operations. These efforts have in some casesproven more difficult than anticipated and may not succeed or may distract ourmanagement from operating our business. Our failure to successfully manageacquisitions or could seriously harm our operating results. In addition, ourstockholders would be diluted if we were to finance acquisitions by incurringconvertible debt or issuing equity securities, and our liquidity may be adverselyaffected if we were to use our cash to make acquisitions.

**ITEM 2. PROPERTIES**

As of May 31, 2005, we leased office space in theUnited States and Europe and our office was located in San Mateo, Californiawhere we leased approximately 15,000 square feet of office space for ourheadquarters and development center. We also had a sales and customer supportoffice in the United Kingdom (U.K.).

As a result of the sale of the Non-North Americabusiness, which closed on July 12, 2005, SeaChange assumed the lease onthe San Mateo, California office space. In August 2005, we moved ourheadquarters to approximately 2,500 square feet of office space in Palo Alto,California.

We leased approximately181,000 square feet of office space for our former headquarters and developmentcenter in San Carlos, California. On April 30, 2004, Liberate filed avoluntary petition for reorganization under Chapter 11 of the United StatesBankruptcy Code. The landlord of Liberate’s former headquarters in San Carlos,California filed a motion to dismiss the case, and on September 8, 2004,the bankruptcy court issued a ruling dismissing Liberate’s bankruptcy case. Thebankruptcy court ruled that Liberate had cash well in excess of its liabilitiesand did not need bankruptcy protection to avoid wasteful liquidation of itsassets. Liberate appealed this ruling in the United States District Court forthe Northern District of California, but later stipulated to a voluntarydismissal of the appeal. The Court granted the stipulation of dismissal anddismissed the appeal with prejudice on January 14, 2005. Accordingly,Liberate will not be able to realize the savings or other benefits of a Chapter11 proceeding. Therefore, Liberate continues to be liable for its obligationsunder the lease in accordance with the terms thereof (which over the life ofthe lease could be up to approximately $34.8 million, including commonarea maintenance expenses). We have accrued $24.2 million as excessfacilities provision in our liabilities of which $18.5 million is long-term and$5.7 million is short term.

**ITEM 3. LEGAL PROCEEDINGS**

*Restatement Class-Action Litigation*.   OnOctober 20, 2004, a Stipulation and Agreement of Settlement (the “Settlement”)was filed with the United States District Court for the Northern District ofCalifornia (the “Court”) in connection with the matter “In re LiberateTechnologies Securities Litigation” (the “Class Action”). The Class Actionis based on the restatement of our financial statements for certain periods offiscal 2002 and the revision of our preliminary financial results announced forthe first quarter of fiscal 2003 (the “Restatement”). The parties to theSettlement are: (i) the lead plaintiff in the Class Action, on behalfof himself and each of the class members; and (ii) defendants Liberate,Mitchell E. Kertzman, Nancy J. Hilker, Donald Fitzpatrick and Coleman Sisson.Under the terms of the Settlement, Liberate agreed to pay or cause to be paid$13.8 million in settlement of the claims specified in the 

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Class Action, and thelead plaintiff and each class member agreed to release Liberate and the otherdefendants from those claims. The Settlement shall in no way be construed ordeemed to be evidence of or an admission or concession on the part of Liberateor the other specified defendants with respect to any claim or any fault orliability or wrongdoing or damage whatsoever, or any infirmity in the defensesthat the defendants have asserted.

Following a settlement hearing on February 15,2005, the Court granted final approval of the Settlement and, pursuant to theSettlement, entered judgment dismissing the Class Action with prejudice.

During Q3 FY05, Liberate paid out the settlementamount of $13.8 million and recovered $5.0 million from its insurance carrier.Liberate expects to recover another $4.4 million as a rebate of part of thepremiums paid for the loss mitigation policy that Liberate obtained for the Class Actionand the Derivative Action, which is included in other receivables at May 31,2005.

*Restatement Derivative Litigation*.   OnMay 3, 2005, a Stipulation of Settlement re Derivative Claims (the “Stipulation”)was filed with the California Superior Court for the County of San Mateo inconnection with the matter “In re Liberate Technologies Derivative Litigation”(the “Derivative Action”). As reflected in the Stipulation, Liberate hasreached an agreement in principle to settle the Derivative Action on termsthat, among other things, provide for Liberate to adopt certain specifiedcorporate governance changes, the dismissal with prejudice of all claimsasserted by plaintiffs, and the payment of plaintiffs’ counsel’s fees andexpenses of $550,000 which has been accrued. The settlement of the DerivativeAction is subject to approval of the Stipulation by the California SuperiorCourt for the County of San Mateo. The court has scheduled a hearing on August16, 2005 to consider approval of the settlement. The Derivative Action is basedon the Restatement and names Liberate as a nominal party and certain of ourformer officers and current or former directors as defendants (collectively,the “Derivative Defendants”). The Derivative Action generally alleges that theDerivative Defendants failed to adequately oversee our financial reporting, andthus are liable for breach of their fiduciary duties, abuse of control, grossmismanagement, and waste of corporate assets. The Derivative Action alsoalleges that the Derivative Defendants are liable for unjust enrichment andthat certain named officers and directors are liable for violations of CaliforniaCode Section 25402 and breach of fiduciary duty for insider selling andmisappropriation of information. The Derivative Action seeks unspecifiedmonetary damages and other relief.

We cannot predict the timing or ultimate outcome ofthis proposed settlement or estimate the amounts of, or potential range of losswith respect to, this litigation if a settlement is not approved.

*SEC Investigation.  *OnFebruary 13, 2003, the SEC initiated a formal, non-public investigationinto the events and circumstances that led to the restatement of Liberate’sfinancial statements. On September 29, 2004, Liberate announced that theSEC’s investigation has been terminated as to Liberate. The SEC also advisedLiberate that no enforcement action against Liberate has been recommended.

*Dismissal of Bankruptcy Case*.   OnApril 30, 2004, Liberate filed a voluntary petition for reorganizationunder Chapter 11 of the United States Bankruptcy Code. The landlord of Liberate’sformer headquarters in San Carlos, California filed a motion to dismiss thecase, and on September 8, 2004, the bankruptcy court issued a rulingdismissing Liberate’s bankruptcy case. The bankruptcy court ruled that Liberatehad cash well in excess of its liabilities and did not need bankruptcyprotection to avoid wasteful liquidation of its assets. Liberate appealed thisruling in the United States District Court for the Northern District ofCalifornia but later stipulated to a voluntary dismissal of the appeal. TheCourt granted the stipulation of dismissal and dismissed the appeal withprejudice on January 14, 2005. Accordingly, Liberate will not be able torealize savings or the other benefits of a Chapter 11 proceeding.

*Lease-Related Litigation.  *OnSeptember 29, 2004, Circle Star Center Associates, L.P., the landlord ofLiberate’s former offices in San Carlos, California, filed a complaint in theCalifornia Superior Court for the County of San Mateo alleging that Liberatehad breached the office lease by, among other things, 

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failing to pay rent forcertain months of 2004 and applicable late fees, failing to replenish theletter of credit and failing to reimburse the landlord for its attorneys’ feesin connection with Liberate’s bankruptcy proceeding. The complaint alsoincludes allegations of conversion and defamation. The complaint seeks damagesof approximately $3.9 million for the alleged breach and conversion andunspecified damages for the alleged defamation. In November 2004, Liberatefiled motions challenging the legal basis for the landlord’s cause of actionfor defamation and claim for attorneys’ fees in connection with Liberate’sbankruptcy. On March 24, 2005, the Superior Court granted Liberate’smotions and dismissed the landlord’s claims for defamation and attorneys’ fees.On May 23, 2005, Liberate paid the landlord approximately $1.2 million forpast rent due, late fees and interest in connection with the various lease-relatedactions, and we have procured a replacement letter of credit. A trial date inthis action is currently scheduled for September 26, 2005.

In addition, on December 16, 2004, the landlordfiled a further complaint for breach of lease against Liberate. The complaintseeks damages in the amount of not less than approximately $1.2 million, plusprejudgment interest, costs of suit and attorneys’ fees, alleging that Liberatebreached the lease by failing to pay rent in November and December 2004.On February 22, 2005, the landlord filed a motion for summary judgment onthe breach of contract claim. On May 10, 2005, Liberate paid the landlordapproximately $1.3 million for the months at issue in this action and on May 13,2005, the Superior Court granted the landlord’s motion for summary judgment.

On May 6, 2005, the landlord filed a thirdcomplaint against Liberate alleging that Liberate breached the lease by failingto pay rent for certain months of 2005 and failing to replenish the letter ofcredit. The landlord seeks approximately $5.5 million plus pre-judgmentinterest, costs of suit and attorneys’ fees. On May 23, 2005 Liberate paidthe landlord approximately $1.2 million for past rent due, late fees andinterest in connection with the various lease-related actions, and we have procureda replacement letter of credit.

*Underwriting Litigation*.   Beginningon May 16, 2001, a number of class-action lawsuits seeking monetarydamages were filed in the United States District Court for the SouthernDistrict of New York against several of the firms that underwrote our initialpublic offering, naming Liberate and certain of our former officers and currentor former directors as co-defendants. The suits allege that the underwritersreceived excessive and improper commissions that were not disclosed in ourprospectus and that the underwriters artificially increased the price of ourstock. The plaintiffs subsequently added allegations regarding our secondaryoffering, and named additional officers and directors as co-defendants. Thesuits were consolidated into one action that was coordinated for pretrial purposeswith hundreds of virtually identical suits under a case captioned “In reInitial Public Offering Securities Litigation”, Civil Action No. 21-MC-92.On February 19, 2003, the court denied in part and granted in part amotion to dismiss filed on behalf of the defendants, including Liberate. Thecourt’s order did not dismiss any claims against Liberate. As a result,discovery may proceed. The individual defendants have been dismissed withoutprejudice in this litigation.

While we deny allegations of wrongdoing, we haveagreed to enter into a global issuer settlement of plaintiffs’ claims. In June 2004,a stipulation of settlement and release of claims against the issuerdefendants, including Liberate, was submitted to the court for approval. Theterms of the settlement, if approved, would dismiss and release all claimsagainst the participating defendants (including Liberate). In exchange for thisdismissal, D&O insurance carriers would agree to guarantee a recovery bythe plaintiffs from the underwriter defendants of at least $1 billion, and theissuer defendants would agree to an assignment or surrender to the plaintiffsof certain claims the issuer defendants may have against the underwriters Thesettlement is subject to a number of conditions, including court approval.

*OpenTV Patent Litigation*.   OnFebruary 7, 2002, OpenTV filed a lawsuit against Liberate in the UnitedStates District Court for the Northern District of California, alleging thatLiberate is infringing two of OpenTV’s patents and seeking monetary damages andinjunctive relief. We filed an answer denying 

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OpenTV’s allegations. Ourcounter-claim alleges that OpenTV infringes one of our patents for informationretrieval systems. We were seeking to have OpenTV’s patents invalidated, andhad requested a finding that our technology does not infringe OpenTV’s patents,and had sought monetary damages and injunctive relief against OpenTV. The courtissued a claim construction ruling, but a trial date is not currently set.Pursuant to the asset purchase agreement with Double C Technologies LLC thatclosed on April 7, 2005, Double C has assumed the defense and liabilitiesassociated with this lawsuit.

*Insurance Coverage Litigation*.   OnDecember 29, 2004, Federal Insurance Company, one of Liberate’s excessinsurance carriers, filed a complaint for declaratory judgment, alleging thatLiberate and other defendants are not entitled to coverage for defense costsand losses incurred in connection with the Class Action, DerivativeAction, SEC investigation or other matters. The complaint, filed in the U.S.District Court for the Northern District of California, named as defendantsLiberate and certain former officers and current and former directors. On March 18,2005, Federal Insurance Company voluntarily dismissed its complaint withoutprejudice.

On March 1, 2005, Liberate filed a complaintagainst the London Underwriters, New Hampshire Insurance Company Per: AIGEurope (UK) Limited and Federal Insurance Company (together, the “Carriers”)for breach of contract, breach of the implied covenant of good faith and fairdealing and declaratory relief. The complaint, filed in the California SuperiorCourt for the County of San Mateo, alleges that the Carriers failed to performany of their obligations under their respective policies and applicable law onbehalf of Liberate or its directors and officers in connection with the Class Action,the Derivative Action and the SEC Investigation. Liberate seeks monetarydamages, exemplary or punitive damages, attorneys’ fees and declaratory relief.

On April 8, 2005, Federal Insurance Company (“Federal”)filed a motion challenging the legal basis for Liberate’s complaint. On May 2,2005, New Hampshire Insurance Company and the London Underwriters filed ananswer to the complaint. On May 13, 2005, the Superior Court denied Federal’smotion. On June 22, 2005, the California Court of Appeal issued a writ ofmandate that directed the Superior Court to grant Federal’s motion with leaveto amend as to Liberate’s breach of contract and bad faith claims againstFederal. On August 3, 2005, Liberate filed an amended complaint with theSuperior Court.

On May 23, 2005, Federal filed a cross-complaintagainst Liberate and certain of its former officers and directors for breach ofcontract and declaratory relief. On July 11, 2005, Liberate filed a motionchallenging the legal basis for Federal’s complaint. On August 9, 2005,the Superior Court granted in part Liberate’s motion with leave to amend.

Liberate intends to prosecute its rights under itsinsurance policies and defend Federal’s cross-complaint vigorously. However,litigation is by its nature uncertain and there can be no assurance thatLiberate will be successful in securing coverage under the policies.

*Stock Option Litigation*.   OnMarch 3, 2005, Mitchell Kertzman, Liberate’s former Chairman of the Boardand Chief Executive Officer, filed a complaint in the California Superior Courtfor the County of San Mateo alleging that Liberate breached its Stock OptionAgreement with Mr. Kertzman by, among other things, failing to allow himto exercise his stock options after the termination of his employment withLiberate. Liberate believes that it has complied at all times with the terms ofthe Stock Option Agreement. The complaint alleges claims for breach ofcontract, breach of the implied covenant of good faith and fair dealing andinterference with contract and prospective economic advantage. The complaintseeks monetary damages of at least $3.0 million, interest and punitive damagesin an unspecified amount. On April 4, 2005, Liberate filed motionschallenging the legal basis for Mr. Kertzman’s complaint. The SuperiorCourt denied Liberate’s motions on June 2, 2005. On June 16, 2005,Liberate filed an answer to the complaint. A trial date in this action iscurrently scheduled for January 17, 2006.

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*Insight Interactive Litigation.  *OnJune 13, 2005, Liberate filed a complaint against Insight InteractiveL.L.C. for breach of contract, specific performance, and open book account. Thecomplaint, filed in the California Superior Court for the County of San Mateo,alleges that under a March 6, 2000 agreement with Liberate, InsightInteractive has failed to pay fees as they become due. Liberate seeks monetarydamages, specific performance, and interest and costs as provided by law and/orthe March 6, 2000 agreement. We expect that Insight Interactive may assertdefenses and claims contending that Liberate is not entitled to payment underthe March 6, 2000 agreement. Liberate intends to prosecute its rightsunder the agreement vigorously. However, litigation is by its nature uncertainand there can be no assurance that Liberate will be successful in obtainingdamages or other relief.

We have notified our various insurance carriers of theClass Action, Derivative Action and other pending legal matters. Our primarycarrier and one of our secondary carriers under our existing policies havedisputed whether certain costs incurred in connection with therestatement-related litigation and the SEC investigation are covered undertheir respective policies. Our insurance may not cover all or portions of ourdefense costs, any settlement, any judgment rendered against us, or amounts weare required to pay to any indemnified person in connection with the ClassAction or Derivative Action or any expenses incurred in connection with the SECinvestigation or any other matter.

While Liberate intends todefend and prosecute the above mentioned lawsuits vigorously because legalactions are inherently uncertain, we cannot predict or determine the outcome orresolution of these actions or estimate the amounts of, or potential range of,loss or recovery with respect to these proceedings. In addition, the timing ofthe final resolution of these proceedings is uncertain. The possibleresolutions of these proceedings could include judgments against us orsettlements that could require substantial payments by us, which could have amaterial adverse impact on our business, financial position, results ofoperations and cash flows. The cost of participating and defending againstthese actions is substantial and will require the continued diversion ofmanagement’s attention and corporate resources.

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

On April 5, 2005 a special meeting ofstockholders was held in Redwood City, California to approve and adopt theAsset Purchase Agreement, dated as of January 14, 2005, by and amongLiberate, Liberate Technologies Canada Ltd., our subsidiary, and Double CTechnologies, LLC, a Delaware limited liability company majority owned andcontrolled by Comcast Corporation with a minority investment by CoxCommunications, Inc., and the sale of substantially all of the assetsrelating to our North America business to Double C pursuant to the AssetPurchase Agreement. The asset sale closed on April 7, 2005.

The information required by this Item is incorporatedby reference to the information set forth in the Definitive Proxy Statement onSchedule 14A related to the sale of the North America business filed with theSEC on March 9, 2005.

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**PART II.**

**ITEM5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES**

**Price Range of Common Stock**

Ourcommon stock has been quoted on the Pink Sheets system since January 17,2003, and trades under the symbol “LBRTQ.” From July 28, 1999 to January 16,2003, our common stock was traded on the Nasdaq National Market. The followingtable sets forth, for the periods indicated, the high and low closing saleprices per share of our common stock:
| **Fiscal 2005** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter        |       | $          | 2.67       |     | $          | 2.40    |       |
| Second Quarter       |       | $          | 2.61       |     | $          | 2.24    |       |
| Third Quarter        |       | $          | 2.50       |     | $          | 2.15    |       |
| Fourth Quarter       |       | $          | 2.38       |     | $          | 0.30    |       |

 
| **Fiscal 2004** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| First Quarter        |       | $          | 4.45       |     | $          | 2.50    |       |
| Second Quarter       |       | $          | 4.00       |     | $          | 3.30    |       |
| Third Quarter        |       | $          | 4.08       |     | $          | 3.00    |       |
| Fourth Quarter       |       | $          | 3.45       |     | $          | 2.60    |       |

 

As of August 1, 2005,the quoted closing price of our common stock on the Pink Sheets system was$0.21 per share, and there were 110,934,837 shares of Liberate common stockoutstanding. According to information obtained from Equiserve LLP, there wereapproximately 268 holders of record of our common stock. Based upon securityposition listings, we believe that there are more than 10,000 beneficial ownersof our common stock.

**RecentSales of Unregistered Securities**

During the period coveredby this report on Form 10-K, Liberate did not issue any unregisteredsecurities.

**Dividend Policy**

On March 25, 2005,the Board of Directors of Liberate Technologies declared a one-time specialdividend of $2.10 per common share. The special dividend was payable to theholders of record on April 4, 2005 upon the closing of the sale ofLiberate’s North America business to Double C Technologies, LLC (the “Double C”)pursuant to the Asset Purchase Agreement with Double C. The Double Ctransaction closed on April 7, 2005. The special dividend, which wasapproximately $223.0 million, was paid on April 8, 2005. Liberate madeequitable adjustments to outstanding awards under its existing equity basedincentive plans in order to take account of the special dividend.

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**EquityCompensation Plan Information**

Thefollowing table summarizes information about our equity compensation plans asof May 31, 2005.
| **Plan category**                                             | ** ** | ** ** | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance  (excluding securities  reflected in column (a))** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **(a)**    | ** ** | **(b)**                                                                                                                                              | ** ** | **(c)**                                                                                                          | ** ** |
| Equity  compensation plans approved by security holders(1)(2) |       |       | 2,742,373  | (3)                                                                                                                                                  |       |                                                                                                             | $          | 11.40                                                                                                                                                            |       |   |   | 25,635,761 |   |   |
| Equity  compensation plans not approved by security holders(4)     |       |       | 1,700,000  |                                                                                                                                                 |       |                                                                                                             | $          | 2.44                                                                                                                                                             |       |   |   | — |   |   |
| Total                                                              |       |       | 4,442,373  |                                                                                                                                                 |       |                                                                                                             | $          | 7.97                                                                                                                                                             |       |   |   | 25,635,761 |   |   |

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(1)          Includes the 1996 StockOption Plan, 1999 Equity Incentive Plan, and the 1999 Employee Stock PurchasePlan. No additional options may be issued under the 1996 Stock Option Plan.Under our 1999 Equity Incentive Plan, we may issue awards up to the availableplan balance in the form of stock options, restricted shares, stockappreciation rights, and stock units. As of May 31, 2005, no awards, otherthan the options and stock units included in the table above, were outstandingunder these plans.

(2)          Each of the 1999 EquityIncentive Plan and 1999 Employee Stock Purchase Plan contains an automaticshare increase provision. Accordingly, the number of shares of common stockreserved for issuance under these plans will automatically increase on June 1of each year, unless the increase is waived by the Board. For our 1999 EquityIncentive Plan, on June 1 of each year the number of shares availableincreases automatically by the lesser of (a) 5% of our common sharesoutstanding on the date of increase, or (b) 6,000,000 shares. For our 1999Employee Stock Purchase Plan, on June 1 of each year the number of sharesavailable for purchase increases automatically by the lesser of (a) 2% ofour common shares outstanding on the date of increase, or (b) 1,666,666shares.

(3)          Represents options topurchase 236,771 shares with a weighted average exercise price of $3.40 issuedunder the 1996 Stock Option Plan; options to purchase 2,314,038 shares with aweighted average exercise price of $13.16 issued under the 1999 Equity IncentivePlan; and 191,564 stock units, each unit convertible into one share of commonstock with no exercise price issued under the 1999 Equity Incentive Plan.

(4)          Includesoption grants made outside of the 1999 Equity Incentive Plan to executiveofficers and employees as well as warrant agreements issued to certain networkoperators. For more details about the grants to executive officers, see “ExecutiveCompensation.”

**ITEM 6. SELECTED FINANCIAL DATA**

Please read the followingselected consolidated financial data in conjunction with Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations;” Item8, “Financial Statements and Supplementary Data;” and with other financial dataincluded elsewhere in this report. We have derived the Consolidated Statementsof Operations data for the years ended May 31, 2005, 2004 and 2003 and theConsolidated Balance Sheet data as of May 31, 2005 and 2004 from theaudited consolidated financial statements included in Item 8. We have derivedthe Consolidated Statements of Operations data for the years ended May 31,2002 and 2001 and the Consolidated Balance Sheets data as of May 31, 2003,2002 and 2001 from our historical consolidated financial 

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statements with the effects of discontinued operationsnot included in this report. These historical results do not necessarilyindicate the results to be expected in any future period.
| ** **                                                                       | ** ** | **Years ended May 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| Revenues:                                                                        |       |                                   |       |   |   |   |   |   |   |   |   |
| License and royalty                                                              |       | $                                      | 978        |   | $ | 2,172 |   | $ | 4,225 |   | $ | 18,412 |   | $ | 19,992 |   |
| Service                                                                          |       | 1,366                                  |       | 5,733 |   | 10,773 |   | 21,660 |   | 12,626 |   |
| Total revenues                                                                   |       | 2,344                                  |       | 7,905 |   | 14,998 |   | 40,072 |   | 32,618 |   |
| Cost of revenues:                                                                |       |                                   |       |   |   |   |   |   |   |   |   |
| License and royalty                                                              |       | 3                                      |       | 265 |   | 715 |   | 1,137 |   | 991 |   |
| Service                                                                          |       | 1,506                                  |       | 2,323 |   | 4,804 |   | 7,296 |   | 4,213 |   |
| Total cost of revenues                                                           |       | 1,509                                  |       | 2,588 |   | 5,519 |   | 8,433 |   | 5,204 |   |
| Gross margin                                                                     |       | 835                                    |       | 5,317 |   | 9,479 |   | 31,639 |   | 27,414 |   |
| Operating  expenses:                                                             |       |                                   |       |   |   |   |   |   |   |   |   |
| Research and development                                                         |       | 5,978                                  |       | 6,873 |   | 21,073 |   | 39,922 |   | 48,046 |   |
| Sales and marketing                                                              |       | 2,255                                  |       | 2,803 |   | 16,351 |   | 21,163 |   | 24,176 |   |
| General and administrative                                                       |       | 18,000                                 |       | 10,923 |   | 43,827 |   | 12,200 |   | 11,088 |   |
| Restructuring costs                                                              |       | —                                 |       | 1,342 |   | 7,077 |   | 2,924 |   | — |   |
| Amortization of goodwill and intangible assets                              |       | —                                 |       | 22 |   | 1,670 |   | 220,742 |   | 216,127 |   |
| Write-off of acquired in-process research and development                   |       | —                                 |       | — |   | — |   | — |   | 22,425 |   |
| Amortization of deferred stock-based  compensation                               |       | —                                 |       | 10 |   | 1,299 |   | 1,669 |   | 1,256 |   |
| Excess facilities charges and related asset  impairment                          |       | 5,839                                  |       | 4,022 |   | 25,094 |   | 9,904 |   | — |   |
| Total operating expenses                                                         |       | 32,072                                 |       | 25,995 |   | 116,391 |   | 308,524 |   | 323,118 |   |
| Loss from operations                                                             |       | (31,237                                | )          | (20,678 | ) | (106,912 | ) | (276,885 | ) | (295,704 | ) |
| Interest income (expense), net                                                   |       | 2,548                                  |       | 2,228 |   | 6,981 |   | 15,975 |   | 30,196 |   |
| Other income  (expense), net                                                     |       | 143                                    |       | 483 |   | (14,037 | ) | (2,762 | ) | (6,137 | ) |
| Loss from continuing operations before income tax  provision                     |       | (28,546                                | )          | (17,967 | ) | (113,968 | ) | (263,672 | ) | (271,645 | ) |
| Income tax  (benefit) provision                                                  |       | (10,858                                | )          | (25 | ) | 1,375 |   | 625 |   | 522 |   |
| Loss from continuing operations                                                  |       | (17,688                                | )          | (17,942 | ) | (115,343 | ) | (264,297 | ) | (272,167 | ) |
| Income (loss)  from discontinued operations, net of tax                          |       | 64,628                                 |       | (15,460 | ) | (74,625 | ) | (70,790 | ) | (34,271 | ) |
| Income (loss)  before cumulative effect of a change in accounting principle |       | 46,940                                 |       | (33,402 | ) | (189,968 | ) | (335,087 | ) | (306,438 | ) |
| Cumulative effect  of a change in accounting principle, net of tax               |       | —                                 |       | — |   | (209,289 | ) | — |   | — |   |
| Net income (loss)                                                                |       | $                                      | 46,940     |   | $ | (33,402 | ) | $ | (399,257 | ) | $ | (335,087 | ) | $ | (306,438 | ) |

 

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| ** **                                                         | ** ** | **Years ended May 31,**                             | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                                                         | ** ** | **(In thousands, except per share data)** | ** ** |
| Basic and diluted net  loss per share:                             |       |                                                               |       |   |   |   |   |   |   |   |   |
| Continuing operations                                              |       | $                                                                  | (0.17      | ) | $ | (0.17 | ) | $ | (1.10 | ) | $ | (2.49 | ) | $ | (2.66 | ) |
| Discontinued operations, basic                                     |       | $                                                                  | 0.61       |   | $ | (0.15 | ) | $ | (0.72 | ) | $ | (0.67 | ) | $ | (0.33 | ) |
| Discontinued operations, diluted                                   |       | $                                                                  | 0.59       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Cumulative effect of change in accounting principle                |       | $                                                                  | —     |   | $ | — |   | $ | (2.00 | ) | $ | — |   | $ | — |   |
| Basic net income (loss) per share                                  |       | $                                                                  | 0.44       |   | $ | (0.32 | ) | $ | (3.82 | ) | $ | (3.16 | ) | $ | (2.99 | ) |
| Diluted net income (loss) per share                                |       | $                                                                  | 0.42       |   | $ | (0.32 | ) | $ | (3.82 | ) | $ | (3.16 | ) | $ | (2.99 | ) |
| Shares used in computing basic net income (loss) per  share        |       | 106,559                                                            |       | 104,805 |   | 104,500 |   | 106,144 |   | 102,464 |   |
| Shares used in  computing diluted net income (loss) per share |       | 109,994                                                            |       | 104,805 |   | 104,500 |   | 106,144 |   | 102,464 |   |

 
| ** **                             | ** ** | **As of May 31,** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| ** **                             | ** ** | **(In thousands)**          | ** ** |
| **Consolidated Balance Sheets  Data:** |       |                             |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents             |       | $                                | 47,124     |   | $ | 215,876 |   | $ | 261,689 |   | $ | 111,396 |   | $ | 126,989 |   |
| Working capital(1)                     |       | 29,746                           |       | 198,864 |   | 232,098 |   | 215,427 |   | 306,571 |   |
| Total assets                           |       | 59,739                           |       | 237,408 |   | 304,968 |   | 680,941 |   | 1,026,475 |   |
| Total long-term  liabilities           |       | 18,577                           |       | 21,556 |   | 24,572 |   | 7,721 |   | 1,731 |   |
| Accumulated  deficit                   |       | (1,257,727                       | )          | (1,304,667 | ) | (1,271,265 | ) | (872,008 | ) | (536,921 | ) |
| Total stockholders’  equity       |       | 15,950                           |       | 188,936 |   | 221,510 |   | 626,019 |   | 949,682 |   |
| Cash dividends declared  per share     |       | $                                | 2.10       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

----

(1)          Working capital isderived from the current assets less current liabilities.

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**ITEM7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

**Overview**

Liberate is a provider ofsoftware for digital cable television systems. Based on industry standards,Liberate’s software enables cable operators to run multiple services, includinghigh-definition television, interactive programming guide, video on demand,personal video recorders and games, on multiple platforms. 

On January 10, 2005,Liberate announced that it had reached an agreement to sell substantially allof the assets of its North America business to Double C Technologies, LLC, ajoint venture majority owned and controlled by Comcast Corporation with aminority investment by Cox Communications, Inc. Under the terms of theagreement, the joint venture received substantially all of the assets,including patents and other intellectual property, and assumed certain limitedliabilities related to Liberate’s North America business. Liberate receivedcash consideration of approximately $82 million. The asset sale closed on April 7,2005.

On March 25, 2005,the Board of Directors of Liberate Technologies declared a one-time specialdividend of $2.10 per common share. The special dividend was payable to theholders of record on April 4, 2005 upon the closing of the sale ofLiberate’s North America business to Double C Technologies, LLC (the “DoubleC”) pursuant to the Asset Purchase Agreement with Double C. The Double Ctransaction closed on April 7, 2005. The special dividend, which wasapproximately $223.0 million, was paid on April 8, 2005. Liberate madeequitable adjustments to outstanding awards under its existing equity basedincentive plans in order to take account of the special dividend.

On July 12, 2005, wecompleted the sale of substantially all of the assets relating to our businessoutside of North America to SeaChange International, Inc. Following thetransaction, we have no current operating product or services business. We willcontinue to operate Liberate to resolve existing liabilities, prosecute anddefend pending litigation and pursue other claims as appropriate that we mayhave against third parties, and dispose of non-operating assets to maximizeshareholder interest. Although our board of directors has not yet made anydetermination, we also will continue from time to time to evaluate andpotentially explore all available alternatives including a dissolution andliquidation of Liberate, a share repurchase, an extraordinary dividend or othertransactions to maximize stockholder value. We believe that our cash, togetherwith the proceeds from Asset Sales, will be sufficient to meet our workingcapital requirements for the next twelve months. In fiscal 2006, we expect tocontinue to use net cash to fund our operating activities.

**Completionof Restatement of Liberate’s Financial Statements**

In late 2002, our auditcommittee, composed of independent outside directors, retained independentcounsel to review the revenue reported during our fiscal year ended May 31,2002. On November 21, 2002, we announced that we had discovered facts thatcalled into question the appropriateness and timing of revenue recognition forvarious transactions that accounted for a total of approximately$10 million in revenue during fiscal 2002. While our audit committee’s investigationwas pending, we were not able to file our quarterly reports on Form 10-Q,and as a result we were delisted from Nasdaq on January 16, 2003.

Our audit committeecompleted its investigation in September 2003, and we restated ourfinancial statements for the fiscal year ended May 31, 2002 and for thequarters ended November 30, 2001, February 28, 2002, and May 31,2002. We also revised our financial statements for the quarter ended August 31,2002, which had been previously announced in a press release. In September 2003,two members of the audit committee resigned and were replaced on the committeeby two other independent directors. The financial statements and relatedinformation contained in this report include the effects of the restatement of thosehistorical financial statements. For further information regarding therestatement, see our amended annual report on Form 10-K/A for ourfiscal year ended May 31, 2002.

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**Filingand Dismissal of Voluntary Petition for Reorganization Under Chapter 11 of U.S.Bankruptcy Code**

On April 30, 2004,Liberate filed a voluntary petition for reorganization under Chapter 11 of theUnited States Bankruptcy Code. The landlord of Liberate’s former headquartersin San Carlos, California filed a motion to dismiss the case, and on September 8,2004, the bankruptcy court issued a ruling dismissing Liberate’s bankruptcycase. The bankruptcy court ruled that Liberate had cash well in excess of itsliabilities and did not need bankruptcy protection to avoid wasteful liquidationof its assets. Liberate appealed this ruling in the United States DistrictCourt for the Northern District of California, but later stipulated to avoluntary dismissal of the appeal. The Court granted the stipulation ofdismissal and dismissed the appeal with prejudice on January 14, 2005.Accordingly, Liberate will not be able to realize the previously anticipatedsavings or other benefits of a Chapter 11 proceeding as disclosed in our Form 10-Kfor the fiscal year ending May 31, 2004.

**Filingof Going Private Proxy Statement**

On June 23, 2005,Liberate filed with the Securities and Exchange Commission a preliminarySchedule 13E-3 Transaction Statement with respect to a going privatetransaction and a preliminary Schedule 14A Proxy Statement soliciting stockholdersto vote on a 1-for-250,000 reverse stock split immediately followedby a 250,000-for-1 forward stock split of Liberate’s common stock(the “Reverse/Forward Stock Split”). If approved, the Reverse/Forward StockSplit should enable Liberate to complete the going private transaction providedthere will be fewer than 300 registered holders of common stock. This willpermit Liberate to discontinue the obligations of filing annual and periodicreports and make other filings with the SEC.

Once the Schedule 13E-3Transaction Statement and Schedule 14A Proxy Statement are approved indefinitive form by the SEC Liberate will mail copies to all of itsstockholders, describing all of the material terms of the Reverse/Forward StockSplit. Liberate intends to effect the Reverse/Forward Stock Split as soon aspossible thereafter. 

**DiscontinuedOperations**

In April 2005, wecompleted the sale of substantially all of the assets of our North Americabusiness to Double C Technologies, LLC, a joint venture majority owned andcontrolled by Comcast Corporation with a minority investment by CoxCommunications, Inc. for approximately $82 million. The sale includedsubstantially all of the assets, including patents and other intellectualproperty, and the assumption of certain limited liabilities related to theNorth America business. We recognized a gain on the sale of the North Americabusiness of $88.9 million in the fourth quarter of fiscal 2005.

Pursuant to the provisionsof SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”, amounts in our audited consolidated financial statements and therelated notes, included in Item 8, have been reclassified to reflect thediscontinued operations of our North America business OSS and Bill-Care.Operating results for the discontinued operations are reported, net of tax,under “Loss from discontinued operations” on the consolidated statement ofoperations. We reclassified $(425,000), $3.3 million and $13.9 millionof revenue and $23.8 million, $28.3 million and $88.3 million ofexpense as part of discontinued operations for fiscal 2005, 2004 and 2003,respectively, relating to the sale of our North America business. See Note 4 inthe Notes to Consolidated Financial Statements.

**CriticalAccounting Policies and Estimates**

Our management’sdiscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. In preparing these financial statements, we are required tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosures of contingent assetsand liabilities. On an 

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ongoingbasis, we evaluate our estimates, including those related to doubtful accounts,investments, goodwill, intangible assets, excess facilities charges, assetimpairment, as well as contingencies and litigation. We base our estimates onhistorical experience and on various other assumptions that we believe arereasonable, the results of which form the basis for making judgments about thecarrying values of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates using differentassumptions or conditions. We believe the following critical accountingpolicies reflect the more significant judgments and estimates used in thepreparation of our consolidated financial statements.

**Revenue Recognition**

*Overview*.   Ourrevenues are derived from fees for licenses of our software, royalties,consulting services, and product maintenance and support. Our revenuerecognition policies are in accordance with Statement of Position (“SOP”) No. 97-2,“Software Revenue Recognition”, as amended by SOP No. 98-9, “SoftwareRevenue Recognition, With Respect to Certain Transactions” and the Securitiesand Exchange Commission’s Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements” and Staff Accounting Bulletin No. 104,“Revenue Recognition”.

*Licenseand Royalty Revenue.  *We license our software tocustomers located in North America and Europe. License and royalty revenuesconsist primarily of fees earned from the licensing of our software, as well asroyalty fees earned upon the shipment or activation of products that incorporateour software. In general, license revenues are recognized when a non-cancelablelicense agreement has been signed and the customer acknowledges anunconditional obligation to pay, the software product has been delivered, thereare no uncertainties surrounding product acceptance, the fees are fixed ordeterminable and collection is considered probable. Delivery is considered tohave occurred when title has been transferred to the customer, which generallyoccurs when media containing the licensed programs is provided to a commoncarrier. In the case of electronic delivery, delivery occurs when the customeris given access to the licensed programs. If collectibility is not consideredprobable, revenue is recognized when the fee is collected.

We recognize revenue usingthe residual method pursuant to the requirements of SOP 97-2, as amendedby SOP 98-9. Revenues recognized from multiple-element softwarearrangements are allocated to each element of the arrangement based on the fairvalues of the elements, such as licenses for software products, maintenance orconsulting services. The determination of fair value is based on objectiveevidence, which is specific to us. We limit our assessment of objectiveevidence for each element to either the price charged when the same element issold separately or the price established by management having the relevantauthority to do so, for an element not yet sold separately. If evidence of fairvalue of all undelivered elements exists but evidence does not exist for one ormore delivered elements, then revenue is recognized under the residual method.Under the residual method, the fair value of the undelivered elements isdeferred and the remaining portion of the arrangement fee is recognized asrevenue. However, if such undelivered elements consist of services that areessential to the functionality of the software, we recognize license andservices revenues using contract accounting, pursuant to SOP No. 81-1,“Accounting for Performance of Construction-Type and Certain Production-TypeContracts”. If license arrangements include the rights to unspecified futureproducts, revenue is recognized ratably over the contractual or estimatedeconomic term of the arrangement. We recognize royalty revenues when a networkoperator reports that it has shipped or activated products or its rights todeploy such products expire.

We record deferred revenuefor software arrangements when cash has been received from the customer and thearrangement does not qualify for revenue recognition under our revenuerecognition policy.

We offset license androyalty revenues by certain expenses as a result of the application ofEITF 01-09. EITF 01-09 generally requires thatconsideration, including warrants, issued to a customer 

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shouldbe classified in a vendor’s financial statements not as an expense, but as anoffset to revenues up to the amount of cumulative revenues recognized or likelyto be recognized from that customer.

*ServiceRevenues.  *Service revenues consist of consulting,maintenance, and other services. We generally recognize consulting and otherservice revenues, including non-recurring engineering and training, as servicesare performed. Where consulting services are performed under a fixed-pricearrangement, we generally recognize revenues on a percentage-of-completionbasis. Maintenance services include both updates and technical support.Maintenance revenues are recognized ratably over the term of the maintenanceagreement, and generally range between 15% and 25% of the cumulative licensefees and activation royalties incurred under the contract, depending upon thelevel of support being provided.

Service revenues alsoinclude reimbursable expenses billed to customers in accordance with EITF No. 01-14,“Income Statement Characterization of Reimbursements Received for “Out-of-Pocket’Expenses Incurred,” which generally requires that a company recognize travelexpenses and other reimbursable expenses billed to customers as revenue. Withthe adoption of EITF 01-14, we recognize reimbursable expenses asservice revenues when there is an agreement to bill the customer for theexpenses, the expenses have been incurred and billed, and collection isprobable.

**Deferred Costs Related to Warrants**

We value warrants based ontheir estimated fair value using the Black-Scholes pricing model as ofthe earlier of the date that the warrants are earned or the date that itbecomes likely that they will be earned. Under the requirements of EITF 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling, Goods or Services,” we revaluewarrants if appropriate. We record the value of warrants as deferred costs, anon-current asset on our Consolidated Balance Sheet and amortize deferred costsover the estimated economic life of the arrangements under which the warrantsare issued. As of May 31, 2005 the deferred costs had been fullyamortized.

In accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”, weperiodically review warrants for impairment whenever events or changes incircumstances indicate that the carrying amount of the warrants may not berecoverable. An assessment of warrants for impairment is subjective by nature,and significant management judgment is required to forecast future revenuestreams and projected cash flows. If our estimates or related assumptionschange in the future, these changes in conditions could require material write-downsof warrants.

**Restructuring Costs**

For restructuringactivities initiated after December 31, 2002, we report for suchactivities in accordance with SFAS No.146, “Accounting for Exit or DisposalActivities,” which addresses accounting for and reporting costs associated withexit or disposal activities and nullifies EITF No. 94-03. Forrestructuring activities initiated prior to December 31, 2002, we continueto record restructuring costs in accordance with EITF No. 94-03, “LiabilityRecognition of Certain Employee Termination Benefits and Other Costs Incurredin a Restructuring,” and SAB No. 100, “Restructuring and ImpairmentCharges.” Severance costs include severance pay and employee benefitobligations to terminated employees. Our executive management approves thescope of any reductions in force. Other costs related to restructuring includethe write-down of intangible assets and amounts expected to be paid inconnection with terminated contracts.

**Marketable Securities**

All marketable securitiesare classified as available-for-sale securities. Available-for-sale securitiesare carried at fair value in accordance with SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities.” Short-term marketablesecurities are those with maturities greater than 90 days but less thanone year. Long-term marketable securities have original maturities greater thanone year. Unrealized 

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gainsand losses on marketable securities are reported net of related taxes as aseparate component of stockholders’ equity. Realized gains and losses on salesof all such investments are reported in earnings and computed using thespecific identification method.

**Equity Investments**

In fiscal 2003, we hadinvested $18.8 million in a number of private companies. We consider variousfactors in determining whether we should recognize an impairment charge relatedto our equity investments. These factors include an entity’s cash available foroperations, performance to budget, general business condition, ability toobtain additional working capital, and overall business plan. Deterioratingfinancial conditions of the companies in which we have invested coupled withthe difficult equity financing market led to write-downs in our equityinvestments. As a result of our assessments, we recorded impairment charges forother-than-temporary declines in value of $1.4 million in fiscal 2002 and$12.1 million in fiscal 2003. As of May 31, 2004 and 2005, thecarrying values of our equity investments were zero.

**Property and Equipment**

We record property andequipment at cost. We compute depreciation using the straight-line method overthe estimated useful lives of the assets of two to five years. We amortizeleasehold improvements over the shorter of the remaining lease term or theestimated useful lives of the improvements using the straight-line method.

**Excess Facilities Charges and Related Asset Impairment**

We evaluate our facilitiesand related long-lived assets for impairment in accordance with SFAS 144.Significant management judgment is required in order to estimate the magnitudeof the excess facilities charges and related asset impairment. These estimatesare based on many factors, including current real estate market rates andconditions, anticipated occupancy rates, and forecasted future sublease income.As of January 1, 2003, we adopted SFAS No. 146, “Accounting for Exitor Disposal Activities,” which addresses accounting for and reporting costsassociated with exit or disposal activities, including excess facilitiescharges and related asset impairment associated with reductions in force, andnullifies EITF 94-03. See Note 14 in the Notes to ConsolidatedFinancial Statements.

As a result of ourrestructurings, we have facilities under long-term leases in excess of ourneeds, and we have accrued for the remaining lease commitments related to theexcess facilities, net of estimated sublease income. We have also evaluated therelated leasehold improvements for impairment and recorded the impairmentcharges accordingly. In assessing the excess facilities and related assetimpairment charges, we consider many factors, including current market ratesand conditions for commercial real estate in the local area and forecastedfuture sublease income. Significant management judgment is required in order toestimate the magnitude of these charges, and we periodically revise theseestimates as necessary.

**Allowance for Doubtful Accounts**

Periodically we evaluatethe adequacy of our allowance for doubtful accounts. We evaluate our accountsreceivable at the end of each accounting period for amounts that we believe aresubject to collection risk. We perform this evaluation by reviewing customerfinancial statements and available credit information, historical collectionexperience with each customer, and the age of each outstanding receivable.Significant management judgment is required in determining the adequacy of theallowance for doubtful accounts. Changes in market or customer conditions couldaffect this evaluation.

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**Litigation**

Our management’s estimatedrange of liability related to pending litigation is based on claims for whichwe can estimate the amount and range of loss with a reasonable degree ofconfidence. We are currently involved in various claims and legal proceedings.Periodically, we review the status of each significant matter and assess ourpotential financial exposure. If the potential loss from any claim or legalproceeding is considered probable and the amount can be reasonably estimated,we specifically accrue a liability for the estimated loss. Significant judgmentis required in both the determination of probability and the determination asto whether an exposure is reasonably estimable. Because of uncertaintiesrelated to these matters, accruals are based only on the best information availableat the time the accrual is recorded. As additional information becomesavailable, we reassess the potential liability related to our pending claimsand litigation and may revise our estimates. Such revisions in the estimates ofthe potential liabilities could have a material impact on our results ofoperations and financial position. We recognize litigation expenses in theperiod in which the litigation services were provided. See Notes 2 and 11 inthe Notes to Consolidated Financial Statements.

**Accounting for Income Taxes**

We account for incometaxes in accordance with SFAS No. 109, “Accounting for Income Taxes.”Under SFAS 109, deferred tax liabilities and assets are determined basedon the differences between the financial statements and tax bases of assets andliabilities, using enacted tax rates in effect for the period in which thedifferences are expected to be reversed. We are required to estimate our incometax liability in each of the jurisdictions in which we operate. This processrequires us to estimate our actual current tax exposures and assess thetemporary differences resulting from different treatment of items for tax andaccounting purposes. These differences result in deferred tax assets andliabilities. We regularly assess whether we will likely be able to use thesetax assets and if we determine that we are not likely to be able to use them,we will record a valuation allowance that offsets their full value. Weconcluded that a full valuation allowance was required for fiscal 2005, 2004and 2003. See Note 2 in the Notes to Consolidated Financial Statements.

**Stock-Based Compensation**

In December 2002, theFASB issued SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accountingfor Stock-Based Compensation,” to provide alternate methods of transitionfor a voluntary change to the fair value based method of accounting for stock-basedemployee compensation. In addition, SFAS 148 amends the disclosurerequirements of SFAS 123 to require more prominent disclosures in bothannual and interim financial statements about the method used on reportedresults. The additional disclosures requirements of SFAS 148 are effectivefor fiscal years ending after December 15, 2002. We have elected tocontinue to follow the intrinsic value method of accounting prescribed byAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees” to account for employee stock options. Under APB 25, nocompensation expense is recognized unless the exercise price of our employeestock option is less than market price of the underlying stock at the date ofgrant. We have not recorded compensation expenses in the periods presentedbecause stock options were granted at their fair market value on the date ofgrant.

In December 2004, theFASB issued SFAS 123(R), “Share-Based Payment.” SFAS 123(R) addresses theaccounting for share-based payment transactions with employees and requirescompanies to expense the value of employee stock options and similar awards.SFAS 123(R) requires stock based compensation of the share-based paymentto be measured at fair value on the date that the company grants the awards toemployees with the first annual period after June 15, 2005. The expenseshould be recognized over the vesting period for each option and adjusted foractual forfeitures that occur before vesting. We are required to adopt SFAS 123(R)in Q1 of fiscal 2007.

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In March 2005, theSEC issued Staff Accounting Bulletin No. 107 (“SAB 107”). SAB 107 coverskey topics related to the implementation of SFAS 123(R) which include thevaluation models, expected volatility, expected option term, income tax effectsof SFAS 123(R), classification of stock-based compensation cost, capitalizationof compensation costs and disclosure requirements. Although we do not expect togrant any future options, the Company is currently assessing the impact SFAS123(R) will have on our financial statements. See Note 2 in the Notesto Consolidated Financial Statements.

**Results of Operations**

**Revenues**

For fiscal 2005, 2004 and 2003, we generated licenseand royalty revenues by licensing our client and server software products,applications, and tools, primarily to network operators that provide televisionservices, and, in a small number of cases, to set-top box manufacturers. Wegenerated service revenues from consulting, maintenance, and other servicesprovided in connection with those licenses. The adoption of EITF 01-09,and EITF 01-14 in December 2001 has affected our presentation of allrevenue components for the past and current periods reported in this report.See Note 2 in the Notes to Consolidated Financial Statements.

Following the Asset Sales, we do not have anysignificant product or services business, and therefore we do not expectsignificant future revenues..

Totalrevenues for the periods reported were as follows (in thousands):
| ** **                                      | ** ** | **Years ended May 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Total revenues                                  |       | $                                      | 2,344      |   | $ | 7,905 |   | $ | 14,998 |   |
| Decrease, year  over year                       |       | $                                      | (5,561     | ) | $ | (7,093 | ) |   |   |
| Percentage increase  (decrease), year over year |       | (70                                    | )%         | (47 | )% |   |   |
|                                                 |            |                                        |            |  |  |  |  |  |  |  |

 

As a result of the sale of our North America business,domestic revenues have been reclassified to discontinued operations. Allrevenues for the periods being presented have been derived from ourinternational customers.

*Licenseand Royalty.  *License and royalty revenues for theperiods reported were as follows (in thousands):
| ** **                           | ** ** | **Years ended May 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| License and  royalty revenues        |       | $                                      | 978        |   | $ | 2,172 |   | $ | 4,225 |   |
| Percentage of  total revenues        |       | 42                                     | %          | 27 | % | 28 | % |
| Decrease, year  over year            |       | $                                      | (1,194     | ) | $ | (2,053 | ) |   |   |
| Percentage decrease,  year over year |       | (55                                    | )%         | (49 | )% |   |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |

 

License and royalty revenues decreased in absolutedollars from fiscal 2004 to fiscal 2005 due to lower license revenues from ourexisting customers. In addition there were no software licenses sold to newcustomers during fiscal 2005. At the end of fiscal 2004, two significantcustomers transitioned from the up-front license revenue model to a monthlysubscription revenue model (for which we have not taken any subscriptionrevenues). These amounts are currently included in deferred revenues on ourconsolidated balance sheet.

License and royalty revenues decreased in absolutedollars from fiscal 2003 to fiscal 2004 due to lower sales of new softwarelicenses.

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Because of the Asset Sales, we have no significantproduct or services business and therefore we don’t expect any significantlicense and royalty revenues in the future.

*Service.  *Servicerevenues for the periods reported were as follows (in thousands):
| ** **                           | ** ** | **Years ended May 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Service revenues                     |       | $                                      | 1,366      |   | $ | 5,733 |   | $ | 10,773 |   |
| Percentage of  total revenues        |       | 58                                     | %          | 73 | % | 72 | % |
| Decrease, year  over year            |       | $                                      | (4,367     | ) | $ | (5,040 | ) |   |   |
| Percentage decrease,  year over year |       | (76                                    | )%         | (47 | )% |   |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |

 

Service revenues decreased in absolute dollars fromfiscal 2004 to fiscal 2005 due to a decline in support revenue. Supportrevenues declined because two large customers transitioned to subscriptionlicense agreements, that don’t provide separate support revenues.

Service revenues decreased in absolute dollars fromfiscal 2003 to fiscal 2004 largely due to a reduction in licensing activity,which led to fewer professional service projects, as well as a strategic shiftaway from professional services work. We expect service revenues will be lowerthan recent historical levels until spending by network operators for digitalinfrastructure software increases.

Service revenues increasedas a percentage of total revenues reflecting the significant drop in licensingand royalty revenues. Due to the Asset Sales, we have no significant product orservices business and therefore expect no significant services revenue in thefuture.

**Cost of Revenues**

Totalcost of revenues for the periods reported was as follows (in thousands):
| ** **                           | ** ** | **Years ended May 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cost of revenues                     |       | $                                      | 1,509      |   | $ | 2,588 |   | $ | 5,519 |   |
| Percentage of  total revenues        |       | 64                                     | %          | 33 | % | 37 | % |
| Decrease, year  over year            |       | $                                      | (1,079     | ) | $ | (2,931 | ) |   |   |
| Percentage decrease,  year over year |       | (42                                    | )%         | (53 | )% |   |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |

 

*Licenseand Royalty.  *Cost of license and royalty revenuesconsists primarily of costs incurred for licenses and support of third-partytechnologies that are incorporated in our products. Cost of license and royaltyrevenues for the periods reported was as follows (in thousands):
| ** **                                  | ** ** | **Years ended May 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cost of license  and royalty revenues       |       | $                                      | 3          |   | $ | 265 |   | $ | 715 |   |
| Percentage of  license and royalty revenues |       | —                                 | %          | 12 | % | 17 | % |
| Decrease, year  over year                   |       | $                                      | (262       | ) | $ | (450 | ) |   |   |
| Percentage decrease,  year over year        |       | (99                                    | )%         | (63 | )% |   |   |
|                                             |            |                                        |            |  |  |  |  |  |  |  |

 

Cost of license and royalty revenues decreased inabsolute dollars from fiscal 2004 to fiscal 2005 due to the decrease in licenseand royalty revenues.

Cost of license and royalty revenues decreased inabsolute dollars from fiscal 2003 to fiscal 2004 due to the decrease in licenseand royalty revenues during fiscal 2004.

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*Service.  *Costof service revenues consists primarily of salary and other related costs foremployees and external contractors. Cost of service revenues for the periodsreported was as follows (in thousands):
| ** **                           | ** ** | **Years ended May 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cost of service  revenues            |       | $                                      | 1,506      |   | $ | 2,323 |   | $ | 4,804 |   |
| Percentage of  service revenues      |       | 110                                    | %          | 41 | % | 45 | % |
| Decrease, year  over year            |       | $                                      | (817       | ) | $ | (2,481 | ) |   |   |
| Percentage decrease,  year over year |       | (35                                    | )%         | (52 | )% |   |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |

 

Cost of service revenues decreased in absolute dollarsfrom fiscal 2004 to fiscal 2005 primarily due to personnel reductions in thesupport and professional services groups which decreased employee relatedexpenses by $403,000 and facilities and shared expenses, which includescorporate overhead by $414,000.

Cost of service revenuesdecreased in absolute dollars from fiscal 2003 to fiscal 2004 primarily due tothe restructuring of the professional services group, resulting in compensationand employee benefits reductions of $2.2 million and a decrease in the use ofexternal contractors by $86,000.

**Operating Expenses**

The operating expenses described below have all beenadjusted for discontinued operations associated with the North America business, OSS and Bill-Care for all periods presented.

*Researchand Development.  *Research and development expensesconsist primarily of salary, employee-related expenses, and costs forexternal contractors for development support, not directly related todevelopment. Research and development expenses were as follows (in thousands):
| ** **                           | ** ** | **Years ended May 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Research and  development            |       | $                                      | 5,978      |   | $ | 6,873 |   | $ | 21,073 |   |
| Percentage of  total revenues        |       | 255                                    | %          | 87 | % | 141 | % |
| Decrease, year  over year            |       | $                                      | (895       | ) | $ | (14,200 | ) |   |   |
| Percentage increase,  year over year |       | 13                                     | %          | 67 | % |   |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |

 

Research and development expenses decreased fromfiscal 2004 to fiscal 2005. This decrease was primarily due a decrease inemployee related expenses of $475,000, a decrease in outside contractorexpenses of $229,000 and a decrease in computer and communications costs of$507,000. These decreases were offset by increases in facilities, sharedexpenses and other costs of $316,000.

Research and development expenses decreased fromfiscal 2003 to fiscal 2004 due to continued restructuring of our research anddevelopment operation. Employee-related expenses decreased by $9.1million, facilities and shared expenses decreased by $3.3 million,external contractor costs decreased by $449,000, computer and communicationscosts decreased by $1.0 million and professional services and other costsdecreased by $354,000.

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*Salesand Marketing.  *Sales and marketing expenses consistprimarily of salaries and other employee-related expenses for sales supportand marketing personnel, public relations and marketing materials. Sales andmarketing expenses were as follows (in thousands):
| ** **                           | ** ** | **Years ended May 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Sales and  marketing                 |       | $                                      | 2,255      |   | $ | 2,803 |   | $ | 16,351 |   |
| Percentage of  total revenues        |       | 96                                     | %          | 35 | % | 109 | % |
| Decrease, year  over year            |       | $                                      | (548       | ) | $ | (13,548 | ) |   |   |
| Percentage decrease,  year over year |       | (20                                    | )%         | (83 | )% |   |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |

 

Sales and marketingexpenses decreased from fiscal 2004 to fiscal 2005 primarily due to a decreasein outside contractor costs of $160,000, a decrease in computer andcommunications costs of $193,000, and a decrease in facilities and sharedexpenses of $311,000. These decreases were partially offset by an increase inemployee related expenses of $115,000.

Sales and marketingexpenses decreased from fiscal 2003 to fiscal 2004 primarily due to a reductionin headcount, resulting in reduced employee-related expenses of $8.8 million,reduced marketing expenses of $1.6 million, reduced facilities and sharedexpenses of $2.2 million, and reduced professional services costs of $505,000.

As a result of the AssetSales, we have no significant operating product or services business thus weexpect that our sales and marketing expenses will be insignificant.

*Generaland Administrative.  *General and administrative expensesconsist primarily of salaries and other employee-related expenses forcorporate development, finance, human resources, and legal employees; outsidelegal and other professional fees. General and administrative expenses for theperiods reported were as follows (in thousands):
| ** **                           | ** ** | **Years ended May 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| General and  administrative          |       | $                                      | 18,000     |   | $ | 10,923 |   | $ | 43,827 |   |
| Percentage of  total revenues        |       | 768                                    | %          | 138 | % | 292 | % |
| Increase  (decrease), year over year |       | $                                      | 7,077      |   | $ | (32,904 | ) |   |   |
| Percentage increase,  year over year |       | 65                                     | %          | (75 | )% |   |   |
|                                      |            |                                        |            |  |  |  |  |  |  |  |

 

General and administrativeexpenses increased from fiscal 2004 to fiscal 2005 due to higher salaries andemployee related expenses of $1.5 million, most of which was the result of the vestingof employee stock options and stock units following the close of the asset saleto Double C in Q4 FY05 . In addition, legal and professional services weresignificantly higher by $5.9 million, primarily due to legal and investmentbanking costs related to the sale of the North America business and specialdividend of $2.10 per share paid in April 2005, ongoing litigation and thecost of Sarbanes-Oxley compliance. These increases were offset by a decrease infacilities and shared expenses of $530,000.

General and administrativeexpenses decreased by $32.9 million from fiscal 2004 to fiscal 2003. Fiscal2003 costs were significantly higher than fiscal 2004 primarily due to a$25.0 million estimated liability associated with our shareholder litigation;there was no such expense in fiscal 2004 or fiscal 2005. In addition, generaland administrative expenses decreased from fiscal 2003 to fiscal 2004, in partdue to the restructuring of our business, resulting in decreases in employeerelated expenses, depreciation and other costs. We incurred significant legalexpenses in fiscal 2003 and 2004 in connection with the accounting restatementand resulting shareholder litigation and SEC investigation and other matters.In addition, for fiscal 2004 we incurred legal expenses in connection with theChapter 11 bankruptcy proceedings. 

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Followingthe Asset Sales, we believe that general and administrative expenses will belower, however costs to resolve existing liabilities, prosecute and defendpending litigation and pursue other claims as appropriate that we may haveagainst third parties, and dispose of non-operating assets to maximizeshareholder interests will continue to be substantial.

*RestructuringCosts.  *Restructuring costs include severance costs andother costs. Severance costs include those expenses related to severance payand related employee benefit obligations, including the acceleration of certainstock option grants in connection with terminated employees. Other costsrelated to restructuring include the write-down of intangible assets, disposalof fixed assets, and amounts paid in connection with terminated contracts. SeeNote 15 in the Notes to Consolidated Financial Statements.

In fiscal 2005, we did notrecord any restructuring costs. We recorded $1.3 million and $7.1 millionof restructuring costs for fiscal 2004 and 2003, respectively, which consistedof employee severance and related expenses.

*Amortizationof Goodwill and Intangible Assets.  *Goodwill andintangible assets represent the purchase price of companies that we haveacquired in excess of identified tangible assets. Intangible assets areamortized over three years. See Note 5 in the Notes to ConsolidatedFinancial Statements. From our inception through May 31, 2005, we haverecorded goodwill and intangible assets related to four acquisitions:

·       InAugust 1997, we acquired Navio and recorded $18.3 million of goodwillthat was fully amortized by the end of the first quarter of fiscal 2001.

·       InMarch 2000, we acquired the Virtual Modem assets of SourceSuite andrecorded $185.5 million of goodwill and $6.5 million of intangibleassets.

·       InJune 2000, we acquired MoreCom and recorded $468.0 million ofgoodwill and $2.9 million of intangible assets.

·       InAugust 2002, we acquired the outstanding capital stock of Sigma Systemsand recorded $34.6 million of goodwill and $9.8 million of intangibleassets. As of May 31, 2004 these amounts have been reclassed asdiscontinued operations, and therefore are not reflected in the table below.

In June 2002, weadopted SFAS 142. In accordance with the provisions of SFAS 142,goodwill is no longer subject to amortization, therefore eliminatingamortization expense of $202.6 million for fiscal 2003. In fiscal 2004, weamortized the remaining value of the intangibles related to MoreCom, bringingthe book value to zero at the end of fiscal 2004. See Note 3 in the Notesto Consolidated Financial Statements.

*Amortizationof Deferred Stock-based Compensation.  *Deferredstock-based compensation represents the difference between the estimatedfair value of our common stock for accounting purposes and the option exerciseprice of such options at the grant date, which were granted prior to ourinitial public offering. We amortize stock-based compensation for stockoptions granted to employees and others on a straight-line basis over thevesting period of such options.

The decrease inamortization for deferred stock-based compensation for each of the fiscalyears was attributable to employee terminations and, to a lesser extent, to thecompletion of vesting of certain employee options. In fiscal 2003 we amortized$1.3 million of deferred stock-based compensation. During fiscal 2004, theremainder of the deferred stock-based compensation was amortized.

*ExcessFacilities Charges and Related Asset Impairment.  *Wehave an existing commitment to lease office space at our former headquarters inSan Carlos, California significantly in excess of our needs for the foreseeablefuture and do not anticipate that we will be able to sublease a substantialportion of our excess office space in the near future. In fiscal 2005, werecorded excess facilities charges of $5.8 million. This charge was primarily basedon additional space vacated in Q4 FY04. We took the charge in Q1 FY05 due tothe fact that we were in bankruptcy at May 31, 2004. In September 2004,the Bankruptcy Court 

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issued a rulingdismissing our bankruptcy case, which removed the uncertainty that existed at May 31,2004. In addition, during FY05, we recorded charges related to an amendment ofsublease income estimates and a revision of the estimated future cash flowsdiscounted at the original effective interest rate.

In fiscal 2004, werecorded additional excess facilities charges of $4.0 million, whichincluded the write-off of the remaining leasehold improvements related tothe San Carlos, California facility and adjustments to our previous estimatesof sublease income. In fiscal 2003, we recorded excess facilities charges andrelated asset impairment of $25.1 million, of which $22.5 million was relatedto excess facilities and $2.6 million was related to certain long-lived assets,including leasehold improvements.

**Interest Income, Net**

Interestincome, net consists of interest earned on our cash, cash equivalents andshort-term and long-term investments, and is netted against interest expenserelated to capital leases. Interest income, net for the periods reported was asfollows (in thousands):
| ** **                                      | ** ** | **Years ended May 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Interest income  (expense), net                 |       | $                                      | 2,548      |   | $ | 2,228 |   | $ | 6,981 |   |
| Percentage of  total revenues                   |       | 109                                    | %          | 28 | % | 47 | % |
| Increase  (decrease), year over year            |       | $                                      | 320        |   | $ | (4,753 | ) |   |   |
| Percentage increase  (decrease), year over year |       | 14                                     | %          | (68 | )% |   |   |
|                                                 |            |                                        |            |  |  |  |  |  |  |  |

 

Interest income, netincreased from fiscal 2004 to fiscal 2005 primarily due to higher interestrates, offset by lower cash balances. Interest income, net decreased fromfiscal 2003 to fiscal 2004 primarily due to lower cash balances, declininginterest rates, and the reinvestment of some of our longer-term investmentspreviously invested at higher yields. Interest income is expected to decline infuture periods because of lower cash balances following the payment of specialdividends in April 2005 and July 2005.

**Other Income (Expense), Net**

Otherincome (expense), net consists of write-downs of equity investments thathave been permanently impaired, losses on disposals of fixed assets,re-measurement gains and losses from the operations of our foreign subsidiariesand foreign currency exchange gains and losses and other non-operatingincome and expenses. The components of other income (expense), net for theperiods reported was as follows (in thousands):
| ** **                                      | ** ** | **Years ended May 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Other income  (expense)                         |       | $                                      | 318        |   | $ | 48 |   | $ | 230 |   |
| Loss on equity  investments                     |       | —                                 |       | — |   | (12,128 | ) |
| Gain (loss) on  fixed assets                    |       | 14                                     |       | (149 | ) | (408 | ) |
| Foreign exchange  gain (loss)                   |       | (189                                   | )          | 584 |   | (1,731 | ) |
| Other income  (expense), net                    |       | $                                      | 143        |   | $ | 483 |   | $ | (14,037 | ) |
| Percentage of  total revenues                   |       | 6                                      | %          | 6 | % | 94 | % |
| Increase (decrease),  year over year            |       | $                                      | (340       | ) | $ | 14,520 |   |   |   |
| Percentage increase  (decrease), year over year |       | (70                                    | )%         | 103 | % |   |   |

 

The decrease in otherincome, net from fiscal 2004 to fiscal 2005 was due to re-measurement lossesfrom foreign currencies offset by other non-operating income items.

Other income of $483,000in fiscal 2004 was primarily due to re-measurement gains from British poundsand Canadian dollars.

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Other expense of $14.0 millionin fiscal 2003 was primarily due to a write-down of equity investments of$12.1 million and foreign exchange losses of $1.7 million.Deteriorating financial conditions of the companies in which we have investedcoupled with the difficult equity financing market led to the write-downsin fiscal 2003. See Note 2 in the Notes to Consolidated FinancialStatements.

**Income TaxProvision**

Incometax provision (benefit) consists of foreign withholding tax expense, foreignand state income taxes, and the recognition of current operating losses. The incometax provision (benefit) for the periods reported was as follows (in thousands):
| ** **                      | ** ** | **Years ended May 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2005**                               | ** ** | ** 2004 ** | ** ** | **2003** | ** ** |
| Income tax  provision (benefit) |       | $                                      | (10,858    | ) |   | $ | (25 | ) |   | $ | 1,375 |   |
|                                 |            |                                        |            |  |  |  |  |  |  |  |  |  |

 

The income tax benefit for fiscal 2005 primarilyresulted from the recognition of tax benefits from current operating lossesresulting from the gain from discontinued operations.

The income tax provisiondecreased from fiscal 2003 to 2004 primarily due to lower foreign and stateincomes taxes resulting from the restructuring of our business and the receiptof tax credits related to foreign research and development. See Note 16 inthe Notes to Consolidated Financial Statements.

**Discontinued Operations**

In May 2003, we sold Bill-Care, a business unitof Sigma Systems we acquired in August 2002. In November 2003, wesold the OSS business and related assets, which we had also acquired in August 2002.Operating results for Bill-Care and OSS as reported in the financial statementsand related notes have been reclassified to reflect these discontinuedoperations. Operating results for the discontinued operations are reported, netof tax, under “Loss from discontinued operations” on the consolidated statementof operations beginning in our fourth quarter of fiscal 2003. For fiscal 2004and fiscal 2003, the loss from discontinued operations was $3.1 millionand $50.1 million, respectively. Related assets and liabilities areclassified as “Assets of discontinued operations” and “Liabilities ofdiscontinued operations,” respectively, in the Consolidated Balance Sheets. SeeNote 4 in the Notes to Consolidated Financial Statements.

In April 2005, we completed the sale ofsubstantially all of the assets of our North America business to Double CTechnologies, LLC, a joint venture majority owned and controlled by ComcastCorporation with a minority investment by Cox Communications, Inc. forapproximately $82 million. The sale included substantially all of the assets,including patents and other intellectual property, and the assumption ofcertain limited liabilities related to the North America business. For fiscal2005, 2004 and fiscal 2003, the loss included in discontinued operationsrelated to the sale of the North America business was $24.3 million, $21.9million and $24.4 million, respectively. We recognized a gain on the sale ofthe North America business of $88.8 million in the fourth quarter offiscal 2005.

Pursuant to the provisionsof SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets”, amounts in our audited consolidated financial statements and therelated notes, included in Item 8, have been reclassified to reflect thediscontinued operations of our North America business OSS and Bill-Care.Operating results for the discontinued operations are reported, net of tax,under “Loss from discontinued operations” on the consolidated statement ofoperations. We reclassified $($425,000), $3.3 million and $13.9 millionof revenue and $23.8 million, $28.3 million and $88.3 million ofexpense as part of discontinued operations for fiscal 2005, 2004 and 2003,respectively. We recognized a gain on the sale of discontinued operations of$88.9 million and $9.5 million for fiscal 2005 and 2004, 

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respectively.For fiscal 2003, we recognized a loss of $177,000 on the sale of discontinuedoperations. See Note 4 in the Notes to Consolidated Financial Statements.

**Change in AccountingPrinciple**

On June 1, 2002, weadopted SFAS 142, “Goodwill and Other Intangible Assets.” Upon adoption,we evaluated goodwill and other intangible assets for impairment with theassistance of an outside valuation firm. At that time, we operated within onereporting unit, as defined by SFAS 142, and therefore, goodwill wasconsidered to be an enterprise-level asset. As required under SFAS 142, wefirst compared the book value of the enterprise to the fair value. Wedetermined that our market capitalization was a good indicator of fair value,and to verify this, we analyzed the enterprise value-to-revenue multiples ofseveral public companies and we also performed a discounted cash flow analysis.We failed the SFAS 142 Step 1 test. We then proceeded to Step 2, startingwith the value obtained in Step 1. The net result was an implied negativegoodwill value as of June 1, 2002. Based on the results of this analysis,we recorded a charge of $209.3 million in fiscal 2003, which is reflectedas “Cumulative effect of change in accounting principle” in our statement ofoperations.

**Liquidity and Capital Resources**

**Cash Flows**

Our principal source of liquidity as of May 31,2005 was cash, cash equivalents and liquid investments of $47.1 million. Inaddition, we had $4.4 million of restricted cash that primarily securesobligations under two office leases.

*Cash Flows From Operating Activities.  *Forfiscal 2005, net cash used in operating activities of $33.9 millionincluded net income of $46.9 million, which included non-cash profits of$82.3 million from a gain on the sale of discontinued operations and $2.5 millionof non-cash adjustments to reconcile net gain to net cash used in operatingactivities. Other uses of cash included a $1.9 million decrease in accruedliabilities, a $3.0 million decrease in other long term liabilities, a$3.5 million increase in prepaid expenses and other current assets and $2.0million decrease in accounts payable. These uses were offset by a $8.7 millionincrease in deferred revenue, a $337,000 decrease in accounts receivable, a $101,000decrease in other assets and $114,000 increase in accrued payroll and relatedexpenses.

For fiscal 2004, net cash used in operating activitiesof $54.7 million included a net loss of $33.4 million, which included$6.0 million of non-cash adjustments to reconcile net loss to net cashused in operating activities. Other uses of cash included a $23.2 milliondecrease in accrued liabilities (including $17.9 million payment ofpremium on a loss mitigation insurance policy related to shareholderlitigation), a $3.0 million decrease in other long term liabilities, a$2.0 million decrease in deferred revenues and $1.1 million decrease in accruedpayroll and related expenses. These uses were offset by a $1.2 millionincrease in accounts payable and a $706,000 decrease in accounts receivable.

For fiscal 2003, net cash used in operations was$81.2 million. The net loss of $399.3 million included a cumulativeeffect of change in accounting principle of $209.3 million, non-cashcharges of $34.3 million from discontinued operations and$47.0 million of other non-cash charges to reconcile net loss to net cashused in operations. Other uses of cash included a $3.0 million decrease inaccrued payroll and related expenses, $2.1 million decrease in other long-termliabilities, a $2.9 million decrease in deferred revenues and a $537,000 decreasein accounts payable. These uses were offset by a $9.6 million decrease inaccounts receivable due to lower revenue, $3.7 million decrease in prepaidexpenses and other current assets, a $22.1 million increase in accruedliabilities (related to our excess facilities) and $513,000 decrease in otherassets.

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*Cash Flows From Investing Activities.  *Forfiscal 2005, net cash provided by investing activities of $88.4 millionincluded $82.0 million proceeds from the sale of our North Americabusiness and a $6.5 million decrease in restricted cash.

For fiscal 2004, net cash provided by investingactivities of $7.0 million included $8.1 million proceeds from thesale of our BillCare and OSS businesses and $616,000 of net proceeds frominvestments, offset by a $1.6 million increase in restricted cash.

For fiscal 2003, net cash provided by investingactivities of $240.2 million included $279.3 million of proceedsreceived from the maturing of investments and $1.4 million of proceedsfrom notes receivable, net, offset by $38.1 million (net of cash received)used to acquire Sigma Systems and $1.8 million used to purchase equityinvestments.

*Cash Flows From Financing Activities.  *Forfiscal 2005, net cash used for financing activities of $223.9 was primarilyfrom the payment of special dividend during Q4FY05 in the amount of $222.8million.

For fiscal 2004, net cash provided by financingactivities of $3.0 million was primarily from the issuance of common stockand a $608,000.increase in short-term borrowing from the bank in connectionwith our San Carlos facility.

For fiscal 2003, net cashused in financing activities of $9.8 million was primarily for therepurchase of our common stock from Cisco.

**Cash Requirements**

Since our incorporation,we raised a significant amount of capital by selling small equity positions toa number of investors, by issuing shares of our stock to the public, byconducting a secondary public offering, and through private offerings of ourstock. In addition to funding normal operating expenses, we anticipate that wewill use this cash to finance our operations and pay outstanding commitments.We believe that our cash, together with the proceeds from Asset Sales, will besufficient to meet our working capital requirements for the next twelve months.In fiscal 2006, we expect to continue to use net cash to fund our operatingactivities.

**Contractual Obligations**

Asummary of our future contractual obligations as of May 31, 2005,primarily on our former headquarters in San Carlos, California and our currentheadquarters in San Mateo, California is as follows (in thousands):
| ** **                     | ** ** | ** ** | ** ** | **Payments due by period** | ** ** |
|--------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **Total**  | ** ** | **Less than  one year**         | ** ** | **1-3  years** | ** ** | **4-5  years** | ** ** | **After 5  years** | ** ** |
| Operating leases               |       | $          | 36,517     |                                      |       | $ | 9,151 |   |   | $ | 17,507 |   | $ | 9,859 |   |   | $ | — |   |   |
| Total contractual  obligations |       | $          | 36,517     |                                      |       | $ | 9,151 |   |   | $ | 17,507 |   | $ | 9,859 |   |   | $ | — |   |   |

 

As a result of theassumption of the lease for the San Mateo, California office by SeaChange, inconnection with the sale of our Non-North America business, our futurecontractual obligations will be reduced by approximately $1.3 million.

**Off Balance Sheet Arrangements**

We have no material offbalance sheet arrangements as of May 31, 2005.

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**Subsequent Events**

**Sale of Non-NorthAmerica business**

On July 12, 2005,Liberate Technologies, completed the previously announced sale of substantiallyall of the assets of its Non-North America business to SeaChange International, Inc.(“SeaChange”). SeaChange acquired certain assets and assumed certain limitedliabilities relating to the business outside of North America. Liberatereceived cash consideration of approximately $23.5 million in connection withthe completion of the asset sale to SeaChange. The sale was made pursuant tothe Asset Purchase Agreement, dated as of April 15, 2005. Additionally,there was a contingent success fee of approximately $411,000 payable to Allen &Company (advisors to the transaction) upon consummation of the sale. This feewill be recorded as an expense in Q1 FY06.

**Dividend of $0.15per Common Share**

On June 15, 2005, theBoard of Directors of Liberate declared a one-time dividend of $0.15 per commonshare. The dividend was payable to the holders of record on June 27, 2005upon the closing of the sale of Liberate’s Non-North America business toSeaChange pursuant to the terms of the Asset Purchase Agreement, dated as of April 15,2005. The SeaChange transaction closed on July 12, 2005. As requiredby the NASD rules, the ex-dividend date will be set one business day after thepayment date. The dividend, totaling $16.6 million, was paid on July 13,2005.

**ExecutiveManagement Retention Bonuses**

On June 15, 2005, the Board of Directors ofLiberate Technologies (“Liberate”) approved payments in connection withamendments to existing employee retention agreements that were entered into asof March 14, 2003, by Liberate and each of Messrs. David Lockwood,Liberate’s Chairman and Chief Executive Officer, Philip Vachon, President—LiberateInternational, Gregory S. Wood, Liberate’s Executive Vice President and ChiefFinancial Officer, and Patrick Nguyen, Liberate’s Executive Vice President—CorporateDevelopment (collectively, the “Executives”). Under the terms of the employeeretention agreements, each Executive was entitled to a severance payment upon aChange in Control (as defined therein) that is followed within one year by anActual or Constructive Termination (as defined therein) of employment of suchExecutive. As a result of the sale of the North America business to Double CTechnologies, LLC on April 7, 2005, each Executive may be entitled toconstructively terminate his employment and receive a severance payment. TheBoard has determined that Liberate’s continuing operations would benefit fromcontinuing employment of such Executives, and has approved the amendment oftheir employee retention agreements effective as of June 15, 2005 (the “EffectiveDate”) so that the Executives will no longer be required to have terminatedemployment to be entitled to the payments thereunder. Instead, Liberate willpay each Executive the amount he would otherwise have been entitled to had suchExecutive’s employment been terminated pursuant to the terms of thoseagreements, at which time, the agreements will terminate and the Executiveswill not be entitled to any further payments or benefits thereunder.

Pursuant to the employeeretention agreements as so amended, Liberate made such payments to theExecutives within thirty days following the Effective Date. The value of thepayment amounts pursuant to the employee retention agreements remain unchanged,which payment amount for each Executive will be equal to twice the Executive’stotal taxable compensation for the prior fiscal year, with a minimum payment of$500,000, and a maximum payment of $750,000. The payments were made on June 17,2005 and July 14, 2005.

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**Filing of GoingPrivate Proxy Statement**

On June 23, 2005, Liberate filed with theSecurities and Exchange Commission a preliminary Schedule 13E-3Transaction Statement with respect to a going private transaction and apreliminary Schedule 14A Proxy Statement soliciting stockholders to vote on a 1-for-250,000reverse stock split immediately followed by a 250,000-for-1 forwardstock split of Liberate’s common stock (the “Reverse/Forward Stock Split”). Ifapproved, the Reverse/Forward Stock Split should enable Liberate to completethe going private transaction provided there will be fewer than 300 registeredholders of common stock. This will permit Liberate to discontinue theobligations of filing annual and periodic reports and make other filings withthe SEC.

Once the Schedule 13E-3Transaction Statement and Schedule 14A Proxy Statement are approved in adefinitive form by the SEC and are, Liberate will mail copies to all of itsstockholders, describing all of the material terms of the Reverse/Forward StockSplit. Liberate currently intends to effect the Reverse/Forward Stock Split assoon as possible thereafter.

**Letter of CreditEstablished**

On June 23, 2005,Liberate established a letter of credit in the amount of $8.8 million with CircleStar Center Associates named as the beneficiary as a security deposit for ourformer headquarters in San Carlos, California. In order to secure ourobligations with the bank, we established a certificate of deposit for $8.8million. This arrangement replaces a letter of credit with another bankinginstitution, and replenishes the letter of credit to the level required in thelease agreement.

**EmployeeDiscretionary Cash Bonuses**

On July 14, 2005, the Compensation Committee ofthe Board of Directors of Liberate Technologies, a Delaware corporation (the “Registrant”)approved the payment of a one-time discretionary cash bonus in recognition ofemployment performance to nine of the Registrant’s remaining employeesincluding executives, finance and administrative staff in the aggregate amountof $1,480,000. Specifically, the Compensation Committee approved cash bonuspayments to the following executive officers: $325,000 to each of David Lockwood,Chief Executive Officer, Gregory Wood, Executive Vice President and ChiefFinancial Officer, and Patrick Nguyen, Executive Vice President of CorporateDevelopment, and $200,000 to Phil Vachon, President—Liberate International.

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**QuarterlyResults of Operations (Unaudited)**

The following table incorporates the unauditedconsolidated quarterly financial data from the periods indicated. We derivedthis table from our consolidated financial statements, and, in our opinion, itincludes all adjustments, which consist of only normal recurring adjustments,necessary to present fairly the financial results for the periods.

**ConsolidatedStatements of Operations(In thousands)Unaudited**
| ** **                                                       | ** ** | **Quarters Ended** | ** ** |
|------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                       | ** ** | **May 31,  2005**  | ** ** | **Feb. 29,  2005** | ** ** | **Nov. 30,  2004** | ** ** | **Aug. 31,  2004** | ** ** | **May 31,  2004** | ** ** | **Feb. 29,  2004** | ** ** | **Nov. 30,  2003** | ** ** | **Aug. 31,  2003** | ** ** |
| Revenues:                                                        |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| License and royalty                                              |       | $                       | 52         |   | $ | 169 |   | $ | 97 |   | $ | 660 |   | $ | 1,463 |   | $ | 557 |   | $ | (163 | ) | $ | 315 |   |
| Service                                                          |       | 158                     |       | 403 |   | 189 |   | 616 |   | 1,136 |   | 1,376 |   | 1,227 |   | 1,994 |   |
| Total revenues                                                   |       | 210                     |       | 572 |   | 286 |   | 1,276 |   | 2,599 |   | 1,933 |   | 1,064 |   | 2,309 |   |
| Cost of revenues                                                 |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| License and royalty                                              |       | (5                      | )          | 1 |   | 4 |   | 3 |   | (24 | ) | 112 |   | 112 |   | 65 |   |
| Service                                                          |       | 338                     |       | 215 |   | 228 |   | 725 |   | 800 |   | 579 |   | 512 |   | 432 |   |
| Total cost of revenues                                           |       | 333                     |       | 216 |   | 232 |   | 728 |   | 776 |   | 691 |   | 624 |   | 497 |   |
| Gross margin                                                     |       | (123                    | )          | 356 |   | 54 |   | 548 |   | 1,823 |   | 1,242 |   | 440 |   | 1,812 |   |
| Operating  expenses:                                             |       |                    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Research and development                                         |       | 2,293                   |       | 1,202 |   | 1,266 |   | 1,217 |   | 1,253 |   | 2,027 |   | 1,588 |   | 2,005 |   |
| Sales and marketing                                              |       | 936                     |       | 255 |   | 555 |   | 509 |   | (217 | ) | 587 |   | 1,003 |   | 1,430 |   |
| General and administrative                                       |       | 8,689                   |       | 2,887 |   | 2,714 |   | 3,710 |   | 488 |   | 2,960 |   | 3,873 |   | 3,602 |   |
| Restructuring costs                                              |       | —                  |       | — |   | — |   | — |   | (40 | ) | 85 |   | 881 |   | 416 |   |
| Amortization of goodwill and intangible assets              |       | —                  |       | — |   | — |   | — |   | — |   | — |   | — |   | 22 |   |
| Amortization of deferred stock-based  compensation               |       | —                  |       | — |   | — |   | — |   | — |   | — |   | — |   | 10 |   |
| Excess facilities charges and related asset impairment      |       | (269                    | )          | 486 |   | 1,206 |   | 4,416 |   | 3,429 |   | — |   | 593 |   | — |   |
| Total operating expenses                                         |       | 11,649                  |       | 4,830 |   | 5,741 |   | 9,852 |   | 4,913 |   | 5,659 |   | 7,938 |   | 7,485 |   |
| Loss from operations                                             |       | (11,772                 | )          | (4,474 | ) | (5,687 | ) | (9,304 | ) | (3,090 | ) | (4,417 | ) | (7,498 | ) | (5,673 | ) |
| Interest income (expense), net                                   |       | 347                     |       | 1,026 |   | 627 |   | 548 |   | 532 |   | 504 |   | 574 |   | 618 |   |
| Other income (expense), net                                      |       | 360                     |       | 113 |   | (176 | ) | (154 | ) | (140 | ) | 1,216 |   | (246 | ) | (347 | ) |
| Loss from continuing operations before income tax  provision     |       | (11,065                 | )          | (3,335 | ) | (5,236 | ) | (8,910 | ) | (2,698 | ) | (2,697 | ) | (7,170 | ) | (5,402 | ) |
| Income tax provision (benefit)                                   |       | (10,869)                |       | (32 | ) | 39 |   | 4 |   | (129 | ) | — |   | — |   | 104 |   |
| Loss from continuing operations                                  |       | (196                    | )          | (3,303 | ) | (5,275 | ) | (8,914 | ) | (2,569 | ) | (2,697 | ) | (7,170 | ) | (5,5,06 | ) |
| Income (loss) from discontinued operations, net of tax      |       | 75,461                  |       | (4,561 | ) | (2,857 | ) | (3,415 | ) | (2,232 | ) | (4,775 | ) | (1,373 | ) | (7,080 | ) |
| Net income (loss)                                                |       | $                       | 75,265     |   | $ | (7,864 | ) | $ | (8,132 | ) | $ | (12,329 | ) | $ | (4,801 | ) | $ | (7,472 | ) | $ | (8,543 | ) | $ | (12,586 | ) |
| Basic net income (loss) per share                                |       | $                       | 0.69       |   | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.12 | ) | $ | (0.05 | ) | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.12 | ) |
| Diluted net income (loss) per share                              |       | $                       | 0.68       |   | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.12 | ) | $ | (0.05 | ) | $ | (0.07 | ) | $ | (0.08 | ) | $ | (0.12 | ) |
| Shares used in computing basic net income (loss)  per share |       | 108,936                 |       | 105,911 |   | 105,742 |   | 105,623 |   | 105,495 |   | 105,204 |   | 104,515 |   | 104,006 |   |
| Shares used in  computing diluted net income (loss) per share    |       | 109,994                 |       | 105,911 |   | 105,742 |   | 105,623 |   | 105,495 |   | 105,204 |   | 104,515 |   | 104,006 |   |

 

**Recent Accounting Pronouncements**

In August 2001, the Financial Accounting StandardsBoard (“FASB”) issued FAS No. 143, “Accounting for Asset RetirementObligations.” FAS 143 establishes financial accounting and reportingobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. FAS 143 requires that the fair value ofa liability for an asset retirement obligation be recognized in 

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the period in which it isincurred if a reasonable estimate of fair value can be made. The associatedasset retirement costs are capitalized as part of the carrying amount of thelong-lived asset. The liability is accreted to its present value each periodwhile the cost is depreciated over its useful life. Liberate adopted FAS 143for the quarter ended November 30, 2003. The adoption of thispronouncement did not materially affect our financial condition, results ofoperations, or cash flows.

In June 2002, the FASB issued SFAS No. 146, “Accountingfor Exit or Disposal Activities.” SFAS No. 146 addresses significantissues regarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring).” The scopeof SFAS No. 146 also includes costs related to terminating a contract thatis not a capital lease and termination benefits that involuntarily terminatedemployees receive under the terms of a one-time benefit arrangement that is notan ongoing benefit arrangement or an individual deferred compensation contract.SFAS No. 146 is effective for exit or disposal activities that areinitiated after December 31, 2002. The Company adopted SFAS No. 146on January 1, 2003. SFAS No. 146 prospectively changes the timing ofwhen restructuring charges are recorded from the commitment date to the datethat liability is incurred. The adoption of SFAS No. 146 did not have amaterial effect on the Company’s financial condition or results of operations.

In November 2002, the FASB issued FASBInterpretation (“FIN”) No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” FIN 45 requires that a liability be recorded in the guarantor’sbalance sheet upon issuance of a guarantee. In addition, FIN 45 requiresdisclosures about the guarantees that an entity has issued, including areconciliation of changes in the entity’s product warranty liabilities. Theinitial recognition and initial measurement provisions of FIN 45 are applicableon a prospective basis to guarantees issued or modified after December 31,2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirementsof FIN 45 are effective for financial statements of annual periods ending afterDecember 15, 2002, but had no impact on the Company. The adoption of FIN No. 45did not have a material effect on the Company’s financial condition or resultsof operations.

In November 2002, the Emerging Issues Task Force(“EITF”) reached a consensus on EITF No. 00-21, “RevenueArrangements with Multiple Deliverables.” EITF 00-21 provides guidance on howto account for arrangements that involve the delivery or performance ofmultiple products, services, and/or rights to use assets. Liberate adopted EITFNo. 00-21 for the quarter ended November 30, 2003, and adoption didnot have a significant impact on our financial statements.

In January 2003, the FASB issued FIN No. 46,“Consolidation of Variable Interest Entities,” and in December 2003 theFASB issued FIN 46-R, a revised interpretation of FIN 46. FIN 46 requirescertain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN 46 is effectiveimmediately for all new variable interest entities created or acquired after January 31,2003. For variable interest entities created or acquired prior to February 1,2003, the provisions of FIN 46-R must be applied in the year ending December 31,2004. The adoption of this standard, in February 2004, did not have animpact on the Company’s financial condition or results of operations, since theCompany has not invested in any variable interest entities.

In May 2003, the FASB issued FAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.” FAS 150 establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability. FAS 150 is effective for 

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financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective atthe beginning of the first interim period beginning after June 15, 2003for public companies. The adoption of FAS 150 did not have a material effect onour financial condition, results of operations, or cash flows.

In December 2003, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “RevenueRecognition.” SAB 104 supersedes Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements (“SAB 101”). SAB 104’s primary purpose isto rescind accounting guidance contained in SAB 101 related to multiple elementrevenue arrangements, superseded as a result of the issuance of EITF 00-21.Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in FinancialStatements Frequently Asked Questions and Answers (“the FAQ”) issued with SAB101 that had been codified in SEC Topic 13, Revenue Recognition. Selectedportions of the FAQ have been incorporated into SAB 104. While the wording ofSAB 104 has changed to reflect the issuance of EITF 00-21, the revenuerecognition principles of SAB 101 remain largely unchanged by the issuance ofSAB 104. As a result, the adoption of this pronouncement did not have anyimpact on the Company’s consolidated financial statements.

In April 2004, the EITF issued Statement No. 03-06“Participating Securities and the Two-Class Method Under FASBStatement No. 128, Earnings Per Share” (“EITF 03-06”). EITF 03-06addresses a number of questions regarding the computation of earnings per shareby companies that have issued securities other than common stock that contractuallyentitle the holder to participate in dividends and our earnings when, and if,it declares dividends on its common stock. The issue also provides furtherguidance in applying the two-class method of calculating earnings per share,clarifying what constitutes a participating security and how to apply thetwo-class method of computing earnings per share once it is determined that asecurity is participating, including how to allocate undistributed earnings tosuch a security. EITF 03-06 is effective for fiscal periods beginning after March 31,2004. The adoption of this standard did not have any impact on the resultingearnings per share of the periods presented.

In December 2004, the FASB issued SFAS No. 153,“Exchanges of Nonmonetary Assets, an amendmentof APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“SFAS 153”).SFAS 153 eliminates the exception from fair value measurement for nonmonetaryexchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29,“Accounting for NonmonetaryTransactions”, and replaces it with an exception for exchanges that donot have commercial substance. SFAS 153 specifies that a nonmonetary exchangehas commercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange. SFAS 153 is effective forperiods beginning after June 15, 2005. We do not expect that adoption ofSFAS 153 will have a material effect on our financial position, results ofoperations, or liquidity.

In December 2004, the FASB issued SFAS 123(R), “Share-BasedPayment.” SFAS 123(R) addresses the accounting for share-based paymenttransactions with employees and requires companies to expense the value ofemployee stock options and similar awards. SFAS 123(R) requires stockbased compensation of the share-based payment to be measured at fair value onthe date that the company grants the awards to employees beginning with thefirst annual period after June 15, 2005. The expense should be recognizedover the vesting period for each option and adjusted for actual forfeituresthat occur before vesting. We are required to adopt SFAS 123R in Q1 of fiscal2007.

In March 2005, the SEC issued Staff AccountingBulletin No. 107 (“SAB 107”). SAB 107 covers key topics related to the implementationof SFAS 123(R) which include the valuation models, expected volatility,expected option term, income tax effects of SFAS 123(R), classification ofstock-based compensation cost, capitalization of compensation costs anddisclosure requirements. Although we do not expect to grant any future options,the Company is currently assessing the impact SFAS 123(R) will have on ourfinancial statements.

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In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3.” ThisStatement changes the requirements for the accounting for and reporting of achange in accounting principle. It applies to all voluntary changes inaccounting principle and to those changes required by an accountingpronouncement when such a pronouncement does not include specific transitionprovisions. SFAS No. 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. We do not expect the adoption of SFAS No. 154 in fiscal2007 to have a material impact on our financial statements.

**CumulativeEffect of Change in Accounting Principle**

On June 1, 2002, we adopted SFAS No. 141, “BusinessCombinations” and SFAS No. 142. SFAS 141 requires us to account forall business combinations initiated after June 30, 2001 using the purchasemethod of accounting. Under SFAS 142, we no longer amortize the remainingbalances of goodwill. Rather, we tested goodwill for impairment immediatelyupon the date of adoption and will continue to test goodwill for impairment atleast once a year. Under SFAS 141 and SFAS 142, the value of anassembled workforce is no longer considered an identifiable intangible assetwith a definite useful life, and accordingly, we reclassified the net balanceof $526,000 to goodwill as of June 1, 2002.

Based on the criteria of SFAS 142, we determinedthat we had one reporting segment at the time we adopted SFAS 142. Ourtesting and analysis process included obtaining an independent appraisal of thefair value of Liberate based on two valuation approaches. The first valuationapproach determined our market capitalization based on our fair value on thedate of adoption using our average stock price over a range of days in May andJune 2002. This average stock price was increased by a control premiumbased on premiums paid for control of comparable companies. The secondvaluation used a discounted cash flows approach.

This analysis resulted in an allocation of fair valuesto identifiable tangible and intangible assets and an implied valuation ofgoodwill of zero as of June 1, 2002. Comparing this goodwill fair value tothe carrying value resulted in a goodwill impairment of $209.3 million,with no income tax effect, at June 1, 2002. We recorded the impairment asthe cumulative effect of a change in accounting principle on our condensedconsolidated statement of operations for Q1 FY03. We will record any futureimpairment as operating expense.

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Asrequired by SFAS 142, a reconciliation of previously reported net loss andnet loss per share to the amounts adjusted for the cumulative effect of changein accounting principle is as follows (in thousands, except per share data):
| ** **                                                                                                | **Year ended  May 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|-----------------------------------|------------|
| ** **                                                                                                | ** **                        | **2003**   | ** ** |
| Net loss, as  reported                                                                                    |                              | $          | (399,257 | ) |
| Add back:                                                                                                 |                              |       |   |
| Cumulative effect of change in accounting principle                                                       |                              | 209,289    |   |
| Loss before  cumulative effect of change in accounting principle, as adjusted                             |                              | $          | (189,968 | ) |
| Basic net income  (loss) per share, as reported                                                           |                              | $          | (3.82 | ) |
| Diluted net  income (loss) per share, as reported                                                         |                              | $          | (3.82 | ) |
| Add back:                                                                                                 |                              |       |   |
| Cumulative effect of change in accounting principle                                                       |                              | 2.00       |   |
| Basic income  (loss) per share before cumulative effect of change in accounting principle,  as adjusted   |                              | $          | (1.82 | ) |
| Diluted income  (loss) per share before cumulative effect of change in accounting principle,  as adjusted |                              | $          | (1.82 | ) |
| Shares used in  computing basic per share amounts                                                         |                              | 104,500    |   |
| Shares used in computing  diluted per share amounts                                                       |                              | 104,500    |   |
|                                                                                                           |                                   |            |  |  |  |

 

**ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

**Interest Rate Risk**

As of May 31, 2005,our investment portfolio consisted primarily of U.S. government obligations,included under cash equivalents which may increase or decrease in value ifinterest rates change prior to maturity. We do not maintain any derivativefinancial instruments in our investment portfolio. We are adverse to principalloss and seek to preserve our invested funds by limiting the default risk,market risk, and reinvestment risk. An immediate 10% change in interest rateswould be immaterial to our financial condition and results of operations.

**Foreign Currency Risk**

Prior to the Asset Sales,we transacted business in various foreign currencies and, accordingly, weresubject to adverse movements in foreign currency exchange rates or weakeconomic conditions in foreign markets. The effect of changes in foreigncurrency exchange rates on revenues had not been material as we generallyconducted our revenue transactions in U.S. dollars. Our foreign subsidiarieswere fully integrated entities, whose functional currency was the U.S. dollar.

**Equity Price Risk**

The estimated fair value of our equity investments was$0 as of May 31, 2005, 2004 and 2003. Therefore we are not subject tomaterial risk of equity price fluctuation. We currently do not expect to makeany new equity investments.

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**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**

**Indexto Consolidated Financial Statements**
| Page                                                     | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|
| Report  of Independent Registered Public Accounting Firm |       | 42         |
| Consolidated  Balance Sheets                             |       | 44         |
| Consolidated  Statements of Operations                   |       | 45         |
| Consolidated  Statements of Stockholders’ Equity    |       | 46         |
| Consolidated  Statements of Cash Flows                   |       | 47         |
| Notes  to Consolidated Financial Statements              |       | 48         |
| Valuation and Qualifying  Accounts                       |       | 99         |

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directorsand Stockholders of   Liberate Technologies:

We have completed anintegrated audit of Liberate Technologies’ 2005 consolidated financialstatements and of its internal control over financial reporting as of May 31,2005 and audits of its 2004 and 2003 consolidated financial statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Our opinions, based on our audits, are presented below.

***Consolidated financial statements***

In our opinion, the consolidated financial statementslisted in the index appearing under Item 8 present fairly, in all materialrespects, the financial position of Liberate Technologies and its subsidiariesat May 31, 2005 and 2004, and the results of their operations and theircash flows for each of the three years in the period ended May 31, 2005 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit of financial statements includes examining, ona test basis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

***Internal control over financial reporting***

Also, in our opinion, management’s assessment,included in Management’s Report on Internal Control Over Financial Reportingappearing under Item 9A, that the Company maintained effective internal controlover financial reporting as of May 31, 2005 based on criteria establishedin *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO), is fairly stated, in all material respects, basedon those criteria. Furthermore, in our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of May 31,2005, based on the criteria established in *Internal Control -Integrated Framework* issued by the COSO. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting. Our responsibility is to express opinions on management’s assessmentand on the effectiveness of the Company’s internal control over financialreporting based on our audit. We conducted our audit of internal control over financialreporting in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. An audit of internal control over financial reporting includesobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we consider necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinions.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance 

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of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.
| /s/ PRICEWATERHOUSECOOPERS  LLP |
|---------------------------------|
| San Francisco,  California      |
| August 12, 2005            |

 

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**LIBERATE TECHNOLOGIES**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands, except share and per share data)**
| ** **                                                                                                                                                                      | ** ** | **May 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2005**         | ** ** | **2004** | ** ** |
| **Assets**                                                                                                                                                                      |       |             |       |   |   |
| Current assets:                                                                                                                                                                 |       |             |       |   |   |
| Cash and cash equivalents                                                                                                                                                       |       | $                | 47,124     |   | $ | 215,877 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $— and $30 as of May 31, 2005 and 2004,  respectively                                       |       | 2,836            |       | 3,143 |   |
| Prepaid expenses and other current assets                                                                                                                                       |       | 368              |       | 1,371 |   |
| Other receivables                                                                                                                                                               |       | 4,630            |       | 175 |   |
| Assets of discontinued operations                                                                                                                                               |       | —           |       | 5,215 |   |
| Total current assets                                                                                                                                                            |       | 54,958           |       | 225,781 |   |
| Property and  equipment, net                                                                                                                                                    |       | 422              |       | 657 |   |
| Restricted cash                                                                                                                                                                 |       | 4,359            |       | 10,869 |   |
| Other assets                                                                                                                                                                    |       | —           |       | 101 |   |
| Total assets                                                                                                                                                                    |       | $                | 59,739     |   | $ | 237,408 |   |
| **Liabilities and Stockholders’  Equity**                                                                                                                                  |       |             |       |   |   |
| Current liabilities:                                                                                                                                                            |       |             |       |   |   |
| Short-term borrowing from bank                                                                                                                                                  |       | $                | —     |   | $ | 608 |   |
| Accounts payable                                                                                                                                                                |       | 1,121            |       | 3,102 |   |
| Accrued liabilities                                                                                                                                                             |       | 14,261           |       | 16,159 |   |
| Accrued payroll and related expenses                                                                                                                                            |       | 435              |       | 321 |   |
| Deferred revenues                                                                                                                                                               |       | 329              |       | 711 |   |
| Liabilities of discontinued operations                                                                                                                                          |       | —           |       | 6,015 |   |
| Total current liabilities                                                                                                                                                       |       | 16,146           |       | 26,916 |   |
| Long-term  excess facilities charges                                                                                                                                            |       | 18,577           |       | 19,140 |   |
| Long-term  deferred revenues                                                                                                                                                    |       | 9,066            |       | — |   |
| Other long-term  liabilities                                                                                                                                                    |       | —           |       | 2,416 |   |
| Total liabilities                                                                                                                                                               |       | 43,789           |       | 48,472 |   |
| Commitments and  contingencies (Note 11)                                                                                                                                   |       |             |       |   |   |
| Stockholders’ equity:                                                                                                                                                      |       |             |       |   |   |
| Common stock, $0.01 par value;  authorized—200,000,000 shares; outstanding—110,869,535 shares as of  May 31, 2005 and 105,512,268 shares as of May 31, 2004 |       | 1,109            |       | 1,055 |   |
| Contributed and paid-in capital                                                                                                                                                 |       | 1,275,302        |       | 1,503,113 |   |
| Deferred stock-based compensation                                                                                                                                               |       | (556             | )          | (8,453 | ) |
| Accumulated other comprehensive loss                                                                                                                                            |       | (2,178           | )          | (2,112 | ) |
| Accumulated deficit                                                                                                                                                             |       | (1,257,727       | )          | (1,304,667 | ) |
| Total stockholders’ equity                                                                                                                                                 |       | 15,950           |       | 188,936 |   |
| Total liabilities  and stockholders’ equity                                                                                                                                |       | $                | 59,739     |   | $ | 237,408 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

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**LIBERATETECHNOLOGIES**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share data)**
| ** **                                                                       | ** ** | **Years ended May 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                                                        |       |                                   |       |   |   |   |   |
| License and royalty                                                              |       | $                                      | 978        |   | $ | 2,172 |   | $ | 4,225 |   |
| Service                                                                          |       | 1,366                                  |       | 5,733 |   | 10,773 |   |
| Total revenues                                                                   |       | 2,344                                  |       | 7,905 |   | 14,998 |   |
| Cost of revenues:                                                                |       |                                   |       |   |   |   |   |
| License and royalty                                                              |       | 3                                      |       | 265 |   | 715 |   |
| Service                                                                          |       | 1,506                                  |       | 2,323 |   | 4,804 |   |
| Total cost of revenues                                                           |       | 1,509                                  |       | 2,588 |   | 5,519 |   |
| Gross margin                                                                     |       | 835                                    |       | 5,317 |   | 9,479 |   |
| Operating  expenses:                                                             |       |                                   |       |   |   |   |   |
| Research and development                                                         |       | 5,978                                  |       | 6,873 |   | 21,073 |   |
| Sales and marketing                                                              |       | 2,255                                  |       | 2,803 |   | 16,351 |   |
| General and administrative                                                       |       | 18,000                                 |       | 10,923 |   | 43,827 |   |
| Restructuring costs                                                              |       | —                                 |       | 1,342 |   | 7,077 |   |
| Amortization of goodwill and intangible assets                                   |       | —                                 |       | 22 |   | 1,670 |   |
| Amortization of deferred stock-based  compensation                               |       | —                                 |       | 10 |   | 1,299 |   |
| Excess facilities charges and related asset  impairment                          |       | 5,839                                  |       | 4,022 |   | 25,094 |   |
| Total operating expenses                                                         |       | 32,072                                 |       | 25,995 |   | 116,391 |   |
| Loss from operations                                                             |       | (31,237                                | )          | (20,678 | ) | (106,912 | ) |
| Interest income  (expense), net                                                  |       | 2,548                                  |       | 2,228 |   | 6,981 |   |
| Other income  (expense), net                                                     |       | 143                                    |       | 483 |   | (14,037 | ) |
| Loss from continuing operations before income tax  provision                     |       | (28,546                                | )          | (17,967 | ) | (113,968 | ) |
| Income tax  (benefit) provision                                                  |       | (10,858                                | )          | (25 | ) | 1,375 |   |
| Loss from continuing operations                                                  |       | (17,688                                | )          | (17,942 | ) | (115,343 | ) |
| Income (loss) from  discontinued operations, net of tax                          |       | 64,628                                 |       | (15,460 | ) | (74,625 | ) |
| Income (loss)  before cumulative effect of a change in accounting principle |       | 46,940                                 |       | (33,402 | ) | (189,968 | ) |
| Cumulative effect  of a change in accounting principle, net of tax               |       | —                                 |       | — |   | (209,289 | ) |
| Net income (loss)                                                                |       | $                                      | 46,940     |   | $ | (33,402 | ) | $ | (399,257 | ) |
| Basic and diluted  net loss per share:                                           |       |                                   |       |   |   |   |   |
| Continuing operations                                                            |       | $                                      | (0.17      | ) | $ | (0.17 | ) | $ | (1.10 | ) |
| Discontinued operations, basic                                                   |       | $                                      | 0.61       |   | $ | (0.15 | ) | $ | (0.72 | ) |
| Discontinued operations, diluted                                                 |       | $                                      | 0.59       |   | $ | — |   | $ | — |   |
| Cumulative effect of change in accounting principle                              |       | $                                      | —     |   | $ | — |   | $ | (2.00 | ) |
| Basic net income (loss) per share                                                |       | $                                      | 0.44       |   | $ | (0.32 | ) | $ | (3.82 | ) |
| Diluted net income (loss) per share                                              |       | $                                      | 0.43       |   | $ | (0.32 | ) | $ | (3.82 | ) |
| Shares used in  computing basic net income (loss) per share                      |       | 106,559                                |       | 104,805 |   | 104,500 |   |
| Shares used in computing  diluted net income (loss) per share                    |       | 109,994                                |       | 104,805 |   | 104,500 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

45

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**LIBERATETECHNOLOGIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

**(Inthousands, except share data)**
| ** **                                                                              | ** ** | ** **            | ** ** | ** **      | ** ** | ** **           | ** ** | **Accumulated**  | ** ** | ** **             | ** ** | ** **      | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------|------------|----------------------|------------|------------------|------------|------------------------|------------|-----------------|------------|
| ** **                                                                              | ** ** | **Common stock** | ** ** | **Contributed** | ** ** | **Deferred**         | ** ** | **other**        | ** ** | ** **             | ** ** | **Total**       | ** ** |
| ** **                                                                              | ** ** | **Number of**    | ** ** | ** **      | ** ** | **and paid-in** | ** ** | **stock-based**  | ** ** | **comprehensive**      | ** ** | **Accumulated** | ** ** | **stockholders’** | ** ** |
| ** **                                                                              | ** ** | **shares**            | ** ** | **Amount**      | ** ** | **capital**          | ** ** | **compensation** | ** ** | **income (loss)** | ** ** | **deficit**     | ** ** | **equity** | ** ** |
| **Balance,  May 31, 2002**                                                         |       | 107,583,119           |       |            | 1,076      |                 |       |             | 1,497,596  |                   |       |            | (1,163     | ) |   |   | 518 |   |   |   | (872,008 | ) |   |   | 626,019 |   |   |
| Issuance of stock  related to stock option exercises and ESPP                           |       | 386,740               |       |            | 4          |                 |       |             | 408        |                   |       |            | —     |   |   |   | — |   |   |   | — |   |   |   | 412 |   |   |
| Stock repurchase                                                                        |       | (3,963,780            | )          |            | (40        | )                    |       |             | (9,916     | )                      |       |            | —     |   |   |   | — |   |   |   | — |   |   |   | (9,956 | ) |   |
| Sigma options  assumed                                                                  |       | —                |       |            | —     |                 |       |             | 1,888      |                   |       |            | (184       | ) |   |   | — |   |   |   | — |   |   |   | 1,704 |   |   |
| Modification of  stock options related to employee reduction in force and remeasurement |       | —                |       |            | —     |                 |       |             | 390        |                   |       |            | (390       | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Reduction of  deferred stock-based compensation related to employee terminations        |       | —                |       |            | —     |                 |       |             | (241       | )                      |       |            | 241        |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of  deferred stock-based compensation                                      |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | 1,302      |   |   |   | — |   |   |   | — |   |   |   | 1,302 |   |   |
| Foreign currency  translation adjustment                                                |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | —     |   |   |   | 1,286 |   |   |   | — |   |   |   | 1,286 |   |   |
| Net loss                                                                                |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | —     |   |   |   | — |   |   |   | (399,257 | ) |   |   | (399,257 | ) |   |
| **Balance,  May 31, 2003**                                                         |       | 104,006,079           |       |            | 1,040      |                 |       |             | 1,490,125  |                   |       |            | (194       | ) |   |   | 1,804 |   |   |   | (1,271,265 | ) |   |   | 221,510 |   |   |
| Issuance of stock  to executive                                                         |       | 103,000               |       |            | 1          |                 |       |             | 349        |                   |       |            | —     |   |   |   | — |   |   |   | — |   |   |   | 350 |   |   |
| Grant and release  of stock related to stock units                                 |       | 220,781               |       |            | 2          |                 |       |             | 10,404     |                   |       |            | (10,406    | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Stock award grants  surrendered by employees in consideration of taxes payable          |       | —                |       |            | —     |                 |       |             | (299       | )                      |       |            | —     |   |   |   | — |   |   |   | — |   |   |   | (299 | ) |   |
| Amortization of  deferred stock-based compensation, net of cancellations                |       | —                |       |            | —     |                 |       |             | (25        | )                      |       |            | 2,009      |   |   |   | — |   |   |   | — |   |   |   | 1,984 |   |   |
| Issuance of stock  related to stock option exercises                                    |       | 1,182,408             |       |            | 12         |                 |       |             | 2,559      |                   |       |            | —     |   |   |   | — |   |   |   | — |   |   |   | 2,571 |   |   |
| Foreign currency  translation adjustment                                                |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | —     |   |   |   | (3,895 | ) |   |   | — |   |   |   | (3,895 | ) |   |
| Unrealized loss on  marketable securities                                               |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | —     |   |   |   | (21 | ) |   |   | — |   |   |   | (21 | ) |   |
| Sigma options  transferred                                                              |       |                  |       |            |       |                 |       |             |       |                   |       |            | 138        |   |   |   |   |   |   |   |   |   |   |   | 138 |   |   |
| Net loss                                                                                |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | —     |   |   |   | — |   |   |   | (33,402 | ) |   |   | (33,402 | ) |   |
| **Balance,  May 31, 2004**                                                         |       | 105,512,268           |       |            | $          | 1,055                |       |             |       | $                      | 1,503,113  |            |       |   | $ | (8,453 | ) |   |   | $ | (2,112 | ) |   |   | $ | (1,304,667 | ) |   |   | $ | 188,936 |   |   |
| Grant and release  of stock related to stock units                                 |       | 1,001,599             |       |            | 10         |                 |       |             | 382        |                   |       |            | (392       | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Stock award grants  surrendered by employees in consideration of taxes payable          |       | —                |       |            | —     |                 |       |             | (543       | )                      |       |            | —     |   |   |   | — |   |   |   | — |   |   |   | (543 | ) |   |
| Amortization of  deferred stock-based compensation, net of cancellations                |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | 3,933      |   |   |   | — |   |   |   | — |   |   |   | 3,933 |   |   |
| Forfeitures of  stock units                                                             |       | —                |       |            | —     |                 |       |             | (4,979     | )                      |       |            | 4,356      |   |   |   | — |   |   |   | — |   |   |   | (623 | ) |   |
| Issuance of stock  related to stock option exercises                                    |       | 4,355,668             |       |            | 44         |                 |       |             | 142        |                   |       |            | —     |   |   |   | — |   |   |   | — |   |   |   | 186 |   |   |
| Unrealized loss on  marketable securities                                               |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | —     |   |   |   | (66 | ) |   |   | — |   |   |   | (66 | ) |   |
| Dividends paid                                                                          |       | —                |       |            | —     |                 |       |             | (222,813   | )                      |       |            | —     |   |   |   | — |   |   |   | — |   |   |   | (222,813 | ) |   |
| Net income                                                                              |       | —                |       |            | —     |                 |       |             | —     |                   |       |            | —     |   |   |   | — |   |   |   | 46,940 |   |   |   | 46,940 |   |   |
| **Balance,  May 31, 2005**                                                         |       | 110,869,535           |       |            | $          | 1,109                |       |             |       | $                      | 1,275,302  |            |       |   | $ | (556 | ) |   |   | $ | (2,178 | ) |   |   | $ | (1,257,727 | ) |   |   | $ | 15,950 |   |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

46

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**LIBERATETECHNOLOGIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**
| ** **                                                                   | ** ** | **Years ended May 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Cash flows from operating activities:**                                    |       |                                   |       |   |   |   |   | *** *** |   |
| Net income (loss)                                                            |       | $                                      | 46,940     |   | $ | (33,402 | ) |   | $ | (399,257 | ) |   |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                                   |       |   |   |   |   |   |   |
| Cumulative effect  of a change in accounting principle                       |       | —                                 |       | — |   |   | 209,289 |   |   |
| Non-cash income  (loss) on disposition of North America Business             |       | (82,294                                | )          | 8,929 |   |   | (3,581 | ) |   |
| Non-cash income  (loss) on disposition of Sigma and Bill-Care                |       | —                                 |       | (8,186 | ) |   | 37,928 |   |   |
| Amortization of  intangible assets                                           |       | —                                 |       | 22 |   |   | 1,670 |   |   |
| Write-offs of  equity investments                                            |       | —                                 |       | — |   |   | 12,128 |   |   |
| Depreciation and  amortization                                               |       | 308                                    |       | 1,555 |   |   | 5,727 |   |   |
| Non-cash stock  based compensation expense                                   |       | 2,450                                  |       | 1,994 |   |   | 1,302 |   |   |
| Stock units  surrendered in consideration of taxes payable                   |       | (244                                   | )          | (150 | ) |   | — |   |   |
| Long-lived asset  impairment charge                                          |       | —                                 |       | 2,447 |   |   | 25,094 |   |   |
| Issuance of stock  to executive                                              |       | —                                 |       | 350 |   |   | — |   |   |
| Write-off of  acquired in-process research and development                   |       | —                                 |       | — |   |   | 300 |   |   |
| Loss on disposal  of property and equipment                                  |       | —                                 |       | 48 |   |   | 547 |   |   |
| Provision  (reversal) for doubtful accounts, net of amounts written off      |       | (30                                    | )          | (539 | ) |   | 19 |   |   |
| Provision for  shareholder notes                                             |       | —                                 |       | — |   |   | 277 |   |   |
| Amortization of  investment discount                                         |       | —                                 |       | (616 | ) |   | — |   |   |
| Accrued interest  on shareholder notes                                       |       | —                                 |       | — |   |   | (42 | ) |   |
| Changes in operating  assets and liabilities, net of acquisitions:           |       |                                   |       |   |   |   |   |   |   |
| Accounts  receivable                                                         |       | 337                                    |       | 706 |   |   | 9,646 |   |   |
| Prepaid expenses  and other current assets                                   |       | (3,452                                 | )          | 93 |   |   | 3,769 |   |   |
| Other assets                                                                 |       | 101                                    |       | (33 | ) |   | 512 |   |   |
| Accounts payable                                                             |       | (1,981                                 | )          | 1,218 |   |   | (537 | ) |   |
| Accrued  liabilities                                                         |       | (1,898                                 | )          | (23,186 | ) |   | 22,146 |   |   |
| Accrued payroll  and related expenses                                        |       | 114                                    |       | (1,063 | ) |   | (3,036 | ) |   |
| Deferred revenues                                                            |       | 8,684                                  |       | (2,026 | ) |   | (2,916 | ) |   |
| Other long-term  liabilities                                                 |       | (2,979                                 | )          | (3,016 | ) |   | (2,148 | ) |   |
| Net cash used in  operating activities                                       |       | (33,944                                | )          | (54,855 | ) |   | (81,163 | ) |   |
| **Cash flows from investing activities:**                                    |       |                                   |       |   |   |   |   |   |   |
| Purchase of  investments                                                     |       | —                                 |       | (266,384 | ) |   | — |   |   |
| Purchases of  equity investments                                             |       | —                                 |       | — |   |   | (1,777 | ) |   |
| Proceeds from  notes receivable, net                                         |       | —                                 |       | — |   |   | 1,383 |   |   |
| (Increase)  decrease in restricted cash                                      |       | 6,510                                  |       | (1,620 | ) |   | (50 | ) |   |
| Proceeds from the  sale of property and equipment                            |       | —                                 |       | 103 |   |   | 64 |   |   |
| Purchases of  property and equipment                                         |       | (73                                    | )          | (173 | ) |   | (587 | ) |   |
| Proceeds from sale  of discontinued operations                               |       | 82,055                                 |       | 8,075 |   |   | — |   |   |
| Proceeds from  maturation of investments                                     |       | —                                 |       | 267,000 |   |   | 279,286 |   |   |
| Cash used to  acquire Sigma Systems Group (Canada), net                      |       | —                                 |       | — |   |   | (38,085 | ) |   |
| Net cash provided  by investing activities                                   |       | 88,492                                 |       | 7,001 |   |   | 240,234 |   |   |
| **Cash flows from financing activities:**                                    |       |                                   |       |   |   |   |   |   |   |
| Principal payments  on capital lease obligations                             |       | —                                 |       | — |   |   | (296 | ) |   |
| Repurchase of common  stock                                                  |       | —                                 |       | — |   |   | (9,956 | ) |   |
| Dividends paid                                                               |       | (222,813                               | )          | — |   |   | — |   |   |
| Short-term  borrowing from bank                                              |       | (608                                   | )          | 608 |   |   | — |   |   |
| Proceeds from  issuance of common stock                                      |       | 186                                    |       | 2,571 |   |   | 412 |   |   |
| Net cash used in  financing activities                                       |       | (223,235                               | )          | 3,179 |   |   | (9,840 | ) |   |
| Effect of exchange  rate changes on cash                                     |       | (66                                    | )          | (1,137 | ) |   | 1,062 |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (168,753                               | )          | (45,812 | ) |   | 150,293 |   |   |
| Cash and cash  equivalents, beginning of period                              |       | 215,877                                |       | 261,689 |   |   | 111,396 |   |   |
| Cash and cash  equivalents, end of period                                    |       | $                                      | 47,124     |   | $ | 215,877 |   |   | $ | 261,689 |   |   |
| **Supplemental cash activities:**                                            |       |                                   |       |   |   |   |   |   |   |
| Cash paid for  income taxes                                                  |       | $                                      | 217        |   | $ | 272 |   |   | $ | 696 |   |   |
| Cash paid for  interest                                                      |       | $                                      | 443        |   | $ | 1 |   |   | $ | 108 |   |   |
| **Supplemental non-cash activities:**                                        |       |                                   |       |   |   |   |   |   |   |
| Issuance of  restricted stock units                                          |       | $                                      | 392        |   | $ | 10,406 |   |   | $ | — |   |   |

\

The accompanying notes are an integral part of these consolidated financial statements.

47

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Note 1.**   Descriptionof Business

Liberate Technologies (“Liberate,” “we,” “us,” or “our”),together with its wholly owned subsidiaries, is a provider of software andservices for digital cable television systems. Based on industry standards, oursoftware enabled cable operators to run multiple applications andservices—including interactive programming guides, high definition television,video on demand, personal video recorders, and games—on multiple platforms.

Liberate began operations in late 1995 as a divisionof Oracle, developing client and server software for the consumer, enterprise,and educational markets. In April 1996, the company separatelyincorporated in Delaware as Network Computer, Inc., and on May 11,1999, it changed its name to Liberate Technologies.

As of May 31, 2005,our headquarters was located in San Mateo, California. We also had sales andcustomer support offices in the U.K. In August 2005, we moved ourheadquarters to Palo Alto, California following the assumption of our San Mateolease by SeaChange.

**Sale of the NorthAmerica business**

In April 2005, wecompleted the sale of substantially all of the assets of our North Americabusiness to Double C Technologies, LLC, a joint venture majority owned andcontrolled by Comcast Corporation with a minority investment by CoxCommunications, Inc. for approximately $82.0 million. The price includedsubstantially all of the assets, including patents and other intellectualproperty, and the assumption of certain limited liabilities related to theNorth America business. We recognized a gain on the sale of the North Americabusiness of $88.9 million in the fourth quarter of fiscal 2005. See Note 4.

**Filing of GoingPrivate Proxy Statement**

On June 23, 2005, Liberate filed with theSecurities and Exchange Commission a preliminary Schedule 13E-3Transaction Statement with respect to a going private transaction and apreliminary Schedule 14A Proxy Statement soliciting stockholders to vote on a 1-for-250,000reverse stock split immediately followed by a 250,000-for-1 forwardstock split of Liberate’s common stock (the “Reverse/Forward Stock Split”). Ifapproved, the Reverse/Forward Stock Split should enable Liberate to completethe going private transaction provided there will be fewer than 300 registeredholders of common stock. This will permit Liberate to discontinue theobligations of filing annual and periodic reports and make other filings withthe SEC.

Once the Schedule 13E-3Transaction Statement and Schedule 14A Proxy Statement are approved in adefinitive form by the SEC, Liberate will mail copies to all of itsstockholders, describing all of the material terms of the Reverse/Forward StockSplit. Liberate currently intends to effect the Reverse/Forward Stock Split assoon as possible thereafter.

**Note 2.**   SignificantAccounting Policies

**Principles ofConsolidation**

Our consolidated financialstatements include the accounts of Liberate and our subsidiaries. Allintercompany accounts and transactions have been eliminated in consolidation.

48

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant AccountingPolicies (Continued)

**Use of Estimates**

The preparation ofconsolidated financial statements in conformity with generally accepted accountingprinciples in the United States requires management to make estimates andassumptions. These estimates affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from these estimates.

**Foreign CurrencyTranslation**

The functional currency of Liberate’s subsidiaries isthe U.S. dollar. Accordingly, the monetary assets and liabilities of theseoperations are re-measured into U.S. dollars at the exchange rate in effect atthe balance sheet date and non-monetary assets and liabilities are re-measuredat historical exchange rates. Revenues, expenses, gains or losses arere-measured at the average exchange rate for the period, other thandepreciation and amortization, which are re-measured at the same respectivehistorical rates as their related assets. The resulting re-measurement gainsand losses of these operations as well as gains and losses from foreigncurrency transactions are included in the condensed consolidated statements ofoperations.

Translation gains orlosses relating to prior periods have been recorded in “Accumulated OtherComprehensive Income (Loss),” a component of Stockholders’ Equity. As of May 31,2005 and May 31, 2004, the cumulative translation losses in accumulatedother comprehensive loss was $2.2 million and $2.1 million, respectively.

**Fair Value ofFinancial Instruments**

Due to their shortmaturities, the carrying value of our financial instruments, including cash andcash equivalents, accounts receivable, restricted cash, accounts payable andshort-term borrowing from bank, approximates their fair market value.

**Cash and CashEquivalents and Investments**

We invest our excess cashprimarily in debt instruments of the U.S. government and its agencies. Allhighly liquid investments with an original maturity of three months or lesswhen purchased are considered to be cash equivalents. All marketable securitiesare classified as available-for-sale securities and are reported at fair value.Unrealized gains and losses on marketable securities are reported net ofrelated taxes in accumulated other comprehensive loss, a separate component ofstockholders’ equity. Realized gains and losses on sales of marketablesecurities are reported in other income (expense), net, and computed using thespecific identification method.

**MarketableSecurities**

Until May 2003, weclassified our marketable securities, which were comprised of commercial paper,government and government backed notes, and corporate notes as held-to-maturitysecurities. These represent securities that we have both a positive intent andability to hold until maturity. As a result of a new investment policy, at theend of May 2003 we liquidated all of the marketable securities in ourvarious brokerage accounts, converting all funds to short-term governmentinstruments. All marketable securities 

49

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant AccountingPolicies (Continued)

wereclassified as available-for-sale securities. Available-for-sale securities arecarried at fair value in accordance with SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities.” Short-term marketablesecurities are those with maturities greater than 90 days but less than oneyear. Long-term marketable securities have original maturities greater than oneyear. Unrealized gains and losses on marketable securities are reported net ofrelated taxes in accumulated other comprehensive loss as a separate componentof stockholders’ equity. Realized gains and losses on sales of all suchinvestments are reported in earnings and computed using the specificidentification method.

**Restricted Cash**

Our restricted cashbalance was $4.4 million as of May 31, 2005 and $10.9 million as of May 31,2004. Restricted cash consists primarily of certificates of deposit establishedwith our banking institutions in connection with lease related letters of credit.As part of the facilities lease for our former headquarters in San Carlos,California and our current headquarters in San Mateo, California, we wererequired to establish irrevocable letters of credit in the amounts of $8.8million and $975,000, respectively, as security deposits. In order to secureour obligations to our bank under these letters of credit, we establishedcertificates of deposit in the same amounts. At the request of our bank, wehave provided additional security of $500,000 to secure our obligations underthe $8.8 million letter of credit. In April 2005, our restricted cashdecreased by $5.9 million due to our former landlord drawing against the letterof credit for unpaid rent, which the restricted cash was securing. In June 2005,we re-establised a new letter of credit and certificate of deposit securing theletter of credit to stay in compliance with the lease terms for our formerheadquarters in San Carlos. As part of our relationship with our bank in theU.K., we were required to establish an irrevocable letter of credit as asecurity deposit for our international wiring transactions. In order to secureour obligations under this letter of credit, we established a certificate ofdeposit valued at approximately $182,000 as of May 31, 2005 and $522,000as of May 31, 2004. We also hold approximately $86,000 of restricted cashin connection with potential obligations related to the closure of an overseasbranch office.

**Concentration ofCredit Risk**

Financial instruments that potentially subject us toconcentration of credit risk primarily consist of cash and cash equivalents andaccounts receivable. Substantially all of our cash and cash equivalents areinvested in high quality money market instruments and securities of the U.S.government. While our customers are geographically dispersed, a substantialamount of our revenues has been generated from a few customers, whosereceivables are typically unsecured. We mitigate our credit risk associatedwith accounts receivable by performing ongoing credit evaluations of ourcustomers’ financial conditions, and we maintain an allowance for potentialcredit losses. Historically, we have not experienced significant losses relatedto accounts receivable.

50

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant AccountingPolicies (Continued)

The table below sets forthinformation relating to each customer that accounted for 10% or more of ourtotal revenues:
| ** ** | ** ** | **Years ended May 31,** | ** ** |
|------------|------------|----------------------------------------|------------|
| ** ** | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Customer A |       |                                   | 46         | % |   |   | 17 | % |   |   | * |   |   |
| Customer B |       |                                   | 24         | % |   |   | 30 | % |   |   | 29 | % |   |
| Customer C |       |                                   | 20         | % |   |   | * |   |   |   | * |   |   |
| Customer D |       |                                   | *          |   |   |   | 48 | % |   |   | 37 | % |   |
| Customer E |       |                                   | 10         | % |   |   | * |   |   |   | * |   |   |
| Customer F |       |                                   | *          |   |   |   | * |   |   |   | 11 | % |   |

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*                    Less than 10%

As of May 31,2005, two customers accounted for 10% or more of our gross accounts receivablebalance, and as of May 31, 2004, four customers accounted for 10% or moreof our gross accounts receivable balance. Their respective receivable balancesas a percentage of our gross accounts receivable balance were as follows:
| ** ** | ** ** | **May 31,** | ** ** |
|------------|------------|------------------|------------|
| ** ** | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Customer A |       |             | *          |   |   |   | 11 | % |   |
| Customer B |       |             | 35         | % |   |   | 15 | % |   |
| Customer D |       |             | 53         | % |   |   | 49 | % |   |
| Customer G |       |             | *          |   |   |   | 18 | % |   |

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*                    Lessthan 10%

**Equity Investments**

Beginning in 2001, we invested in companies in thefield of interactive television and related markets. Through fiscal 2003, wehad invested $18.8 million in our portfolio of private companies, and theseinvestments had been accounted for under the cost method. In determiningwhether to recognize an impairment charge, we consider various factors,including the entity’s cash available for operations, performance to budget,general business condition, ability to obtain additional working capital andoverall business plan. Based on these evaluations, we recorded impairmentcharges for an other-than-temporary decline in value of $12.1 million in fiscal2003. Impairment charges were reported in other income (expense), net.

Deteriorating financialconditions of the companies in which we have invested coupled with thedifficult equity financing market led to write downs in our equity investments.As of May 31, 2004 and 2005, the carrying values of our equity investmentswere zero.

**Property andEquipment**

We record property andequipment at cost. We compute depreciation using the straight-line method overthe estimated useful lives of the assets of two to five years. We amortizeleasehold improvements over 

51

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant Accounting Policies (Continued)

theshorter of the remaining lease term or the estimated useful lives of theimprovements using the straight-line method.

**Goodwill andIntangible Assets**

On June 1, 2002, weadopted SFAS 142 “Goodwill and Other Intangible Assets,” which provides that wedo not amortize goodwill or intangibles with indefinite lives resulting fromacquisitions. SFAS No. 142 requires that we test these assets forimpairment at the reporting unit level on an annual basis and between annualtests in certain circumstances. Separable intangible assets that are not deemedto have an indefinite life are amortized over their estimated useful lives,which are normally three years. Upon adoption on June 1, 2002, the impliedvaluation of goodwill was zero. Comparing this goodwill fair value to thecarrying value resulted in a goodwill impairment of $209.3 million, with noincome tax effect at June 1, 2002. We recorded the impairment as thecumulative effect of a change in accounting principle in the fiscal 2003.

**Impairment ofLong-Lived Assets**

Under SFAS 142 and 144, wereview long-lived assets to be held and used, including goodwill andintangibles, for impairment whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable. Wemeasure recoverability of long-lived assets by comparing their carrying valueto an estimate of undiscounted future cash flows that they are expected togenerate, which reflects the fair market value as defined under SFAS 142 and144. Impairment reflects the amount by which the carrying value of thelong-lived assets exceeds their fair market value.

**Stock BasedCompensation**

In December 2002, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 148, “Accounting for Stock BasedCompensation—Transition and Disclosure.” SFAS 148 amends SFAS 123, “Accountingfor Stock Based Compensation,” to provide alternate methods of transition for avoluntary change to the fair value based method of accounting for stock basedemployee compensation. In addition, SFAS 148 amends the disclosure requirementsof SFAS 123 to require more prominent disclosures in both annual and interimfinancial statements about the method used on reported results. The additionaldisclosures requirements of SFAS 148 are effective for fiscal years endingafter December 15, 2002. We have elected to continue to follow theintrinsic value method of accounting prescribed by Accounting Principles BoardOpinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), toaccount for employee stock options. Under APB 25, no compensation expense isrecognized unless the exercise price of our employee stock option is less thanmarket price of the underlying stock at the date of grant. We have not recordedcompensation expenses in the periods presented because stock options weregranted at their fair market value on the date of grant.

In December 2004, the FASB issued SFAS 123(R), “Share-BasedPayment.” SFAS 123(R) addresses the accounting for share-based paymenttransactions with employees and requires companies to expense the value ofemployee stock options and similar awards. SFAS 123(R) requires stockbased compensation of the share-based payment to be measured at fair value onthe date that the company grants the awards to employees with the first annualperiod after June 15, 2005. The expense should be recognized over the vestingperiod for each option and adjusted for actual forfeitures that occur beforevesting. We are required to adopt SFAS 123(R) in Q1 of fiscal 2007.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant AccountingPolicies (Continued)

In March 2005, the SEC issued Staff AccountingBulletin No. 107 (“SAB 107”). SAB 107 covers key topics related to theimplementation of SFAS 123(R ) which include the valuation models, expectedvolatility, expected option term, income tax effects of SFAS 123(R ),classification of stock-based compensation cost, capitalization of compensationcosts and disclosure requirements. Although we do not expect to grant anyfuture options, the Company is currently assessing the impact SFAS 123(R) willhave on our financial statements.

The following information regarding net loss and lossper share prepared in accordance with SFAS 123 has been determined as if we hadaccounted our employee stock options, stock units and shares issued under our1999 Equity Incentive Plan using the fair value method prescribed by SFAS 123.The resulting effect on net loss and loss per share pursuant to SFAS 123 is notlikely to be representative of the effects on net loss and loss per share pursuantto SFAS 123 in future periods, because future periods will include additionalgrants and periods of vesting.

Thefollowing table illustrates the effect on reported net income (loss) and income(loss) per share had we applied the fair value recognition provisions of SFAS123 (in thousands, except per share data):
| ** **                                                                                                                                                           | ** ** | **Years ended May 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                                           | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income  (loss), as reported                                                                                                                                      |       | $                                      | 46,940     |   | $ | (33,402 | ) | $ | (399,257 | ) |
| Adjustments:                                                                                                                                                         |       |                                   |       |   |   |   |   |
| Stock based employee compensation expense included  in reported net loss, net of related tax effects                                                                 |       | —                                 |       | 10 |   | 1,302 |   |
| Stock unit compensation expense included in reported  net income (loss)                                                                                              |       | 2,450                                  |       | 773 |   | — |   |
| Total stock based employee compensation expense  determined under fair value method for all awards granted since July 1,  1995, net of related tax effects |       | (6,524                                 | )          | (4,371 | ) | (7,574 | ) |
| Pro forma net income  (loss)                                                                                                                                         |       | $                                      | 42,866     |   | $ | (36,990 | ) | $ | (405,529 | ) |
| Basic net income  (loss) per share, as reported                                                                                                                      |       | $                                      | 0.44       |   | $ | (0.32 | ) | $ | (3.82 | ) |
| Diluted net  income (loss) per share, as reported                                                                                                                    |       | $                                      | 0.43       |   | $ | (0.32 | ) | $ | (3.82 | ) |
| Basic net income  (loss) per share, pro forma                                                                                                                        |       | $                                      | 0.40       |   | $ | (0.35 | ) | $ | (3.88 | ) |
| Diluted net income  (loss) per share, pro forma                                                                                                                      |       | $                                      | 0.39       |   | $ | (0.35 | ) | $ | (3.88 | ) |

 

53

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant AccountingPolicies (Continued)

The fair value of stock optionsand shares issued under the 1999 Equity Incentive Plan was estimated at thedate of grant utilizing a Black Scholes valuation model with the followingweighted average assumptions:
| ** **                       | ** ** | **Options**                            | ** ** | **ESPP(1)**                            | ** ** |
|----------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **Years ended May 31,** | ** ** | **Years ended May 31,** | ** ** |
| ** **                       | ** ** | **2005**                               | ** ** | **2004**                               | ** ** | **2003** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free interest rate          |       |                                   | —     |                                   |       | 1.62 | % | 2.27 | % |   | — |   |   |   | — |   |   | 2.08 | % |
| Dividend yield                   |       |                                   | —     |                                   |       | 0 | % | 0 | % |   | — |   |   |   | — |   |   | 0 | % |
| Volatility of common stock       |       |                                   | —     |                                   |       | 46 | % | 106 | % |   | — |   |   |   | — |   |   | 94 | % |
| Average expected life (in years) |       |                                   | —     |                                   |       | 2.26 |   | 2.81 |   |   | — |   |   |   | — |   |   | 0.50 |   |
| Weighted average  fair value     |       |                                   | —     |                                   |       | $ | 0.94 |   | $ | 1.38 |   |   | — |   |   |   | — |   |   | $ | 2.47 |   |
|                                  |            |                                        |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          TheESPP has been suspended since January 2003.

**Revenue Recognition**

*Overview*.   The Company’s revenues are derived fromfees for licenses of its software products, royalties, consulting, maintenanceand other services. The Company’s revenue recognition policies are inaccordance with Statement of Position (SOP) No. 97-2, “SoftwareRevenue Recognition”, as amended by; SOP No. 98-9, “Software RevenueRecognition, With Respect to Certain Transactions” and the Securities andExchange Commission’s Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements” and Staff Accounting Bulletin No. 104,“Revenue Recognition”.

*License and Royalty Revenue*.   TheCompany licenses its software through its direct sales force located in NorthAmerica and Europe. License and royalty revenues consist primarily of feesearned from the licensing of its software, as well as royalty fees earned uponthe shipment or activation of products that incorporate its software. Ingeneral, license revenues are recognized when a non-cancelable licenseagreement has been signed and the customer acknowledges an unconditionalobligation to pay, the software product has been delivered, there are nouncertainties surrounding product acceptance, the fees are fixed ordeterminable and collection is considered probable. Delivery is considered tohave occurred when title and risk of loss have been transferred to thecustomer, which generally occurs when media containing the licensed programs isprovided to a common carrier. In the case of electronic delivery, deliveryoccurs when the customer is given access to the licensed programs. Ifcollectibility is not considered probable, revenue is recognized when the feeis collected. Subscription based license revenues are recognized ratably overthe subscription period

The Company recognizes revenue using the residualmethod pursuant to the requirements of SOP 97-2, as amended by SOP 98-9.Revenues recognized from multiple element software arrangements are allocatedto each element of the arrangement based on the fair values of the elements,such as licenses for software products, maintenance or consulting services. Thedetermination of fair value is based on objective evidence, which is specificto the Company. The Company limits its assessment of objective evidence foreach element to either the price charged when the same element is soldseparately or the price established by management having the relevant authorityto do so, for an element not yet sold separately. If evidence of fair value ofall undelivered elements exists but evidence does not exist for one or 

54

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant AccountingPolicies (Continued)

more delivered elements,then revenue is recognized under the residual method. Under the residualmethod, the fair value of the undelivered elements is deferred and theremaining portion of the arrangement fee is recognized as revenue. However, ifsuch undelivered elements consist of services that are essential to thefunctionality of the software, we recognize license and services revenues usingcontract accounting, pursuant to SOP No. 81-1, “Accounting forPerformance of Construction-Type and Certain Production-Type Contracts”. Iflicense arrangements include the rights to unspecified future products, revenueis recognized ratably over the contractual or estimated economic term of thearrangement. The Company recognizes royalty revenues when a network operatorreports that it has shipped or activated products or its rights to deploy suchproducts expire.

The Company records deferred revenue for softwarearrangements when cash has been received from the customer and the arrangementdoes not qualify for revenue recognition under its revenue recognition policy.

The Company offsets license and royalty revenues bycertain expenses as a result of the application of EITF 01-09. EITF 01-09generally requires that consideration, including warrants, issued to a customershould be classified in a vendor’s financial statements not as an expense, butas an offset to revenues up to the amount of cumulative revenues recognized orlikely to be recognized from that customer.

*Service Revenues*.   Servicerevenues consist of consulting, maintenance, and other services. The Companygenerally recognizes consulting and other service revenues, includingnon-recurring engineering and training, as services are performed. Whereconsulting services are performed under a fixed price arrangement, the Companygenerally recognizes revenues on a percentage-of-completion basis. Maintenanceservices include both updates and technical support. Maintenance revenues arerecognized ratably over the term of the maintenance agreement, and generallyrange between 15% and 25% of the cumulative license fees and activationroyalties incurred under the contract, depending upon the level of supportbeing provided.

Service revenues alsoinclude reimbursable expenses billed to customers in accordance with EITF No. 01-14,“Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’Expenses Incurred,” which generally requires that a company recognize travelexpenses and other reimbursable expenses billed to customers as revenue. Withthe adoption of EITF 01-14, we recognize reimbursable expenses as servicerevenues when there is an agreement to bill the customer for the expenses, theexpenses have been incurred and billed, and collection is probable.

**Deferred Revenues**

Deferred revenues consistprimarily of payments received from customers for prepaid license and royaltyfees and prepaid services for undelivered products and services. The timing ofthe conversion of deferred revenues into revenues largely depends on whencustomers choose to deploy products and when services are performed for thecustomer or when their rights terminate or expire.

**SoftwareDevelopment Costs**

Under the criteria setforth in SFAS No. 86, “Accounting for the Costs of Computer Software to BeSold, Leased, or Otherwise Marketed,” capitalization of software developmentcosts begins upon the establishment of technological feasibility of theproduct, which we have defined as the completion of beta 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant AccountingPolicies (Continued)

testingof a working product. The period of time between establishing technologicalfeasibility of our products and making them generally available has been short.The establishment of technological feasibility and the ongoing assessment ofthe recoverability of these costs require judgment by management with respectto certain external factors, including, but not limited to, anticipated futuregross product revenues, estimated economic life, and changes in software andhardware technology. After considering these factors, we have not capitalizedany software development costs to date.

**AdvertisingExpenses**

We expense advertisingcosts as we incur them. Advertising expenses were less than $1,000 for fiscal2005 and fiscal 2004 and $79,000 for fiscal 2003.

**Restructuring Costs**

As of January 1, 2003, we adopted SFAS No. 146,“Accounting for Exit or Disposal Activities,” which addresses accounting forand reporting costs associated with exit or disposal activities and nullifiesEITF 94-03. For restructuring costs incurred prior to January 1,2003, we record restructuring costs in accordance with EITF No. 94-03,“Liability Recognition of Certain Employee Termination Benefits and Other CostsIncurred in a Restructuring,” and SAB No. 100, “Restructuring andImpairment Charges.” Severance costs include those expenses related toseverance pay, related employee benefit obligations, and the acceleration ofcertain stock option grants in connection with terminated employees. Ourexecutive management approves the scope of any reductions in force. Facilitiescosts include obligations under non-cancelable leases for facilities we will nolonger occupy, as well as the cost associated with unrecoverable leaseholdimprovements. Other costs related to restructuring include the write-down ofintangible assets and amounts expected to be paid in connection with terminatedcontracts.

We have recordedsignificant restructuring costs in connection with reductions in force and theconsolidation of our research and development activities. In some cases, thesecosts were based on management estimates. See Note 15.

**Income Taxes**

Deferred tax assets andliabilities are determined based on the differences between the financialstatements and tax bases of assets and liabilities, using enacted tax rates ineffect for the year in which the differences are expected to be reversed. Weare required to estimate our income tax liability in each of the jurisdictionsin which we operate. This process requires us to estimate our actual currenttax exposures and assess the temporary differences resulting from differenttreatment of items for tax and accounting purposes. These differences result indeferred tax assets and liabilities. We regularly assess whether we will likelybe able to use these tax assets. If we determine that we are not likely to beable to use them, we will record a valuation allowance that offsets their fullvalue.

In accordance with FAS 109, we have recognized atax benefit in continuing operations and an equal offsetting additional taxprovision in the discontinued operation in each period that continuingoperations had a loss that can be applied to offset income from thediscontinued operation.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant AccountingPolicies (Continued)

**Comprehensive Income (Loss)**

Comprehensive income(loss) includes our net income or loss and adjustments for foreign currencytranslation gains and losses and unrealized gains and losses on marketable securitiesthat have been previously excluded from net income (loss) and are reflectedinstead in equity. These adjustments consist of the gains and losses resultingfrom the translation of the assets and liabilities of our foreign subsidiaries,whose functional currencies are the local currency, to U.S. dollars using theperiod-end exchange rates. Additionally, we translate revenues and expenses toU.S. dollars using average exchange rates during the period.

Thefollowing table sets forth the components of comprehensive income (loss):
| ** **                                            | ** ** | **Years ended May 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss)                                     |       | $                                      | 46,940     |   | $ | (33,402 | ) | $ | (399,257 | ) |
| Foreign currency  translation adjustment              |       | —                                 |       | (3,895 | ) | 1,286 |   |
| Unrealized loss  on marketable securities, net of tax |       | (66                                    | )          | (21 | ) | — |   |
|                                                  |       | $46,874                                |       | $ | (37,318 | ) | $ | (397,971 | ) |
|                                                       |            |                                        |            |  |  |  |  |  |  |  |

 

**Computation of Basic and Diluted Net Loss Per Share**

Basic net loss per shareis computed using the weighted average number of shares of common stockoutstanding during the periods presented. Calculation of fully diluted sharesis required when reporting net income per share and includes the weightedaverage number of shares of common stock, stock options, stock units andwarrants outstanding. As we have recorded a net loss for fiscal 2004 and fiscal2003, net loss per share on a diluted basis is equivalent to basic net loss pershare because the effect of converting outstanding stock options, stock unitsand warrants would be anti-dilutive. Accordingly, we excluded from thecalculation of net loss per share, for normal and discontinued operationsearnings per share, total potential dilutive common shares of 13,363,000 and20,097,000 for fiscal 2004 and 2003, respectively. For fiscal 2005, thedilutive common shares were 3,435,000 which were all related to stock options.

**Reclassifications**

Certain reclassifications,primarily resulting from discontinued operations, have been made to previouslyreported amounts in order to conform to current year’s presentation. See Note4, “Discontinued Operations”.

**Recent Accounting Pronouncements**

In August 2001, the Financial AccountingStandards Board (“FASB”) issued FAS No. 143, “Accounting for AssetRetirement Obligations.” FAS 143 establishes financial accounting and reportingobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. FAS 143 requires that the fair value ofa liability for an asset retirement obligation be recognized in the period inwhich it is incurred if a reasonable estimate of fair value can be made. Theassociated asset retirement costs are capitalized as part of the carryingamount of the long-lived asset. The liability is accreted to its present valueeach period while the cost is depreciated over its useful life. Liberateadopted FAS 143 for the quarter ended November 30, 2003. The adoption ofthis pronouncement did not materially affect our financial condition, resultsof operations, or cash flows.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant Accounting Policies(Continued)

In June 2002, the FASB issued SFAS No. 146, “Accountingfor Exit or Disposal Activities.” SFAS No. 146 addresses significantissues regarding the recognition, measurement, and reporting of costs that are associatedwith exit and disposal activities, including restructuring activities that arecurrently accounted for under EITF No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring).” The scope of SFAS No. 146also includes costs related to terminating a contract that is not a capitallease and termination benefits that involuntarily terminated employees receiveunder the terms of a one-time benefit arrangement that is not an ongoingbenefit arrangement or an individual deferred compensation contract. SFAS No. 146is effective for exit or disposal activities that are initiated after December 31,2002. The Company adopted SFAS No. 146 on January 1, 2003. SFAS No. 146prospectively changes the timing of when restructuring charges are recordedfrom the commitment date to the date that liability is incurred. The adoptionof SFAS No. 146 did not have a material effect on the Company’s financialcondition or results of operations.

In November 2002, the FASB issued FASBInterpretation (“FIN”) No. 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” FIN 45 requires that a liability be recorded in the guarantor’sbalance sheet upon issuance of a guarantee. In addition, FIN 45 requiresdisclosures about the guarantees that an entity has issued, including areconciliation of changes in the entity’s product warranty liabilities. Theinitial recognition and initial measurement provisions of FIN 45 are applicableon a prospective basis to guarantees issued or modified after December 31,2002, irrespective of the guarantor’s fiscal year-end. The disclosurerequirements of FIN 45 are effective for financial statements of annual periodsending after December 15, 2002, but had no impact on the Company. Theadoption of FIN No. 45 did not have a material effect on the Company’sfinancial condition or results of operations.

In November 2002, the Emerging Issues Task Force(“EITF”) reached a consensus on EITF No. 00-21, “RevenueArrangements with Multiple Deliverables.” EITF 00-21 provides guidance on howto account for arrangements that involve the delivery or performance ofmultiple products, services, and/or rights to use assets. Liberate adopted EITFNo. 00-21 for the quarter ended November 30, 2003, and adoption didnot have a significant impact on our financial statements.

In January 2003, the FASB issued FIN No. 46,“Consolidation of Variable Interest Entities,” and in December 2003 theFASB issued FIN 46-R, a revised interpretation of FIN 46. FIN 46 requirescertain variable interest entities to be consolidated by the primarybeneficiary of the entity if the equity investors in the entity do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN 46 is effectiveimmediately for all new variable interest entities created or acquired after January 31,2003. For variable interest entities created or acquired prior to February 1,2003, the provisions of FIN 46-R must be applied in the year ending December 31,2004. The adoption of this standard, in February 2004, did not have animpact on the Company’s financial condition or results of operations, since theCompany has not invested in any variable interest entities.

In May 2003, the FASB issued FAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity.” FAS 150 establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity. It requires that an issuer classify a financial instrument that iswithin its scope as a liability. FAS 150 is effective for 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant Accounting Policies (Continued)

financial instrumentsentered into or modified after May 31, 2003, and otherwise is effective atthe beginning of the first interim period beginning after June 15, 2003for public companies. The adoption of FAS 150 did not have a material effect onour financial condition, results of operations, or cash flows.

In December 2003, the Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “RevenueRecognition.” SAB 104 supersedes Staff Accounting Bulletin No. 101, “RevenueRecognition in Financial Statements (“SAB 101”). SAB 104’s primary purpose isto rescind accounting guidance contained in SAB 101 related to multiple elementrevenue arrangements, superseded as a result of the issuance of EITF 00-21.Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in FinancialStatements Frequently Asked Questions and Answers (“the FAQ”) issued with SAB101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portionsof the FAQ have been incorporated into SAB 104. While the wording of SAB 104has changed to reflect the issuance of EITF 00-21, the revenue recognitionprinciples of SAB 101 remain largely unchanged by the issuance of SAB 104. As aresult, the adoption of this pronouncement did not have any impact on theCompany’s consolidated financial statements.

In April 2004, the EITF issued Statement No. 03-06“Participating Securities and the Two-Class Method Under FASBStatement No. 128, Earnings Per Share” (“EITF 03-06”). EITF 03-06addresses a number of questions regarding the computation of earnings per shareby companies that have issued securities other than common stock thatcontractually entitle the holder to participate in dividends and our earningswhen, and if, it declares dividends on its common stock. The issue alsoprovides further guidance in applying the two-class method of calculatingearnings per share, clarifying what constitutes a participating security andhow to apply the two-class method of computing earnings per share once it isdetermined that a security is participating, including how to allocateundistributed earnings to such a security. EITF 03-06 is effective for fiscalperiods beginning after March 31, 2004. The adoption of this standard didnot have any impact on the resulting earnings per share of the periodspresented.

In December 2004, the FASB issued SFAS No. 153,Exchange of Nonmonetary Assets, an Amendment of APB Opinion No. 29, “Accountingfor Nonmonetary Transactions.” SFAS No. 153 is based on the principle thatexchange of nonmonetary assets should be measured based on the fair marketvalue of the assets exchanged. SFAS No. 153 eliminates the exception ofnonmonetary exchanges of similar productive assets and replaces it with ageneral exception for exchanges of nonmonetary assets that donot havecommercial substance. SFAS No. 153 is effective for nonmontary exchangesin fiscal periods beginning after June 15, 2005. The Company is currentlyevaluating the provisions of SFAS No. 153 and does not believe that theadoption of SFAS No. 153 will have a material impact on its financialcondition, results of operations and liquidity.

In December 2004, the FASB issued SFAS 123(R), “Share-BasedPayment.” SFAS 123 (R) addresses the accounting for share-based paymenttransactions with employees and requires companies to expense the value ofemployee stock options and similar awards. SFAS 123(R) requires stockbased compensation of the share-based payment to be measured at fair value onthe date that the company grants the awards to employees beginning with thefirst annual period after June 15, 2005. The expense should be recognizedover the vesting period for each option and adjusted for actual forfeituresthat occur before vesting. We are required to adopt SFAS 123(R) in Q1 offiscal 2007.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant Accounting Policies (Continued)

In March 2005, the SEC issued Staff AccountingBulletin No. 107 (“SAB 107”). SAB 107 covers key topics related to theimplementation of SFAS 123(R ) which include the valuation models, expectedvolatility, expected option term, income tax effects of SFAS 123(R ),classification of stock-based compensation cost, capitalization of compensationcosts and disclosure requirements. Although we do not expect to grant anyfuture options, the Company is currently assessing the impact SFAS 123(R) willhave on our financial statements.

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—areplacement of APB Opinion No. 20 and FASB Statement No. 3.” ThisStatement changes the requirements for the accounting for and reporting of achange in accounting principle. It applies to all voluntary changes inaccounting principle and to those changes required by an accountingpronouncement when such a pronouncement does not include specific transitionprovisions. SFAS No. 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. We do not expect the adoption of SFAS No. 154 in fiscal2007 to have a material impact on our financial statements.

**Cumulative Effectof Change in Accounting Principle**

On June 1, 2002, we adopted SFAS No. 141, “BusinessCombinations,” and SFAS No. 142. SFAS No. 141 requires us to accountfor all business combinations initiated after June 30, 2001 using thepurchase method of accounting. Under SFAS No. 142, we no longer amortizethe remaining balances of goodwill. Rather, we tested goodwill for impairmentimmediately upon the date of adoption and will continue to test goodwill forimpairment at least once a year. Under SFAS No. 141 and SFAS No. 142,the value of an assembled workforce is no longer considered an identifiableintangible asset with a definite useful life, and accordingly, we reclassifiedthe net balance of $526,000 to goodwill as of June 1, 2002.

Based on the criteria of SFAS No. 142, wedetermined that we had one reporting unit at the time we adopted SFAS No. 142.Our testing and analysis process included obtaining an independent appraisal ofthe fair value of Liberate based on two valuation approaches. The firstvaluation approach determined our market capitalization based on our fair valueon the date of adoption using our average stock price over a range of days in May andJune 2002. This average stock price was increased by a control premiumbased on premiums paid for control of comparable companies. The secondvaluation used a discounted cash flows approach.

This analysis resulted in an allocation of fair valuesto identifiable tangible and intangible assets and an implied valuation ofgoodwill of zero as of June 1, 2002. Comparing this goodwill fair value tothe carrying value resulted in a goodwill impairment of $209.3 million,with no income tax effect, on June 1, 2002. We recorded the impairment asthe cumulative effect of a change in accounting principle in the first quarterof fiscal 2003. Subsequent impairment charges, if any, will be recorded asoperating expenses.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 2.**   Significant Accounting Policies (Continued)

As required by SFAS No. 142,a reconciliation of previously reported net loss and net loss per share to theamounts adjusted for the exclusion of cumulative effect of change in accountingprinciple is as follows (in thousands, except per share data):
| **  **                                                                                             | ** ** | **Year ended May 31, 2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| Net loss, as  reported                                                                                       |       |                                            | $          | (399,257 | ) |   |
| Add back:                                                                                                    |       |                                            |       |   |   |
| Cumulative effect of change in accounting principle                                                          |       |                                            | 209,289    |   |   |
| Loss before  cumulative effect of change in accounting principle, as adjusted                           |       |                                            | $          | (189,968 | ) |   |
| Basic net income  (loss) per share, as reported                                                              |       |                                            | $          | (3.82 | ) |   |
| Diluted net  income (loss) per share, as reported                                                            |       |                                            | $          | (3.82 | ) |   |
| Add back:                                                                                                    |       |                                            |       |   |   |
| Cumulative effect of change in accounting principle                                                          |       |                                            | 2.00       |   |   |
| Basic income  (loss) per share before cumulative effect of change in accounting  principle, as adjusted |       |                                            | $          | (1.82 | ) |   |
| Diluted income  (loss) per share before cumulative effect of change in accounting principle,  as adjusted    |       |                                            | $          | (1.82 | ) |   |
| Shares used in  computing basic per share amounts                                                            |       |                                            | 104,500    |   |   |
| Shares used in computing  diluted per share amounts                                                          |       |                                            | 104,500    |   |   |

 

**Note 3.**   Acquisition of Sigma Systems

In August 2002, we acquired the outstandingcapital stock of Sigma Systems Group (Canada) for $60.4 million in cash,before deducting $22.3 million of cash received in connection with theacquisition. We also assumed Sigma Systems’ unvested employee options with afair value of $1.9 million, agreed to satisfy certain obligations of SigmaSystems to its employees in the aggregate amount of $3.0 million andincurred acquisition costs of approximately $1.3 million. The total considerationand acquisition costs were $66.6 million, and we accounted for theacquisition as a purchase.

We have allocated thetotal purchase price consideration of $66.6 million as follows (inthousands):
| Cash                                  |   | $      | 22,314 |   |
|---------------------------------------|--------|--------|--------|--------|
| Receivables and  other current assets |   | 2,232  |   |
| Property and  equipment               |   | 672    |   |
| Liabilities  assumed                  |   | (3,586 | )      |
| Deferred  compensation                |   | 184    |   |
| In-process  research and development  |   | 300    |   |
| Intangible assets                     |   | 9,830  |   |
| Goodwill                              |   | 34,630 |   |
| Total  consideration                  |   | $      | 66,576 |   |

 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 3.**   Acquisition of Sigma Systems (Continued)

We immediately wrote off $300,000 of acquiredin-process research and development that had not reached technologicalfeasibility and had no alternative future use. The value of Sigma Systems’in-process research and development was determined by using the incomeapproach, which measures the present worth and anticipated future benefit ofthe intangible asset.

We also used the income approach to determine thevalue of Sigma Systems’ existing products and technology, customer lists andorder backlog, and trademarks. Based on these valuations, we initially recorded$9.8 million of intangible assets, and we began amortizing this amount ona straight-line basis over an estimated useful life of three years. Intangibleassets consisted of $9.2 million of existing technology and $609,000 ofcustomer lists and order backlog and trademarks. We also initially recorded$34.6 million of goodwill, which represented the purchase price in excessof the identified net tangible and intangible assets. In accordance with SFAS No. 142,we did not amortize goodwill but periodically reviewed it for impairment. SeeNote 5.

At the time of theacquisition, we entered into an escrow agreement with Sigma Systems anddeposited $9.0 million into an escrow account to secure certainobligations of Sigma Systems and its major shareholders. On November 19,2003, we and the representative of such former Sigma Systems’ majorshareholders entered into a settlement agreement and limited release of claims,pursuant to which we received approximately $3.5 million in cash from theescrow account. The return of escrow funds was accounted for as part of thegain on sale of discontinued operations. See Note 4.

**Note 4.**   Discontinued Operations

In April 2005, we completed the sale ofsubstantially all of the assets of our North America business to Double CTechnologies, LLC, a joint venture majority owned and controlled by ComcastCorporation with a minority investment by Cox Communications, Inc. forapproximately $82.0 million. The price included substantially all of theassets, including patents and other intellectual property, and the assumptionof certain limited liabilities related to the North America business. We recognizeda gain on the sale of the North America business of $88.9 million in the fourthquarter of fiscal 2005.

In November 2003, we completed the sale of theOSS division and its assets to Sigma Software Solutions Inc. andaffiliated entities. The price included $3.6 million in cash and theassumption of $7.4 million of lease obligations and other liabilities. Inconnection with the sale of the OSS division, we received a total of$7.1 million in cash, which consisted of the cash proceeds of$3.6 million and the return of escrow funds of $3.5 million, and werecorded a gain on the sale of OSS of $9.5 million in fiscal 2004. SeeNote 3 for a discussion of the return of escrow funds.

In August 2002, we acquired the outstandingcapital stock of Sigma Systems. In accordance with SFAS No. 142, wedetermined that Sigma Systems had two reporting units, Bill-Care and OSS. In May 2003,we sold Bill-Care to a company owned by certain former shareholders of SigmaSystems for the consideration of $1.0 million in cash, resulting in a losson the sale of Bill-Care of $177,000 which was recorded in the fourth quarterof fiscal 2003.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 4.**   Discontinued Operations (Continued)

Computation of the gainson sales of the OSS division and the North America business is as follows (inthousands):
| ** **                               | ** ** | **North  America  business** | ** ** | **OSS** | ** ** |
|------------------------------------------|------------|------------------------------|------------|---------|------------|
| Proceeds                                 |       | $                            | 82,055     |    | $          | 7,075 |   |
| Expenses of sale                         |       | —                       |       | (715    | )          |
| Net liabilities assumed  by buyer        |       | 6,818                        |       | 3,178   |       |
| Gain on sale of  discontinued operations |       | $                            | 88,873     |    | $          | 9,538 |   |

 

Pursuant to the provisions of SFAS No. 144,amounts in the audited consolidated financial statements for fiscal 2005, 2004and 2003 and related notes have been reclassified to reflect the discontinuedoperations of the North America business, OSS and Bill-Care. Operating resultsfor the discontinued operations are reported, net of tax, under “Loss fromdiscontinued operations” in the Consolidated Statements of Operations. Relatedassets and liabilities are classified as “Assets of discontinued operations”and “Liabilities of discontinued operations,” respectively, in the ConsolidatedBalance Sheets.

The following tablereflects the amounts reclassified within the statements of operations to thedisclosure for discontinued operations (in thousands):
| ** **                                                     | ** ** | **Years ended May 31,** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                     | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues                                                       |       | $                                      | (425       | ) | $ | 3,259 |   | $ | 13,899 |   |
| Cost of revenues                                               |       | 1,339                                  |       | 4,601 |   | 23,385 |   |
| Gross margin                                                   |       | (1,764                                 | )          | (1,342 | ) | (9,486 | ) |
| Operating  expenses                                            |       | 10,849                                 |       | 16,676 |   | 18,100 |   |
| Amortization of  deferred costs related to warrants            |       | —                                 |       | 6,800 |   | 3,837 |   |
| Amortization and  impairment of goodwill and intangible assets |       | —                                 |       | 287 |   | 40,010 |   |
| Write-off  of acquired in-process research and development     |       | —                                 |       | — |   | 300 |   |
| Amortization of  deferred stock based compensation             |       | —                                 |       | 46 |   | 3 |   |
| Restructuring  costs                                           |       | —                                 |       | 88 |   | 2,152 |   |
| Operating loss from discontinued operations                    |       | (12,613                                | )          | (25,239 | ) | (73,888 | ) |
| Interest and  other income (expense), net                      |       | 521                                    |       | 405 |   | (375 | ) |
| Income (loss) on  sale of discontinued operations              |       | 88,873                                 |       | 9,538 |   | (177 | ) |
| Income tax  provision (benefit)                                |       | $12,153                                |       | 164 |   | 185 |   |
| Loss from discontinued  operations                             |       | $                                      | 64,628     |   | $ | (15,460 | ) | $ | (74,625 | ) |

 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 4.**   Discontinued Operations (Continued)

Additionally, thefollowing table reflects the impact of discontinued operations from the sale ofthe North America business on certain balance sheet data (in thousands):
| ** **                                 | **May 31, 2004** | ** ** |
|--------------------------------------------|----------------------------|------------|
| Prepaid expenses  and other current assets |                       |       | $ | 271 |   |   |   |
| Property and  equipment, net               |                       |       | 1,194 |   |   |   |
| Goodwill and  intangible assets            |                       |       | 3,583 |   |   |   |
| Other assets                               |                       |       | 167 |   |   |   |
| Assets of discontinued operations          |                       |       | $ | 5,215 |   |   |   |
| Accounts payable                           |                       |       | $ | — |   |   |   |
| Accrued  liabilities                       |                       |       | 225 |   |   |   |
| Accrued payroll  and related expenses      |                       |       | 364 |   |   |   |
| Deferred revenues                          |                       |       | 5,426 |   |   |   |
| Liabilities of  discontinued operations    |                       |       | $ | 6,015 |   |   |   |
|                                            |                            |            |  |  |  |  |  |  |  |

 

**Note 5.**   Goodwill and Intangible Assets

**Goodwill**

Under the provisions of SFAS No. 142, we nolonger amortize goodwill, but rather test it for impairment at least once ayear. Additionally, SFAS No. 142 defines assembled workforce intangibleassets as part of goodwill. On June 1, 2002, we adopted SFAS No. 142and transferred the remaining net book value of assembled workforce intangibleassets to goodwill. We tested the resulting balance of goodwill for impairmentand determined that $209.3 million of goodwill was impaired. Theimpairment charge was reported as a cumulative effect of a change in accountingprinciple in the first quarter of fiscal 2003.

In August 2002, weacquired Sigma Systems and recorded $34.6 million in goodwill. In thefourth quarter of fiscal 2003, we performed an annual impairment test anddetermined that the Sigma Systems’ goodwill of $31.5 million was impaired.At May 31, 2003 the balance was zero.

**Intangible assets**

On June 1, 2002, we adopted SFAS No. 144 anddetermined that the fair value of the Virtual Modem trademarks that we hadacquired in fiscal 2000 was zero. This permanent impairment resulted in a write-downof the carrying value from $66,000 to zero. As discussed above, we adopted SFASNo. 142 on June 1, 2002 and transferred the remaining net book valueof assembled workforce intangible assets of $526,000 to goodwill.

In connection with the acquisition of Sigma Systems inAugust 2002, we acquired intangible assets with a value of$9.8 million. In the fourth quarter of fiscal 2003, we recorded animpairment charge of $6.3 million for intangible assets related to SigmaSystems. As of May 31, 2003, we had intangible assets of $1.3 million(at net book value) related to Sigma Systems, which was included in the “Assetsof discontinued operations” in the Consolidated Balance Sheet as of May 31,2003. See Note 4.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 5.**   Goodwill and Intangible Assets (Continued)

Identified intangibleassets (excluding intangible assets related to discontinued operations) attheir net book value consist of the following (in thousands):
| ** **                        | ** ** | **May 31, 2004**      | ** ** |
|-----------------------------------|------------|---------------------------------|------------|
| ** **                        | ** ** | **Gross carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Impairment** | ** ** | **Book Value** | ** ** |
| Existing products  and technology |       |                            | $          | 529 |   |   |   | $ | (529 | ) |   |   | $ | — |   |   |   | — |   |   |
| Customer lists  and order backlog |       |                            | 1,055      |   |   |   | (1,055 | ) |   |   | — |   |   |   | — |   |   |
|                              |       |                            | $          | 1,584 |   |   |   | $ | (1,584 | ) |   |   | $ | — |   |   |   | $ | — |   |   |
|                                   |            |                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization of intangibleassets was $22,000 and $1.6 million for fiscal 2004 and 2003, respectively.

**Note 6.**   Cash and Cash Equivalents

Cashand cash equivalents consist of the following (in thousands):
| ** **          | ** ** | **May 31, 2005** | ** ** |
|---------------------|------------|----------------------------|------------|
| ** **          | ** ** | **Cost**                   | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Cash                |       | $                          | 3,144      |   |   | $ | — |   |   | $ | 3,144 |   |
| Money market  funds |       | 43,980                     |       |   | — |   |   | 43,980 |   |
|                |       | $                          | 47,124     |   |   | $ | — |   |   | $ | 47,124 |   |

 
| ** **           | ** ** | **May 31, 2004** | ** ** |
|----------------------|------------|----------------------------|------------|
| ** **           | ** ** | **Cost**                   | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| Cash                 |       | $                          | 12,587     |   |   | $ | — |   |   | $ | 12,587 |   |
| Money market  funds  |       | 11,475                     |       |   | — |   |   | 11,475 |   |
| U.S. treasury  bills |       | 191,835                    |       |   | (21 | ) |   | 191,814 |   |
|                 |       | $                          | 215,897    |   |   | $ | (21 | ) |   | $ | 215,876 |   |

 

As of May 31, 2004and 2005, all marketable securities had original maturities of less than threemonths and accordingly were classified as cash equivalents. As of May 31,2005, the estimated fair value of marketable securities approximated their bookvalue, and there were no gross unrealized gains or losses. As of May 31,2004, the estimated fair value of marketable securities was slightly lower thantheir book value, due to a gross unrealized loss of $21,000.

**Note 7.**   Restricted Cash

Our restricted cashbalance was $4.4 million as of May 31, 2005 and $10.9 million as of May 31,2004. Restricted cash consists primarily of certificates of deposit establishedat our banking institutions in connection with lease-related letters ofcredit. As part of the facilities lease for our former headquarters in SanCarlos, California and our current headquarters in San Mateo, California, wewere required to establish irrevocable letters of credit in the amounts of$8.8 million and $975,000, respectively, as security deposits. In order tosecure our obligations to our bank under these letters of credit, weestablished certificates of deposit in the same amounts. At the request of ourbank, we have provided additional 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 7.**   Restricted Cash (Continued)

security of $500,000 to secure our obligations underthe $8.8 million letter of credit. In April 2005, our restricted cashdecreased by $5.9 million due to our former landlord drawing against the letterof credit for unpaid rent, which the restricted cash was securing. In June 2005,we re-establised a new letter of credit and certificate of deposit securing theletter of credit to stay in compliance with the lease terms for our formerheadquarters in San Carlos. We also have restricted cash deposits related to alease obligations and bank relationship in the UK of approximately $182,000 asof May 31, 2005 and $522,000 as of May 31, 2004. We also holdapproximately $86,000 of restricted cash in connection with potentialobligations related to the closure of an overseas branch office.

**Note 8.**   Property and Equipment

As of May 31,2005 and 2004, property and equipment consisted of the following (inthousands):
| ** **                                       | ** ** | **May 31,** | ** ** | **Useful Life** | ** ** |
|--------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                       | ** ** | **2005**         | ** ** | **2004**             | ** ** | **(in years)** | ** ** |
| Computer  equipment                              |       | $                | 2,992      |                 | $          | 2,984 |   |   | 3 |   |   |
| Software                                         |       | 3,818            |       | 3,815                |       |   | 2 |   |   |
| Office furniture  and equipment                  |       | 251              |       | 251                  |       |   | 5 |   |   |
| Leasehold  improvements                          |       | 401              |       | 401                  |       |   | * |   |   |
|                                             |       | 7,462            |       | 7,451                |       |   |   |   |   |
| Less: accumulated  depreciation and amortization |       | (7,040           | )          | (6,794               | )          |   |   |   |   |
| Property and equipment,  net                     |       | $                | 422        |                 | $          | 657 |   |   |   |   |   |

----

*                    Typically thelength of lease term, not to exceed 10 years.

Depreciation andamortization expense was $308,000, $1.6 million and $5.7 million forfiscal 2005, 2004 and 2003, respectively.

**Note 9.**   Accrued Liabilities

As of May 31,2005 and 2004, accrued liabilities consisted of the following (in thousands):
| ** **                                       | ** ** | **May 31,** | ** ** |
|--------------------------------------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2005**         | ** ** | **2004** | ** ** |
| Accrued taxes  payable                           |       | $                | 2,927      |   | $ | 1,892 |   |
| Accrued  professional fees                       |       | 349              |       | 569 |   |
| Short-term  portion of excess facilities charges |       | 6,321            |       | 4,969 |   |
| Accrued  restructuring costs                     |       | —           |       | 37 |   |
| Litigation  liability                            |       | 2,255            |       | 6,725 |   |
| Accrued royalties                                |       | 448              |       | 448 |   |
| Other                                            |       | 1,961            |       | 1,519 |   |
|                                             |       | $                | 14,261     |   | $ | 16,159 |   |

 

**Note 10.**   Short-term Borrowing from Bank

The lease agreement forour former headquarters in San Carlos, California, requires that we maintain anirrevocable letter of credit from our bank in the amount of $8.8 millionas a security deposit. We 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 10.**   Short-term Borrowing from Bank (Continued)

vacatedthe San Carlos facility in March 2004 and ceased rent payment effective April 1,2004. Our former landlord has since drawn against the letter of credit for theunpaid rent, net of sublease income from the facility. As of May 31, 2004,we had a short-term borrowing of $608,000 from the bank for the amounts drawnby our former landlord against the letter of credit but not yet repaid by us tothe bank. The short-term borrowing bears interest at prime rate plus twopercent. The principal and interest were repaid to the bank in Q1 FY05.

**Note 11.**   Commitments and Contingencies

**Operating Leases**

At May 31,2005, we had operating leases for our former headquarters in San Carlos,California and the headquarters in San Mateo, California, which expire onvarious dates through fiscal 2009 and thereafter. The future minimum leasepayments under these operating leases as of May 31, 2005 is as follows (inthousands):
| **Years ending May 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|------------|------------|
| 2006                                    |       | $          | 9,151      |       |
| 2007                                    |       | 9,095      |       |
| 2008                                    |       | 8,412      |       |
| 2009 and  thereafter                    |       | 9,859      |       |
|                                    |       | $          | 36,517     |       |

 

We leased approximately 181,000 square feet of officespace for our former headquarters and development center in San Carlos,California. The obligations under the San Carlos lease in accordance with theterms thereof could be up to approximately $36.5 million over the life ofthe lease, including common area maintenance expenses. We have accrued $24.2 millionas excess facilities provision included in our liabilities, of which $18.5million is in long-term and $5.7 million is in short-term related to this lease.Rent expense was $360,000 for fiscal 2005, $5.6 million for fiscal 2004and $5.6 million for fiscal 2003.

As a result of theassumption of the lease for the San Mateo, California office by SeaChange, inconnection with the sale of our Non-North America business, our future contractualobligations will be reduced by approximately $1.3 million.

**Letters of Credit**

We maintain variousirrevocable letters of credit as security deposits for the followingfacilities: our current headquarters in San Mateo, California and our former headquartersin San Carlos, California. As of May 31, 2005, the aggregate outstandingbalance of all letters of credit was $9.8 million, of which$8.8 million was related to the letter of credit for our formerheadquarters in San Carlos, California. As discussed in Note 10 above, wevacated the San Carlos facility in March 2004 and ceased rent paymenteffective April 1, 2004. Our former landlord had drawn against the letterof credit for the unpaid rent, net of sublease income from the facility, in theamount of $6.3 million as of May 31, 2005.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   Commitments and Contingencies(Continued)

**Equity Investments**

In June 2001, we werecommitted to invest up to $2.0 million in one of the private companies inour equity investment portfolio. In fiscal 2002, we made an investment of$750,000, and we do not intend to make further investments in this company. Asof May 31, 2005, we had no other outstanding commitments to loan to orinvest in any of our portfolio companies.

**EmploymentAgreements**

In March and April 2003, we entered intoemployee retention agreements with David Lockwood, Patrick Nguyen, Gregory Woodand Philip Vachon. Under the terms of the retention agreements, in the event ofa change of control of Liberate that is followed within one year by theofficer’s actual or constructive termination, the officer will receive apayment equal to twice his total taxable compensation for the prior fiscalyear, with a minimum payment of $500,000 and a maximum payment of $750,000. OnJune 15, 2005, the Board of Directors approved the payment of certain severancepayments in connection with amendments to the retention agreements. Pursuant tothe employee retention agreements as so amended, Liberate made such payments tothe Executives within thirty days following the Effective Date. The value ofthe payment amounts pursuant to the employee retention agreements remainunchanged. The payments were made on June 17, 2005 and July 14, 2005.We have other retention agreements with a small number of non-executiveemployees.

As part of our standardcompensation package, certain employees and managers may be eligible toparticipate in a variety of discretionary and non-discretionary bonus plans orcommission plans. We accrue bonus and commission expense ratably over thefiscal year, based on expected payouts against those plans.

**IndemnificationObligations**

FIN 45 “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.” FIN 45 requires that a guarantor recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken inissuing the guarantee or indemnification. FIN 45 also requires additionaldisclosure by a guarantor in its interim and annual financial statements aboutits obligations under certain guarantees and indemnifications. The initialrecognition and measurement provisions of FIN 45 are applicable for guaranteesissued or modified after December 31, 2002. The disclosure requirements ofFIN 45 are effective for financial statements of interim or annual periodsending after December 15, 2002. We adopted the recognition and measurementprovisions of FIN 45 prospectively to guarantees issued or modified afterDecember 31, 2002. The adoption of this standard did not have a materialimpact on our consolidated results of operations or financial position.

Our software licenseagreements typically provide for indemnification of customers for intellectualproperty infringement claims. To date, no such claims have been filed againstus. We also warrant to customers that software products operate substantiallyin accordance with specifications. Historically, we have incurred minimal costsrelated to product warranties, and accordingly, we have not accrued warrantycosts for the periods presented. In addition, we are obligated to indemnify ourofficers and directors under the terms of indemnity agreements entered intowith them, as well as pursuant to our certificate of 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   Commitments and Contingencies(Continued)

incorporation,bylaws, and applicable Delaware law. We are unable to quantify the charge thatcould result from officer and director indemnification.

**Legal Matters**

*Restatement Class-Action Litigation*.   OnOctober 20, 2004, a Stipulation and Agreement of Settlement (the “Settlement”)was filed with the United States District Court for the Northern District ofCalifornia (the “Court”) in connection with the matter “In re LiberateTechnologies Securities Litigation” (the “Class Action”). The Class Actionis based on the restatement of our financial statements for certain periods offiscal 2002 and the revision of our preliminary financial results announced forthe first quarter of fiscal 2003 (the “Restatement”). The parties to theSettlement are: (i) the lead plaintiff in the Class Action, on behalfof himself and each of the class members; and (ii) defendants Liberate,Mitchell E. Kertzman, Nancy J. Hilker, Donald Fitzpatrick and ColemanSisson. Under the terms of the Settlement, Liberate agreed to pay or cause to bepaid $13.8 million in settlement of the claims specified in the Class Action,and the lead plaintiff and each class member agreed to release Liberate and theother defendants from those claims. The Settlement shall in no way be construedor deemed to be evidence of or an admission or concession on the part ofLiberate or the other specified defendants with respect to any claim or anyfault or liability or wrongdoing or damage whatsoever, or any infirmity in thedefenses that the defendants have asserted.

Following a settlement hearing on February 15,2005, the Court granted final approval of the Settlement and, pursuant to theSettlement, entered judgment dismissing the Class Action with prejudice.

During Q3 FY05, Liberate paid out the settlementamount of $13.8 million and recovered $5.0 million from its insurance carrier.Liberate expects to recover another $4.4 million as a rebate of part of thepremiums paid for the loss mitigation policy that Liberate obtained for the Class Actionand the Derivative Action, which is included in other receivables at May 31,2005.

*Restatement Derivative Litigation*.   OnMay 3, 2005, a Stipulation of Settlement re Derivative Claims (the “Stipulation”)was filed with the California Superior Court for the County of San Mateo inconnection with the matter “In re Liberate Technologies Derivative Litigation”(the “Derivative Action”). As reflected in the Stipulation, Liberate hasreached an agreement in principle to settle the Derivative Action on termsthat, among other things, provide for Liberate to adopt certain specifiedcorporate governance changes, the dismissal with prejudice of all claimsasserted by plaintiffs, and the payment of plaintiffs’ counsel’s fees andexpenses of $550,000, which has been accrued. The settlement of the DerivativeAction is subject to approval of the Stipulation by the California Superior Courtfor the County of San Mateo. The court has scheduled a hearing onAugust 16, 2005 to consider approval of the settlement. The DerivativeAction is based on the Restatement and names Liberate as a nominal party andcertain of our former officers and current or former directors as defendants(collectively, the “Derivative Defendants”). The Derivative Action generallyalleges that the Derivative Defendants failed to adequately oversee ourfinancial reporting, and thus are liable for breach of their fiduciary duties,abuse of control, gross mismanagement, and waste of corporate assets. TheDerivative Action also alleges that the Derivative Defendants are liable forunjust enrichment and that certain named officers and directors are liable forviolations of California Code Section 25402 and breach of fiduciary dutyfor insider selling and misappropriation of information. The Derivative Actionseeks unspecified monetary damages and other relief.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   Commitments and Contingencies(Continued)

We cannot predict the timing or ultimate outcome ofthis proposed settlement or estimate the amounts of, or potential range of losswith respect to, this litigation if a settlement is not approved.

*SEC Investigation.  *OnFebruary 13, 2003, the SEC initiated a formal, non-public investigationinto the events and circumstances that led to the restatement of Liberate’sfinancial statements. On September 29, 2004, Liberate announced that theSEC’s investigation has been terminated as to Liberate. The SEC also advisedLiberate that no enforcement action against Liberate has been recommended.

*Lease-Related Litigation.  *OnSeptember 29, 2004, Circle Star Center Associates, L.P., the landlord ofLiberate’s former offices in San Carlos, California, filed a complaint in theCalifornia Superior Court for the County of San Mateo alleging that Liberatehad breached the office lease by, among other things, failing to pay rent forcertain months of 2004 and applicable late fees, failing to replenish theletter of credit and failing to reimburse the landlord for its attorneys’ feesin connection with Liberate’s bankruptcy proceeding. The complaint alsoincludes allegations of conversion and defamation. The complaint seeks damagesof approximately $3.9 million for the alleged breach and conversion andunspecified damages for the alleged defamation. In November 2004, Liberatefiled motions challenging the legal basis for the landlord’s cause of actionfor defamation and claim for attorneys’ fees in connection with Liberate’sbankruptcy. On March 24, 2005, the Superior Court granted Liberate’smotions and dismissed the landlord’s claims for defamation and attorneys’ fees.On May 23, 2005, Liberate paid the landlord approximately $1.2 million forpast rent due, late fees and interest in connection with the various lease-relatedactions, and we have procured a replacement letter of credit. A trial in thisaction is currently scheduled for September 26, 2005.

In addition, on December 16, 2004, the landlordfiled a further complaint for breach of lease against Liberate. The complaintseeks damages in the amount of not less than approximately $1.2 million, plusprejudgment interest, costs of suit and attorneys’ fees, alleging that Liberatebreached the lease by failing to pay rent in November and December 2004.On February 22, 2005, the landlord filed a motion for summary judgment onthe breach of contract claim. On May 10, 2005, Liberate paid the landlordapproximately $1.3 million for the months at issue in this action and on May 13,2005, the Superior Court granted the landlord’s motion for summary judgment.

On May 6, 2005, the landlord filed a thirdcomplaint against Liberate alleging that Liberate breached the lease by failingto pay rent for certain months of 2005 and failing to replenish the letter ofcredit. The landlord seeks approximately $5.5 million plus pre-judgmentinterest, costs of suit and attorneys’ fees. On May 23, 2005 Liberate paidthe landlord approximately $1.2 million for past rent due, late fees and interestin connection with the various lease-related actions, and we have procured areplacement letter of credit.

*Underwriting Litigation*.   Beginningon May 16, 2001, a number of class-action lawsuits seeking monetarydamages were filed in the United States District Court for the SouthernDistrict of New York against several of the firms that underwrote our initialpublic offering, naming Liberate and certain of our former officers and currentor former directors as co-defendants. The suits allege that the underwritersreceived excessive and improper commissions that were not disclosed in ourprospectus and that the underwriters artificially increased the price of ourstock. The plaintiffs subsequently added allegations regarding our secondaryoffering, and named additional officers and directors as co-defendants. Thesuits were consolidated into one action that was coordinated for pretrial purposeswith hundreds of virtually identical suits under a case captioned “In reInitial Public Offering Securities Litigation”, Civil Action 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   Commitments and Contingencies(Continued)

No. 21-MC-92. On February 19,2003, the court denied in part and granted in part a motion to dismiss filed onbehalf of the defendants, including Liberate. The court’s order did not dismissany claims against Liberate. As a result, discovery may proceed. The individualdefendants have been dismissed without prejudice in this litigation.

While we deny allegations of wrongdoing, we haveagreed to enter into a global issuer settlement of plaintiffs’ claims. In June 2004,a stipulation of settlement and release of claims against the issuerdefendants, including Liberate, was submitted to the court for approval. Theterms of the settlement, if approved, would dismiss and release all claimsagainst the participating defendants (including Liberate). In exchange for thisdismissal, D&O insurance carriers would agree to guarantee a recovery bythe plaintiffs from the underwriter defendants of at least $1 billion, and theissuer defendants would agree to an assignment or surrender to the plaintiffsof certain claims the issuer defendants may have against the underwriters Thesettlement is subject to a number of conditions, including court approval.

*OpenTV Patent Litigation*.   OnFebruary 7, 2002, OpenTV filed a lawsuit against Liberate in the UnitedStates District Court for the Northern District of California, alleging thatLiberate is infringing two of OpenTV’s patents and seeking monetary damages andinjunctive relief. We filed an answer denying OpenTV’s allegations. Ourcounter-claim alleges that OpenTV infringes one of our patents for informationretrieval systems. We were seeking to have OpenTV’s patents invalidated, andhad requested a finding that our technology does not infringe OpenTV’s patents,and had sought monetary damages and injunctive relief against OpenTV. The courtissued a claim construction ruling, but a trial date is not currently set.Pursuant to the asset purchase agreement with Double C Technologies LLC thatclosed on April 7, 2005, Double C has assumed the defense and liabilitiesassociated with this lawsuit.

*Insurance Coverage Litigation*.   OnDecember 29, 2004, Federal Insurance Company, one of Liberate’s excessinsurance carriers, filed a complaint for declaratory judgment, alleging thatLiberate and other defendants are not entitled to coverage for defense costsand losses incurred in connection with the Class Action, DerivativeAction, SEC investigation or other matters. The complaint, filed in the U.S. DistrictCourt for the Northern District of California, named as defendants Liberate andcertain former officers and current and former directors. On March 18,2005, Federal Insurance Company voluntarily dismissed its complaint withoutprejudice.

On March 1, 2005, Liberate filed a complaintagainst the London Underwriters, New Hampshire Insurance Company Per: AIGEurope (UK) Limited and Federal Insurance Company (together, the “Carriers”)for breach of contract, breach of the implied covenant of good faith and fairdealing and declaratory relief. The complaint, filed in the California SuperiorCourt for the County of San Mateo, alleges that the Carriers failed to performany of their obligations under their respective policies and applicable law onbehalf of Liberate or its directors and officers in connection with the Class Action,the Derivative Action and the SEC Investigation. Liberate seeks monetarydamages, exemplary or punitive damages, attorneys’ fees and declaratory relief.

On April 8, 2005, Federal Insurance Company (“Federal”)filed a motion challenging the legal basis for Liberate’s complaint. On May 2,2005, New Hampshire Insurance Company and the London Underwriters filed ananswer to the complaint. On May 13, 2005, the Superior Court deniedFederal’s motion. On June 22, 2005, the California Court of Appeal issueda writ of mandate that directed the Superior Court to grant Federal’s motionwith leave to amend as to Liberate’s breach of contract and bad 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   Commitments and Contingencies(Continued)

faith claims againstFederal. On August 3, 2005, Liberate filed an amended complaint with theSuperior Court.

On May 23, 2005, Federal filed a cross-complaintagainst Liberate and certain of its former officers and directors for breach ofcontract and declaratory relief. On July 11, 2005, Liberate filed a motionchallenging the legal basis for Federal’s complaint. On August 9, 2005,the Superior Court granted in part Liberate’s motion with leave to amend.

Liberate intends to prosecute its rights under itsinsurance policies and defend Federal’s cross-complaint vigorously.However, litigation is by its nature uncertain and there can be no assurancethat Liberate will be successful in securing coverage under the policies.

*Stock Option Litigation*.   OnMarch 3, 2005, Mitchell Kertzman, Liberate’s former Chairman of the Boardand Chief Executive Officer, filed a complaint in the California Superior Courtfor the County of San Mateo alleging that Liberate breached its Stock OptionAgreement with Mr. Kertzman by, among other things, failing to allow himto exercise his stock options after the termination of his employment withLiberate. Liberate believes that it has complied at all times with the terms ofthe Stock Option Agreement. The complaint alleges claims for breach ofcontract, breach of the implied covenant of good faith and fair dealing andinterference with contract and prospective economic advantage. The complaintseeks monetary damages of at least $3.0 million, interest and punitive damagesin an unspecified amount. On April 4, 2005, Liberate filed motionschallenging the legal basis for Mr. Kertzman’s complaint. The SuperiorCourt denied Liberate’s motions on June 2, 2005. On June 16, 2005,Liberate filed an answer to the complaint. A trial date in this action iscurrently scheduled for January 17, 2006.

*Insight Interactive Litigation.  *OnJune 13, 2005, Liberate filed a complaint against Insight InteractiveL.L.C. for breach of contract, specific performance, and open book account. Thecomplaint, filed in the California Superior Court for the County of San Mateo,alleges that under a March 6, 2000 agreement with Liberate, InsightInteractive has failed to pay fees as they become due. Liberate seeks monetarydamages, specific performance, and interest and costs as provided by law and/orthe March 6, 2000 agreement. We expect that Insight Interactive may assertdefenses and claims contending that Liberate is not entitled to payment underthe March 6, 2000 agreement. Liberate intends to prosecute its rightsunder the agreement vigorously. However, litigation is by its nature uncertainand there can be no assurance that Liberate will be successful in obtainingdamages or other relief.

We have notified our various insurance carriers of theClass Action, Derivative Action and other pending legal matters. Our primarycarrier and one of our secondary carriers under our existing policies havedisputed whether certain costs incurred in connection with therestatement-related litigation and the SEC investigation are covered undertheir respective policies. Our insurance may not cover all or portions of ourdefense costs, any settlement, any judgment rendered against us, or amounts weare required to pay to any indemnified person in connection with the ClassAction or Derivative Action or any expenses incurred in connection with the SECinvestigation or any other matter.

While Liberate intends todefend and prosecute the above mentioned lawsuits vigorously because legalactions are inherently uncertain, we cannot predict or determine the outcome orresolution of these actions or estimate the amounts of, or potential range of,loss or recovery with respect to these proceedings. In addition, the timing ofthe final resolution of these proceedings is uncertain. The possibleresolutions of these proceedings could include judgments against us orsettlements that could require 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 11.**   Commitments and Contingencies(Continued)

substantialpayments by us, which could have a material adverse impact on our business,financial position, results of operations and cash flows. The cost ofparticipating and defending against these actions is substantial and willrequire the continued diversion of management’s attention and corporateresources. We recognize litigation expenses in the period in which thelitigation services were provided.

**Note 12.**   Common Stock

**Dividend Paid**

On March 25, 2005,the Board of Directors of Liberate Technologies declared a one-time specialdividend of $2.10 per common share. The special dividend was payable to theholders of record on April 4, 2005 upon the closing of the sale ofLiberate’s North America business to Double C Technologies, LLC (the “DoubleC”) pursuant to the Asset Purchase Agreement with Double C. The Double C transactionclosed on April 7, 2005. The special dividend, which was approximately$223.0 million, was paid on April 8, 2005. Liberate made equitableadjustments to outstanding awards under its existing equity based incentiveplans in order to take account of the special dividend.

**Stockholder RightsPlan**

In May 2003, theBoard of Directors adopted a stockholder rights plan, which is designed to givethe Board flexibility in responding to unsolicited acquisition proposals. Underthe plan, rights were distributed as a dividend at the rate of one right foreach share of our common stock held by stockholders of record as of the closeof business on May 20, 2003. Each right will initially entitlestockholders to buy a fraction of a share of preferred stock. The rights willgenerally be exercisable only if a person or group acquires beneficialownership of at least 15% of our common stock or starts a tender or exchangeoffer that would give them beneficial ownership of at least 15% of our commonstock. The plan will expire on May 15, 2013.

**Stock Repurchase**

In July 2002, werepurchased 3,963,780 shares of our common stock beneficially owned by CiscoSystems, Inc. for an aggregate purchase price of $10.0 million. Thepurchase price of $2.5117 per share was the average stock price, less a twopercent discount, for the ten consecutive trading days ending on the lasttrading day prior to July 18, 2002. Following the repurchase, the shareswere retired, and they are now authorized and unissued.

**Warrant Agreements**

In fiscal 1999, we agreed to issue warrants topurchase up to 4,599,992 shares of our common stock to certain networkoperators who satisfied specific performance milestones within specific timeframes. We estimated the fair market value of the warrants using the Black-Scholespricing model as of the earlier of the date the warrants were earned or thedate that it became likely that they would be earned, and revalued the warrantsif appropriate. These agreements were all with network operators located in theNorth America territory. As a result of the sale of the North America business,the amortization of theses warrants were reclassed to discontinued operations.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 12.**   Common Stock(Continued)

Warrant activity in fiscal2003, 2004 and 2005 was as follows:
| ** **                 | ** ** | **Available** | ** ** | **Earned** | ** ** | **Repurchased** | ** ** | **Expired** | ** ** | **To Be  Earned** | ** ** |
|----------------------------|------------|---------------|------------|------------|------------|-----------------|------------|-------------|------------|------------------------|------------|
| Balance  May 31, 2002 |       | 4,599,992     |       | (2,396,660 | )          |            | —     |        |       | (220,000               | )          | 1,983,332 |   |
| Fiscal 2003 activities     |       | —        |       | —     |       |            | (400,000   | )           |       | (933,332               | )          | (1,333,332 | ) |
| Balance  May 31, 2003 |       | 4,599,992     |       | (2,396,660 | )          |            | (400,000   | )           |       | (1,153,332             | )          | 650,000 |   |
| Fiscal 2004 activities     |       | —        |       | —     |       |            | —     |        |       | (650,000               | )          | (650,000 | ) |
| Balance  May 31, 2004 |       | 4,599,992     |       | (2,396,660 | )          |            | (400,000   | )           |       | (1,803,332             | )          | — |   |
| Fiscal 2005 activities     |       | —        |       | 2,396,660  |       |            | 400,000    |        |       | (2,796,660             | )          | — |   |
| Balance May 31,  2005 |       | 4,599,992     |       | —     |       |            | —     |        |       | (4,599,992             | )          | — |   |

 

In August 2002, we paid $1.1 million toMediaOne of Colorado and MediaOne of Michigan, each a wholly owned subsidiaryof AT&T Broadband, to buy back unearned warrants to purchase 400,000shares.

As of May 31, 2004, network operators had earnedwarrants to purchase 2,396,660 shares of our common stock. Of this amount,warrants to purchase 552,774 shares had previously been exercised, warrants topurchase 163,890 shares had been retired in connection with those exercises,and warrants to purchase 546,666 shares had expired unexercised. As of May 31,2004, there were earned and outstanding warrants to purchase 1,133,330 shareswith exercise prices of $4.80 and $6.90 per share and a weighted averageexercise price of $6.71 per share. All earned and outstanding warrants expiredon May 31, 2005.

In accordance with EITF 01-09, warrant amortizationexpense has been classified as an offset to associated revenues up to theamount of cumulative revenues recognized or to be recognized. Such amortizationexpense was all reclassified as part of discontinued operations for the periodspresented.

We recorded an impairmentcharge of $5.0 million in fiscal 2004 to reduce the carrying value ofcertain warrants to a level equal to the expected future revenues from theholders of those warrants during the term of the underlying customer agreement.

**Note 13.   Stock Plans**

**1996 Stock OptionPlan**

In October 1996, ourBoard of Directors adopted, and our then-sole stockholder approved, the 1996Stock Option Plan (the “1996 Plan”). This Plan, as amended, allowed for thepurchase of up to 11,666,666 shares of our common stock. The 1996 Planpermitted grants of both incentive and non-qualified stock options toemployees and non-qualified stock options to consultants and directors. Theexercise price of incentive stock options could not be less than the fairmarket value of the common stock on the grant date, as determined by our Boardof Directors. The exercise price of non-qualified options could not be lessthan 85% of the fair market value on the grant date. The term of the incentiveand non-qualified stock options was generally ten years from the date ofgrant or a shorter term as provided in the option agreement. Options generallyvested over three to four years. As of the date of our initial public offering,all remaining shares available for grant under the 1996 Plan were transferredto the 1999 Equity 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 13.**   Stock Plans(Continued)

Incentive Plan (see discussion in the next paragraph),and no further grants were made from the 1996 Plan. As of May 31, 2005,options to purchase 236,771 shares of our common stock were outstanding underthe 1996 Plan.

**1999 EquityIncentive Plan**

In May 1999, our Board of Directors adopted, andin June 1999 our stockholders approved, our 1999 Equity Incentive Plan(the “1999 Plan”). The 1999 Plan authorizes grants of options to purchaseshares of common stock, stock appreciation rights, restricted shares and stockunits. Shares not yet issued under the 1996 Plan as of the date of our initialpublic offering (3,051,498 shares) became available for grant under the 1999Plan. Each year on June 1, commencing on June 1, 2000, the number ofshares available under the 1999 Plan is automatically increased by a numberequal to the lesser of 6,000,000 shares or 5% of the outstanding common shareson such date, unless such increase is waived by the Board. The exercise pricefor all incentive stock options and nonstatutory stock options may not be lessthan 100% or 85%, respectively, of the fair market value of our common stock onthe date of grant. Options generally vest over three to four years and have aterm of ten years. As of May 31, 2005, 18,443,466 were available forfuture grants and options to purchase 2,314,038 shares of our common stock wereoutstanding under the 1999 Plan.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 13.**   Stock Plans (Continued)

Stock option activityunder the 1996 Plan and the 1999 Plan is summarized below:
| ** **                    | ** ** | **Shares available  for grant** | ** ** | **Options  outstanding** | ** ** | **Weighted  average  exercise price** | ** ** |
|-------------------------------|------------|-------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| Balance at  May 31, 2002 |       |                                      | 902,383    |                     |       | 14,936,951                                 |       |   | $ | 9.74 |   |   |
| Authorized                    |       |                                      | 5,379,155  |                     |       | —                                     |       |   | — |   |   |
| Granted                       |       |                                      | (6,200,000 | )                        |       | 6,200,000                                  |       |   | 2.49 |   |   |
| Exercised                     |       |                                      | —     |                     |       | (46,614                                    | )          |   | 1.59 |   |   |
| Cancelled—1996 Plan      |       |                                      | —     |                     |       | (1,680,623                                 | )          |   | 3.87 |   |   |
| Cancelled—1999 Plan      |       |                                      | 9,663,598  |                     |       | (9,663,598                                 | )          |   | 7.88 |   |   |
| Balance at May 31, 2003  |       |                                      | 9,745,136  |                     |       | 9,746,116                                  |       |   | 8.02 |   |   |
| Authorized                    |       |                                      | 5,200,303  |                     |       | —                                     |       |   | — |   |   |
| Granted—Options          |       |                                      | (14,000    | )                        |       | 14,000                                     |       |   | 3.45 |   |   |
| Granted—Stock Awards     |       |                                      | (103,000   | )                        |       | —                                     |       |   | — |   |   |
| Granted—Stock Units      |       |                                      | (2,910,028 | )                        |       | —                                     |       |   | — |   |   |
| Exercised                     |       |                                      | —     |                     |       | (876,991                                   | )          |   | 2.38 |   |   |
| Cancelled—1996 Plan      |       |                                      | —     |                     |       | (735,477                                   | )          |   | 3.37 |   |   |
| Cancelled—1999 Plan      |       |                                      | 4,527,590  |                     |       | (4,469,465                                 | )          |   | 7.71 |   |   |
| Balance at May 31, 2004  |       |                                      | 16,446,001 |                     |       | 3,678,183                                  |       |   | 10.65 |   |   |
| Authorized                    |       |                                      | —     |                     |       | —                                     |       |   | — |   |   |
| Granted—Options          |       |                                      | —     |                     |       | —                                     |       |   | — |   |   |
| Granted—Stock Awards     |       |                                      | —     |                     |       | —                                     |       |   | — |   |   |
| Granted—Stock Units      |       |                                      | (160,768   | )                        |       | —                                     |       |   | 2.44 |   |   |
| Exercised                     |       |                                      | —     |                     |       | (116,445                                   | )          |   | 1.35 |   |   |
| Cancelled—1996 Plan      |       |                                      | —     |                     |       | (156,616                                   | )          |   | 4.31 |   |   |
| Cancelled—1999 Plan      |       |                                      | 2,158,233  |                     |       | (854,313                                   | )          |   | 8.27 |   |   |
| Balance at  May 31, 2005 |       |                                      | 18,443,466 |                     |       | 2,550,809                                  |       |   |   |   |   |

 

**Non-Plan StockOption Grants**

In fiscal 2003, we grantednonstatutory options to purchase 5,900,000 shares of common stock to certainnew employees, including options to purchase 5,600,000 shares granted to fourcurrent executive officers. These options were granted outside of the 1999 Planand have a term of ten years. Options granted to executive officers vestmonthly over four years and would become fully vested upon certain employmenttermination events in connection with a change of control of Liberate. As aresult of the sale of the North America business, completed in April 2005,the vesting of these options was accelerated and 4,200,000 shares wereexcercised. As of May 31, 2005, 1,700,000 options granted outside of the1999 Plan remained outstanding and had a weighted average exercise price of$1.95 per share.

**Other Stock Options**

In connection with our acquisitions, we assumed stockoptions that were granted under various stock option plans previouslyadministered by the acquired companies. We did not assume these stock optionplans and did not grant any awards under these plans subsequent to theacquisitions. Under these plans, 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 13.**   Stock Plans (Continued)

options to purchase 39,223shares were exercised during fiscal 2005, and options to purchase 59,064 shareswere cancelled during fiscal 2005. As of May 31, 2005, there were nooutstanding options to purchase shares of our common stock.

Asummary of all outstanding and exercisable options, including those assumed inconnection with our acquisitions and the stock options issued outside of thestock plans, as of May 31, 2005 is as follows:
| ** **              | ** ** | **Options outstanding** | ** ** | ** **      | ** ** | ** **                    | ** ** |
|-------------------------|------------|------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | **Weighted**    | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | **average**     | ** ** | ** **                    | ** ** | **Options vested/exercisable** | ** ** |
| ** **              | ** ** | **Number of**           | ** ** | **remaining**   | ** ** | **Weighted**                  | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| **Range of**       | ** ** | **options**                  | ** ** | **contractual** | ** ** | **Average**                   | ** ** | **options** | ** ** | **average** | ** ** |
| **exercise price** | ** ** | ** **                   | ** ** | **outstanding** | ** ** | **life (in years)** | ** ** | **exercise price** | ** ** | **exercisable** | ** ** | **exercise price** | ** ** |
| $1.56-$  2.25 |       | 64,312                       |       |            | 3.18       |                          |       |   | $ | 2.24 |   |   | 63,200 |   |   | $ | 2.25 |   |   |
| $2.39-$  2.39 |       | 1,705,156                    |       |            | 7.87       |                          |       |   | 2.39 |   |   | 1,705,156 |   |   | 2.39 |   |   |
| $2.42-$  6.35 |       | 1,034,916                    |       |            | 6.44       |                          |       |   | 4.04 |   |   | 1,003,050 |   |   | 4.10 |   |   |
| $6.77-$  9.10 |       | 962,304                      |       |            | 6.36       |                          |       |   | 8.91 |   |   | 959,694 |   |   | 8.91 |   |   |
| $9.15-$96.38            |       | 484,121                      |       |            | 5.19       |                          |       |   | 37.88 |   |   | 484,121 |   |   | 37.88 |   |   |
|                    |       | 4,250,809                    |       |            | 6.80       |                          |       |   | 8.31 |   |   | 4,215,221 |   |   | 8.35 |   |   |
|                         |            |                              |            |                 |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As of May 31, 2004,options to purchase 98,287 shares were vested with a weighted average exerciseprice of $4.03 per share.

**Stock Units AwardProgram**

During fiscal 2004, we implemented a program to grantstock units to employees and non-employee directors under the 1999 Plan. Eachstock unit entitles the holder to receive one share of our common stock whenthe stock unit vests. Stock units granted to employees generally vest over aperiod of four years, and those granted to non-employee directors generallyvest over 12 months. Upon termination of employment unvested stock unitswill be forfeited. On the vesting dates, stock units are settled by thedelivery of the corresponding number of shares of our common stock, and thefair value of the common stock delivered becomes compensation to the holder andis subject to tax withholdings. Such fair value is based on the closing priceof our common stock on the last trading day prior to the vesting date. Infiscal 2005, we granted 160,768 stock units, 1,218,512 stock units becamevested (of which 216,913 vested units were withheld to satisfy employeewithholding taxes, resulting in a net issuance of 989,835 shares) and 1,303,290were cancelled due to employee terminations primarily related to the AssetSales. As of May 31, 2005, 191,564 stock units remained outstanding.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 13.**   Stock Plans (Continued)

Inconnection with the granting of stock units in fiscal 2005 and 2004, werecorded $400,000 and $10.4 million of deferred stock-basedcompensation, respectively, based on the fair value of the underlying shares ofour common stock at the date of grant, and such value is amortized over thevesting period as compensation expenses. In fiscal 2004, $1.2 million and$800,000 was amortized due to discontinued operations and continuingoperations, respectively. In fiscal 2005, $1.2 million and $2.8 million wasamortized due to discontinued operations and continuing operations,respectively. During fiscal 2005, $4.4 million has been forfeited due toemployee terminations and the unamortized balance of deferred stock-basedcompensation was $556,000 at May 31, 2005. For the periods presented, theamortization of deferred stock-based compensation by functions, excludingamounts related to the Asset Sales was as follows (in thousands):
| ** **                  | ** ** | **Years ended May 31,**       | ** ** |
|-----------------------------|------------|----------------------------------------------|------------|
| ** **                  | ** ** | **   2005   ** | ** ** | **    2004    ** | ** ** |
| Cost of revenues            |       | $                                            | 53         |   |   | $ | 63 |   |   |
| Research and  development   |       | 239                                          |       |   | 370 |   |   |
| Sales and  marketing        |       | 587                                          |       |   | 138 |   |   |
| General and  administrative |       | 1,571                                        |       |   | 202 |   |   |
|                        |       | $                                            | 2,450      |   |   | $ | 773 |   |   |

 

We did not grant any stockunits prior to fiscal 2004 and, accordingly, did not record any compensationexpense related to stock units in 2003.

**Stock Award**

In September 2003, weentered into a management transition agreement and related stock awardagreement with a former executive officer. Pursuant to the stock award agreement,we granted the former executive officer an award of 103,000 shares of ourcommon stock with a value of $3.40 per share, and these shares were fullyvested on the date of grant. We recorded the value of the shares ascompensation expense in the second quarter of fiscal 2004.

**Deferred Stock-basedCompensation**

In connection with thegrant of certain stock options to employees prior to our initial publicoffering, we recorded deferred stock-based compensation of$7.1 million in fiscal 1999 and $1.6 million in fiscal 2000,representing the difference between the estimated fair value of the commonstock for accounting purposes and the option exercise price of such options atthe date of grant. Such amounts are presented as a reduction of stockholders’equity. As of May 31, 2004, the deferred stock-based compensationrelated to these stock options was fully amortized. Amortization of deferred stock-basedcompensation for the

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 13.**   Stock Plans (Continued)

periods reportedconsisted of amounts related to the following functions for Liberate, excludingthe amounts that were reclassed to discontinued operations (in thousands):
| ** **                  | ** ** | **Years ended May 31,** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | **2005**                               | ** ** | ** 2004 ** | ** ** | **2003** | ** ** |
| Cost of revenues            |       | $                                      | —     |   |   | $ | 1 |   |   | $ | 132 |   |
| Research and  development   |       | —                                 |       |   | 4 |   |   | 469 |   |
| Sales and  marketing        |       | —                                 |       |   | 3 |   |   | 257 |   |
| General and  administrative |       | —                                 |       |   | 2 |   |   | 441 |   |
|                        |       | $                                      | —     |   |   | $ | 10 |   |   | $ | 1,299 |   |

 

**1999 Employee StockPurchase Plan**

In May 1999, theBoard of Directors adopted our 1999 Employee Stock Purchase Plan (“1999Purchase Plan”) and the stockholders approved the 1999 Purchase Plan in June 1999.A total of 1,666,666 shares of common stock were reserved for issuanceunder the 1999 Purchase Plan. In addition, starting on June 1, 2000, theavailable pool automatically increased each year by the lesser of1,666,666 shares or 2% of the outstanding common shares on the date of theincrease unless such increase is waived by the Board. The 1999 Purchase Planpermits eligible employees to acquire shares of our common stock throughperiodic payroll deductions of up to 15% of base cash compensation. Eachparticipant could purchase up to 1,500 shares in any offering period beginningbefore September 30, 2002, and up to 6,000 shares in any offering periodbeginning on or after October 1, 2002. The price at which the common stockcould be purchased was 85% of the lower of the fair market value of our commonstock on the date immediately before the first day of the applicable offeringperiod or on the last day of the respective offering period. Each offeringperiod has a maximum duration of six months. The first offering periodcommenced on the effective date of the initial public offering and ended on March 31,2000. As of May 31, 2004, 4,999,998 shares of common stock were reservedunder the 1999 Purchase Plan, of which 3,858,963 shares were available forissuance. Employees purchased 381,217 shares in fiscal 2002 and 204,068 sharesin fiscal 2003. In January 2003, the Board suspended the 1999 PurchasePlan, and accordingly, no shares were purchased in the second half of fiscal2003 or in fiscal 2004.

**Note 14.**   Excess Facilities Charges and RelatedAsset Impairment

Excess facilities charges represent remaining leasecommitments on vacant facilities, net of expected sublease income. Weperiodically evaluate our existing needs, the current and estimated futurevalue of our subleases, and other future commitments to determine whether weshould record excess facilities charges or adjustments to such charges.Additionally, we periodically evaluate our leasehold improvements forimpairment and, if necessary, we reduce the carrying value using estimates offuture cash flows to a level equal to the expected future value at that time.We have an existing commitment to lease office space at our former headquartersin San Carlos, California, in excess of our needs, and we did not anticipatethat we would be able to sublease a substantial portion of our excess officespace in the near future.

In fiscal 2005, we recorded excess facilities chargesof $5.8 million. This charge included $4.4 million which was based on revisedestimates related to future sublease income and the additional space vacated inQ4 FY04. We took the charge in Q1 FY05 due to the fact that we were inbankruptcy at May 31, 2004. In September 2004, the Bankruptcy Courtissued a ruling dismissing our bankruptcy case, which removed the 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 14.**   Excess FacilitiesCharges and Related Asset Impairment (Continued)

uncertainty that existedat May 31, 2004. In addition, during FY05, we recorded charges of $1.4million related to lease payments made (after the dismissal of the bankruptcycase), an amendment of sublease income estimates and a revision of theestimated future cash flows discounted at the original effective interest rate.As of May 31, 2005, we have accrued $24.9 million as excess facilitiesprovision included in our liabilities, of which $18.6 million is in long-termand $6.3 is in short-term.

In fiscal 2004, we recorded additional excessfacilities charges of $4.0 million, which consisted of $593,000 of excessfacilities charges and $2.0 million of write-off of the remainingleasehold improvements related to the San Carlos facility and $1.4 million ofexcess facilities charges related to our sales office in the U.K. because we nolonger occupy the facility. See Notes 1 and 11 for discussions of the SanCarlos facility and the rejection of the lease in connection with ourbankruptcy filing.

In fiscal 2003, werecorded excess facilities charges and related asset impairment of$25.1 million, of which $22.5 million was related to excessfacilities and $2.6 million was related to certain long-lived assets,including leasehold improvements. During fiscal 2003, we vacated additionalspace in the San Carlos facility as a result of our restructuring and relatedreductions in workforce. In addition, we adjusted our estimated timeframes tosublease the excess office space and the estimated sublease rates to reflectthe continuous downward trend in the commercial real estate market.

**Note 15.**   Restructuring Costs

Restructuring costsinclude severance costs, facilities costs and other costs. Severance costsinclude expenses related to severance pay and related employee benefitobligations, including the acceleration of certain stock option grants inconnection with terminated employees. Facilities costs include obligationsunder non-cancelable leases for facilities that we will no longer occupy, aswell as the cost associated with unrecoverable leasehold improvements. Othercosts related to restructuring include the write-down of intangible assets,disposal of fixed assets and amounts paid in connection with terminatedcontracts.

**Fiscal 2005**

There were norestructuring costs for fiscal 2005. The remaining liability of $37,000 at May 31,2004 was paid in Q4 FY05.

**Fiscal 2004**

During fiscal 2004, we recorded additionalrestructuring costs of $345,000 in connection with the reductions in forceannounced in January and April 2003. We also recorded a reversal of $34,000restructuring costs related to employees we decided to retain.

During fiscal 2004, weterminated the employment of five employees in the first quarter and 15 employeesin the second quarter. As a result, we recorded $1.1 million of restructuringcosts related to severance payments

**Fiscal 2003**

As part of our ongoing efforts to control costs, weeffected a reduction in force in July and August 2002, resulting in aheadcount reduction of 106 employees. In connection with this reduction in 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 15.**   Restructuring Costs(Continued)

force, we recorded$2.2 million of restructuring costs in the first quarter of fiscal 2003,and the restructuring costs were comprised primarily of salary and employee-relatedexpenses.

In January 2003, we announced a further reductionin force. We terminated the employment of 228 employees and recorded$5.1 million of restructuring costs related to salary and employee-relatedexpenses.

In April 2003, we announced another reduction inforce. This action resulted in a headcount reduction of 75 employees,worldwide, with 32 on transition plans as of May 31, 2003. We initiallyestimated a total restructuring charge of approximately $2.3 millioncomprising salary and employee-related expenses. For the quarter ended May 31,2003, we recorded $2.1 million of the initial $2.3 million estimate.

During fiscal 2003, management revised its estimatesunderlying the restructuring accrual. Accordingly, we reversed $241,000 ofrestructuring costs previously recorded.

Asummary of restructuring costs is as follows (in thousands):
| ** **                                        | ** ** | ** Severance ** | ** ** | **Facilities** | ** ** | ** Other ** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|---------------------------|------------|----------------|------------|-----------------------|------------|-----------|------------|
| Accrued restructuring costs at May 31, 2002  |       |                      | $          | 65             |       |                  |       | $         | 188        |   |   |   | $ | 14 |   |   | $ | 267 |   |
| Restructuring  costs                              |       |                      | 8,827      |           |       |                  | —     |      |       |   | — |   |   | 8,827 |   |
| Cash payments                                     |       |                      | (8,328     | )              |       |                  | (37        | )         |       |   | (2 | ) |   | (8,367 | ) |
| Revision of  estimates                            |       |                      | (79        | )              |       |                  | (151       | )         |       |   | (11 | ) |   | (241 | ) |
| Effect of foreign  exchange                       |       |                      | 11         |           |       |                  | —     |      |       |   | (1 | ) |   | 10 |   |
| Accrued restructuring costs at May 31, 2003  |       |                      | 496        |           |       |                  | —     |      |       |   | — |   |   | 496 |   |
| Restructuring  costs                              |       |                      | 1,440      |           |       |                  | —     |      |       |   | — |   |   | 1,440 |   |
| Cash payments                                     |       |                      | (1,865     | )              |       |                  | —     |      |       |   | — |   |   | (1,865 | ) |
| Revision of  estimates                            |       |                      | (34        | )              |       |                  | —     |      |       |   | — |   |   | (34 | ) |
| Accrued restructuring costs at May 31, 2004  |       |                      | 37         |           |       |                  | —     |      |       |   | — |   |   | 37 |   |
| Restructuring  costs                              |       |                      | —     |           |       |                  | —     |      |       |   | — |   |   | — |   |
| Cash payments                                     |       |                      | (37        | )              |       |                  | —     |      |       |   | — |   |   | (37 | ) |
| Revision of  estimates                            |       |                      | —     |           |       |                  | —     |      |       |   | — |   |   | — |   |
| Accrued  restructuring costs at May 31, 2005 |       |                      | $          | —         |       |                  |       | $         | —     |   |   |   | $ | — |   |   | $ | — |   |

 

The table above reflectsthe restructuring activity for Liberate on a consolidated basis for the periodsshown. Restructuring costs that have been reclassed to discontinued operationswere $64,000 and $1.5 million for fiscal years 2004 and 2003,respectively.

**Note 16.**   Income Taxes

We account for income taxes in accordance with SFASNo. 109, “Accounting for Income Taxes.” Deferred taxes result from differencesbetween the financial and tax bases of Liberate's assets and liabilities andare adjusted for changes in tax rates and tax laws when changes are enacted.Valuation allowances are recorded to reduce deferred tax assets when it is morelikely than not that a tax benefit will not be realized by Liberate.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In accordance with FAS 109, we have recognized a taxbenefit in continuing operations and an equal offsetting additional taxprovision in the discontinued operation in each period that continuingoperations had a loss that can be applied to offset income from thediscontinued operation. 

Thecomponents of income (loss) before income taxes are as follows (in thousands):
| ** **                         | ** ** | **Years Ended May 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| ** **                         | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Ongoing Operations:                |       |                                   |       |   |   |   |   |
| Domestic                           |       | (29,277                                | )          | (18,614 | ) | (107,305 | ) |
| Foreign                            |       | 731                                    |       | 647 |   | (6,607 | ) |
|                               |       | (28,546                                | )          | (17,967 | ) | (113,912 | ) |
| Discontinued  Operations:          |       |                                   |       |   |   |   |   |
| Domestic                           |       | 77,764                                 |       | (18,894 | ) | (72,364 | ) |
| Foreign                            |       | (1,142                                 | )          | 3,434 |   | (2,261 | ) |
|                               |       | 76,622                                 |       | (15,460 | ) | (74,625 | ) |
| Income (loss)  before income taxes |       | 48,076                                 |       | (33,427 | ) | (188,537 | ) |

 

Thecomponents of the provision for income taxes are as follows (in thousands):
| ** **                        | ** ** | **Years Ended May 31,** | ** ** |
|-----------------------------------|------------|----------------------------------------|------------|
| ** **                        | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Current:                          |       |                                   |       |   |   |   |   |   |   |
| Federal                           |       | (9,991                                 | )          |   | — |   |   | — |   |
| State                             |       | (990                                   | )          |   | (42 | ) |   | 220 |   |
| Foreign                           |       | 123                                    |       |   | 17 |   |   | 1,155 |   |
|                              |       | (10,858                                | )          |   | (25 | ) |   | 1,375 |   |
| Deferred:                         |       |                                   |       |   |   |   |   |   |   |
| Federal                           |       | —                                 |       |   |   |   |   |   |   |
| State                             |       |                                   |       |   |   |   |   |   |   |
| Foreign                           |       | —                                 |       |   |   |   |   |   |   |
|                              |       | —                                 |       |   |   |   |   | — |   |
| Total provision for  income taxes |       | (10,858                                | )          |   | (25 | ) |   | 1,375 |   |

 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 16.**   Income Taxes(Continued)

For the periods reported,the provision for income taxes differs from the amounts that would result byapplying the applicable statutory federal income tax rate to income beforetaxes as follows (in thousands):
| ** **                                  | ** ** | **Years Ended May 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Benefit at  Federal statutory rate          |       | (9,991                                 | )          | (11,691 | ) | (135,156 | ) |
| State income  taxes, net of Federal benefit |       | (999                                   | )          | (1,169 | ) | (13,913 | ) |
| Change in  valuation allowance              |       | —                                 |       | 14,056 |   | 66,092 |   |
| Research &  Development Credit     |       | —                                 |       | (1,000 | ) | (1,000 | ) |
| Nondeductible  In-Process R&D           |       | —                                 |       | — |   | 102 |   |
| Nondeductible  goodwill amortization        |       | —                                 |       | 108 |   | 85,329 |   |
| Stock  compensation                         |       | —                                 |       | 20 |   | 443 |   |
| Other                                       |       | 132                                    |       | (349 | ) | (522 | ) |
|                                        |       | (10,858                                | )          | (25 | ) | 1,375 |   |

 

Deferredtax assets (liabilities) consist of the following (in thousands):
| ** **                    | ** ** | **Years Ended May 31,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **2005**                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| Deferred Tax Assets           |       |                                   |       |   |   |   |   |
| Net operating losses          |       | 6,779                                  |       | 200,813 |   | 182,128 |   |
| Temporary differences         |       | 20,979                                 |       | 55,493 |   | 60,123 |   |
| Tax Credits                   |       | 399                                    |       | 11,659 |   | 11,659 |   |
|                          |       | —                                 |       | — |   |   |   |
| Total deferred tax asset      |       | 28,157                                 |       | 267,965 |   | 253,910 |   |
| Valuation allowance           |       | (28,157                                | )          | (267,965 | ) | (253,910 | ) |
| Total net deferred tax  asset |       | —                                 |       | — |   | — |   |

 

We recorded a valuation allowance for the entiredeferred tax asset due to uncertainties regarding the realization of the asset,our lack of profitability to date, and our uncertainty regarding futureoperating profitability. The total valuation allowance decreased by $239.8million in 2005 and increased by $14 million in 2004. The decrease in valuationallowance in 2005 primarily relates to the limitation on net operating loss andtax credit carryfowards pursuant to Section 382 of the Internal RevenueCode. If the valuation allowance relating to deferred assets were released asof May 31, 2005, approximately $27.7 million would be credited to thestatement of operations, and $.4 million would be credited to additionalpaid-in capital.

As of May 31, 2005, we had federal and state netoperating loss carry-forwards of $18.9 million and $4.1 million, respectively,and tax credits totaling $.4 million. The federal and state loss carry-forwardsexpire at various dates between 2005 and 2025. The tax credits expire atvarious dates between 2011 and 2025. Under current tax law, net operating losscarry-forwards available to offset future operating income in any given yearmay be limited upon the occurrence of certain events, including significantchanges in ownership interests. Based on our analysis, we believe that an “changeof ownership” as defined under Section 382 of the Internal Revenue Codehas occurred, and therefore, we believe that the future use of part of our netoperating losses and tax credit carryforwards may be limited.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 17.**   Related Party Transactions

**Transactions withCox Communications**

A former member of ourBoard, Chris Bowick, is an executive officer of Cox Communications. Cox is botha significant customer and a stockholder, currently owning less than fivepercent of our outstanding stock. In fiscal 2000, we entered into an agreementwith Cox for the license of our software products and for the provision ofservices. The agreement also provides that Cox will have the right to test oursoftware free of charge and without any commitment to deploy services using ourtechnology. Under the agreement, Cox paid us $6.0 million in prepaidlicenses and services, and Cox is entitled to receive the benefits of any morefavorable terms and conditions that we may grant to any other North Americannetwork operator. Total revenues from Cox during fiscal 2003 and fiscal 2004,before taking into account warrant-related offsets, were $1.6 millionand $496,000, respectively. Net revenues from Cox, including the impact of thewarrant-related offsets, were $410,000 in fiscal 2003 and a negative$697,000 in fiscal 2004. In addition, under the commercial agreement, we wererequired to issue warrants to Cox. A total of 883,332 shares of our commonstock are reserved for issuance to Cox under these warrants. The exercise priceof these warrants is $6.90 per share. These warrants vested according tomilestones established in the commercial agreement to motivate Cox to deployour products and as of fiscal 2004, they were fully vested. In addition, Coxpaid us $285,000 in fiscal 2003 and $396,000 in fiscal 2004 related primarilyto services.

**EmploymentAgreements and Transactions with Officers**

*Executive Employment Agreements.  *InMarch and April 2003, we entered into new employee retentionagreements with David Lockwood, Patrick Nguyen, Gregory Wood and Philip Vachon.Under the terms of the retention agreements, in the event of a change ofcontrol of Liberate that is followed within one year by the officer’s actual orconstructive termination, the officer will receive a payment equal to twice histotal taxable compensation for the prior fiscal year, with a minimum payment of$500,000 and a maximum payment of $750,000.

On June 15, 2005, the Board of Directors ofLiberate Technologies (“Liberate”) approved the payment of certain severancepayments in connection with amendments to the existing employee retentionagreements. As a result of the sale of the North America business toDouble C Technologies, LLC on April 7, 2005, each Executive was entitledto constructively terminate his employment and receive a severance payment. TheBoard determined that Liberate’s continuing operations would benefit from thecontinuing employment of such Executives, and had approved the amendment oftheir employee retention agreements effective as of June 15, 2005 so thatthe Executives will no longer be required to have terminated employment to beentitled to the severance payments thereunder. Instead, Liberate will pay eachExecutive the amount he would otherwise have been entitled to had suchExecutive’s employment been terminated pursuant to the terms of thoseagreements, at which time, the agreements will terminate and the Executiveswill not be entitled to any further payments or benefits thereunder.

Pursuant to the employee retention agreements as soamended, Liberate will make such payments to the Executives within thirty daysfollowing the effective date. The value of the payment amounts pursuant to theemployee retention agreements remain unchanged, which payment amount for eachExecutive will be equal to twice the Executive’s total taxable compensation forthe prior fiscal year, with a minimum payment of $500,000, and a maximumpayment of $750,000. The payments were made on June 17, 2005 and July 14,2005.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 17.**   Related Party Transactions(Continued)

*Option and Stock Unit Grants.  *Inthe third quarter of fiscal 2003, the compensation committee of the boardapproved new options grants of 1.3 million shares to each of Mr. Lockwood,Mr. Wood, and Mr. Nguyen and 1.7 million shares to Mr. Vachon.The vesting of these options accelerated on April 7, 2005, in connectionwith the sale of the North America business.

In July 2002, in order to retain qualifiedindependent directors, the board approved the grant of options to purchase50,000 shares of our stock to each of the three independent board members.These options have an exercise price of $2.42 per share, which was the closingprice of the stock on the date of grant, and vest monthly over four years. Thevesting of these options accelerated on April 7, 2005, in connection withthe sale of the North America business.

In October 2003, Liberate’s four non-employeedirectors each received 5,882 stock units under the terms of the 1999 EquityIncentive Plan. The stock units vest over one year following grant, and vestingaccelerates upon certain changes of control of Liberate. In October 2004,these four non-employee directors each received 7,692 stock units under theterms of the 1999 Equity Incentive Plan. The vesting of these stock unitsaccelerated on April 7, 2005, in connection with the sale of the NorthAmerica business.

In April 2004, the compensation committee of theBoard approved new stock unit grants representing 150,000 shares to each of Mr. Woodand Mr. Nguyen and 100,000 shares to Mr. Vachon. The stock units vestover four years following the date of grant, and vesting accelerates uponcertain termination events in connection with a change of control. The vestingof these stock units accelerated on April 7, 2005, in connection with thesale of the North America business.

As part of our standard compensation package, certainemployees and managers may be eligible to participate in a variety ofdiscretionary and non-discretionary bonus plans or commission plans. We accruebonus and commission expense ratably over the fiscal year, based on expectedpayouts against those plans.

*Consulting Agreements.  *InSeptember 2002, we entered into a consulting agreement with Mr. Limpin which we agreed to pay him not less than $10,000 per month for consultingservices. We paid Mr. Limp approximately $123,000 under this consultingagreement, which terminated in March 2003. In November 2002, weentered into a letter agreement with Philip Vachon, in which we agreed to payhim $56,500 per month for advisory services through February 28, 2003. Wesubsequently extended that agreement through April 11, 2003, at which timeMr. Vachon became president—Liberate International.

*Senior Management Bonus Plan andSales Commission Plan.  *In July 2002, thecompensation committee of the board of directors approved a senior managementbonus plan under which Mr. Kertzman, Mr. Sisson, and Mr. Walkerwould have been eligible to receive bonuses if Liberate had achieved specifiedrevenue and operating expense targets. No payments were made under this plan.In July 2002, the compensation committee also approved a sales commissionplan under which Mr. Fitzpatrick would be eligible to receive commissionsbased on achievement of revenue and earnings targets. During fiscal 2003, wepaid Mr. Fitzpatrick $31,000 under his sales commission plan.

*Executive Loans.  *In2001, we extended loans in the principal amount of $500,000 to each of Mr. Limp,Mr. Fitzpatrick, and Mr. Sisson. Each loan carried an interest rateof 5.9% compounded annually and was due two years from issuance. In July 2002,Mr. Limp repaid the full principal and interest due under his promissorynote. In November 2002, Mr. Fitzpatrick repaid $275,000 of theprincipal amount of his promissory note. According to the terms of Mr. Fitzpatrick’spromissory note, his 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 17.**   Related Party Transactions(Continued)

outstanding principalbalance of $225,000 and all accrued interest was due 60 days from December 27,2002, the date of the termination of his employment. As of May 31, 2005, Mr. Fitzpatrickhad not repaid the balance of this loan and we have recorded a reserve to coverour potential loss. In January 2003, Mr. Sisson repaid the fullprincipal and interest due under his promissory note.

*Fiscal2001 Retention Agreements.  *In January 2001, weentered into employee retention agreements with Coleman Sisson, DonaldFitzpatrick, and David Limp, who were then serving as executive officers. Eachretention agreement was to provide $818,000 in periodic payments to eachofficer who achieved two years of continuous service through January 2003.In July 2002, Mr. Limp left Liberate as part of a reduction in forceand realignment of management roles, which triggered a payment of the remaining$526,000 under his retention agreement. During fiscal 2003, we paid Mr. Fitzpatrick$219,000 under his retention agreement. In connection with the events leadingto the restatement of our financial statements, we terminated Mr. Fitzpatrick’semployment on December 27, 2002, before additional payments were due.During fiscal 2003, we paid Mr. Sisson the remaining $526,000 due underhis retention agreement.

**Note 18. Subsequent Events**

**Sale of Non-NorthAmerica business**

On July 12, 2005,Liberate Technologies, completed the previously announced sale of substantiallyall of the assets of its Non-North America business to SeaChange International, Inc.(“SeaChange”). SeaChange acquired certain assets and assumed certain limitedliabilities relating to the business outside of North America. Liberatereceived cash consideration of approximately $23.5 million in connection withthe completion of the asset sale to SeaChange. The sale was made pursuant tothe Asset Purchase Agreement, dated as of April 15, 2005. Additionally,there was a contingent success fee of approximately $411,000 payable to Allen &Company (advisors to the transaction) upon consummation of the sale. This feewill be recorded as an expense in Q1 FY06.

**Dividend of $0.15per Common Share**

On June 15, 2005, theBoard of Directors of Liberate declared a one-time dividend of $0.15 per commonshare. The dividend was payable to the holders of record on June 27, 2005upon the closing of the sale of Liberate’s Non-North America business toSeaChange pursuant to the terms of the Asset Purchase Agreement, dated as of April 15,2005. The SeaChange transaction closed on July 12, 2005. As requiredby the NASD rules, the ex-dividend date was set one business day after thepayment date. The dividend aggregating $16.6 million was paid on July 13,2005.

**ExecutiveManagement Retention Bonuses**

On June 15, 2005, the Board of Directors ofLiberate Technologies (“Liberate”) approved payments in connection withamendments to existing employee retention agreements that were entered into asof March 14, 2003, by Liberate and each of Messrs. David Lockwood,Liberate’s Chairman and Chief Executive Officer, Philip Vachon, President—LiberateInternational, Gregory S. Wood, Liberate’s Executive Vice President and ChiefFinancial Officer, and Patrick Nguyen, Liberate’s Executive Vice President—CorporateDevelopment (collectively, the “Executives”). Under the terms of the employeeretention agreements, each Executive was entitled to a severance payment upon aChange in Control (as 

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 18. SubsequentEvents (Continued)**

defined therein) that isfollowed within one year by an Actual or Constructive Termination (as definedtherein) of employment of such Executive. As a result of the sale of the NorthAmerica business to Double C Technologies, LLC on April 7, 2005, eachExecutive was entitled to constructively terminate his employment and receive aseverance payment. The Board had determined that Liberate’s continuingoperations would benefit from the continuing employment of such Executives, andhad approved the amendment of their employee retention agreements effective asof June 15, 2005 (the “Effective Date”) so that the Executives will nolonger be required to have terminated employment to be entitled to the paymentsthereunder. Instead, Liberate will pay each Executive the amount he wouldotherwise have been entitled to had such Executive’s employment been terminatedpursuant to the terms of those agreements, at which time, the agreements willterminate and the Executives will not be entitled to any further payments orbenefits thereunder.

Pursuant to the employeeretention agreements as so amended, Liberate made such payments to theExecutives within thirty days following the Effective Date. The value of thepayment amounts pursuant to the employee retention agreements remain unchanged,which payment amount for each Executive will be equal to twice the Executive’stotal taxable compensation for the prior fiscal year, with a minimum payment of$500,000, and a maximum payment of $750,000. The payments were made on June 17,2005 and July 14, 2005.

**Filing of GoingPrivate Proxy Statement**

On June 23, 2005, Liberate filed with theSecurities and Exchange Commission a preliminary Schedule 13E-3Transaction Statement with respect to a going private transaction and apreliminary Schedule 14A Proxy Statement soliciting stockholders to vote on a 1-for-250,000reverse stock split immediately followed by a 250,000-for-1 forwardstock split of Liberate’s common stock (the “Reverse/Forward Stock Split”). Ifapproved, the Reverse/Forward Stock Split should enable Liberate to completethe going private transaction provided there will be fewer than 300 registeredholders of common stock. This will permit Liberate to discontinue theobligations of filing annual and periodic reports and make other filings withthe SEC.

Once the Schedule 13E-3Transaction Statement and Schedule 14A Proxy Statement are approved in adefinitive form by the SEC and are, Liberate will mail copies to all of itsstockholders, describing all of the material terms of the Reverse/Forward StockSplit. Liberate currently intends to effect the Reverse/Forward Stock Split assoon as possible thereafter.

**Letter of CreditEstablished**

On June 23, 2005,Liberate established a letter of credit in the amount of $8.8 million withCircle Star Center Associates named as the beneficiary as a security depositfor our former headquarters in San Carlos, California. In order to secureour obligations with the bank, we established a certificate of deposit for $8.8million. This arrangement replaces a letter of credit with another bankinginstitution, and replenishes the letter of credit to the level required in thelease agreement.

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**LIBERATE TECHNOLOGIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Note 18. SubsequentEvents (Continued)**

**EmployeeDiscretionary Cash Bonuses**

On July 14, 2005, the Compensation Committee of theBoard of Directors of Liberate Technologies, a Delaware corporation (the“Registrant”) approved the payment of a one-time discretionary cash bonus inrecognition of employment performance to nine of the Registrant’s remainingemployees including executives, finance and administrative staff in theaggregate amount of $1,480,000. Specifically, the Compensation Committeeapproved cash bonus payments to the following executive officers: $325,000 toeach of David Lockwood, Chief Executive Officer, Gregory Wood, Executive VicePresident and Chief Financial Officer, and Patrick Nguyen, Executive VicePresident of Corporate Development, and $200,000 to Phil Vachon,President—Liberate International.

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**ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

None.

**ITEM 9A. CONTROLS AND PROCEDURES**

*Evaluation ofDisclosure Controls and Procedures*

Under the supervision andwith the participation of our management, including our Chief Executive Officer(CEO) and Chief Financial Officer (CFO), we conducted an evaluation of ourdisclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended (the Exchange Act). Basedon this evaluation, our CEO and CFO concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this annualreport.

*Management’s Reporton Internal Control Over Financial Reporting*

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) underthe Securities Exchange Act of 1934, as amended). Our management, including ourCEO and CFO, conducted an evaluation of the effectiveness of our internalcontrol over financial reporting as of May 31, 2005. In making ourevaluation, we used the framework set forth by the Committee of SponsoringOrganizations of the Treadway Commission (COSO) in *Internal Control—Integrated Framework*.

Based on our evaluation, under the framework set forthby the COSO in *Internal Control—IntegratedFramework*, we concluded that, as of May 31, 2005, our internalcontrol over financial reporting was effective. Our assessment of the effectivenessof our internal control over financial reporting as of May 31, 2005has been audited by PricewaterhouseCoopers LLP, an independent registeredpublic accounting firm, as stated in their report included herein.

Our management, includingour CEO and CFO, acknowledge that because of its inherent limitations, internalcontrol over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

*Changes in InternalControl Over Financial Reporting*

There were no changes in our internal control overfinancial reporting during the quarter ended May 31, 2005 that havematerially affected, or are reasonably likely to materially affect our internalcontrols over financial reporting.

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**PART III.**

**ITEM10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

The information regarding our directors and executiveofficers required by this Item is incorporated by reference to the informationset forth in the section entitled “Board of Directors”, “Election of Directors”and “Executive Officers” in the definitive proxy statement for our 2005 annualmeeting of stockholders to be filed with the SEC pursuant toRegulation 14A not later than 120 days after the end of the fiscalyear covered by this Form 10-K (the “Proxy Statement”).

Information required by the Item with respect tocompliance with Section 16(a) of the Securities Act of 1934 isincorporated by reference to the information set forth in the section entitled “Section 16(a) BeneficialOwnership Reporting Compliance” in the Proxy Statement.

We have adopted a Code ofEthics for Senior Financial Officers, which applies to our Chief ExecutiveOfficer, Chief Financial Officer, controller and other individuals in ourfinance department performing similar functions. The Code of Ethics isavailable on our website at www.liberate.com. If any substantive amendment tothe Code of Ethics is made or any waiver is granted thereunder, including anyimplicit waiver, our Chief Executive Officer, Chief Financial Officer or otherauthorized officer will disclose the nature of such amendment or waiver on ourwebsite at www.liberate.com or in a report on Form 8-K.

**ITEM 11. EXECUTIVE COMPENSATION**

The information requiredby this Item is incorporated by reference to the information set forth in thesection entitled “Executive Compensation” in the Proxy Statement.

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS**

The information requiredby this Item regarding security ownership of certain beneficial owners isincorporated by reference to the information set forth in the section entitled “StockOwnership of Certain Beneficial Owners and Management” in the Proxy Statement.

**ITEM13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

The information requiredby this Item is incorporated by reference to the information set forth in thesection entitled “Certain Relationships and Related Transactions” in the ProxyStatement.

**ITEM14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

The information requiredby this Item is incorporated by reference to the information set forth in thesection entitled “Audit Fees” in the Proxy Statement.

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**PART IV**

**ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

(a)           Thefollowing documents are filed as part of this report:

1.     Financial Statements
|                                                          | ** ** | **Page** | ** ** |
|----------------------------------------------------------|------------|----------|------------|
| Report  of Independent Registered Public Accounting Firm |       |     | 42         |   |   |
| Consolidated Balance Sheets                              |       |     | 44         |   |   |
| Consolidated Statements of Operations                    |       |     | 45         |   |   |
| Consolidated Statements of Stockholders’ Equity     |       |     | 46         |   |   |
| Consolidated Statements of Cash Flows                    |       |     | 47         |   |   |
| Notes  to Consolidated Financial Statements              |       |     | 48         |   |   |

 

2.     Financial Statement Schedules

Schedule II—Valuationand Qualifying Accounts. See page 99.

3.     Exhibits
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                              |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Agreement and Plan of Merger, dated May 16,  1997, between and Navio (incorporated by reference to similarly numbered  exhibit to the Registration Statement on Form S-1 filed by the  Registrant (Reg. No. 333-78781)).                                                                                                                                                      |
| 2.2              |       | Merger Agreement and Plan of Reorganization with SourceSuite LLC,  dated January 12, 2000 (incorporated by reference to similarly numbered  exhibit to the Registration Statement on Form S-1 filed by the  Registrant (Reg. No. 333-95139)).                                                                                                                            |
| 2.3              |       | Plan and Agreement of Reorganization with  MoreCom, Inc., dated March 27, 2000 (incorporated by reference to  similarly numbered exhibit to the Form 8-K filed by the Registrant  on July 7, 2000).                                                                                                                                                                      |
| 2.4              |       | Amendment No. 1 to Plan and Agreement of  Reorganization with MoreCom, Inc. (incorporated by reference to  similarly numbered exhibit to the Form 8-K filed by the Registrant  on July 7, 2000).                                                                                                                                                                         |
| 2.5              |       | Share Purchase Agreement, date as of July 24,  2002, by and among Liberate, 2014120 Ontario, Inc., Sigma Systems Group  (Canada) Inc., the shareholders of Sigma Systems and Arjun Jasuja, as the  Shareholders’ Representative (incorporated by reference to similarly numbered  exhibit to the current report on Form 8-K filed by Liberate on  August 22, 2002). |
| 2.6              |       | Asset Purchase Agreement dated as of  January 14, 2005 by and among Liberate Technologies, Liberate  Technologies Canada Ltd. and Double C Technologies, LLC (incorporated by  reference to similarly numbered exhibit to the Form 8-K filed by the  Registrant on January 18, 2005).                                                                                         |
| 2.7              |       | Asset Purchase Agreement, by and among Liberate  Technologies, Liberate Technologies B.V. and SeaChange  International, Inc., dated as of April 15, 2005 (incorporated by  reference to similarly numbered exhibit to the Form 8-K filed by the  Registrant on April 19, 2005).                                                                                          |
| 3.1              |       | Amended and Restated Bylaws of Liberate  (incorporated by reference to the similarly numbered exhibit to the  Registrant’s report on Form 10-K filed by the Registrant on  September 16, 2003).                                                                                                                                                                               |
| 3.2              |       | Sixth Amended and Restated Certificate of  Incorporation of Liberate (incorporated by reference to Exhibit 3.5 to  the Registration Statement on Form S-1 filed by the Registrant  (Reg. No. 333-78781)).                                                                                                                                                                     |

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| 3.3  |   | Certificate of Designation, Preferences, and Results  of Series A Junior Participating Preferred Stock (incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K  filed by the Registrant on May 14, 2003).                                                                                    |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1  |   | Specimen Certificate of Liberate’s common stock  (incorporated by reference to similarly numbered exhibit to the Registration  Statement on Form S-1 filed by the Registrant (Reg. No. 333-78781)).                                                                                                               |
| 4.2  |   | Standstill Agreement between Liberate, Delphi Asset  Management Corporation, US Trust Company of Delaware, and United States Trust  Company of New York, entered into as of January 23, 2001 (incorporated  by reference to similarly numbered exhibit to the Form 10-Q filed  by the Registrant on October 10, 2001). |
| 4.3  |   | Rights Agreement dated May 12, 2003, between  Liberate and Equiserve Trust Company, N.A., as Rights Agent (incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K  filed by the Registrant on May 14, 2003).                                                                                 |
| 4.4  |   | Form of Rights Certificate (Incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K  filed by the Registrant on May 14, 2003).                                                                                                                                                                |
| 4.5  |   | First Amendment to Rights Agreement between Liberate  Technologies and Equiserve Trust Company, N.A., dated as of January 10,  2005 (incorporated by reference to similarly numbered exhibit to the  Form 8-K filed by the Registrant on January 13, 2005).                                                            |
| 4.6  |   | First Amendment to Rights Agreement between Liberate  Technologies and Equiserve Trust Company, N.A., dated as of January 10,  2005 (incorporated by reference to similarly numbered exhibit to the  Form 8-K filed by the Registrant on January 13, 2005).                                                            |
| 9.1  |   | Voting Agreement, dated May 12, 1999, among  Liberate, Oracle, Comcast Technology, Cox Communications and MediaOne  Interactive Services (incorporated by reference to similarly numbered exhibit  to the Registration Statement on Form S-1 filed by the Registrant  (Reg. No. 333-78781)).                      |
| 9.2  |   | Amendment to Voting Agreement, dated  December 11, 2000 (incorporated by reference to similarly numbered  exhibit to the Form 10-Q filed by the Registrant on  January 12, 2001).                                                                                                                                      |
| 9.3  |   | Irrevocable Trust Agreement between Delphi Asset  Management Corporation, United States Trust Company of New York, and US Trust  Company of Delaware, effective as of January 23, 2001 (incorporated by  reference to similarly numbered exhibit to the Form 10-K filed by  the Registrant on August 24, 2001).        |
| 10.1 |   | Form of Indemnification Agreement entered into  between Liberate and its directors and executive officers (incorporated by  reference to similarly numbered exhibit to the Form 10-K filed by  the Registrant on August 24, 2001).*                                                                                    |
| 10.2 |   | Network Computer, Inc. 1996 Stock Option Plan,  and form of Option Agreement (incorporated by reference to similarly numbered  exhibit to the Registration Statement on Form S-1 filed by the  Registrant (Reg. No. 333-78781)).                                                                                       |
| 10.3 |   | Navio Communications, Inc. 1996 Stock Option  Plan and form of Option Agreement (incorporated by reference to similarly  numbered exhibit to the Registration Statement on Form S-1 filed  by the Registrant (Reg. No. 333-78781)).                                                                                    |
| 10.4 |   | Navio Communications, Inc. Non-Qualified  Option Plan, and form of Option Agreement (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                                                                                |
| 10.5 |   | 1999 Equity Incentive Plan, as amended (incorporated  by reference to the similarly numbered exhibit to the Registrant’s report on  Form 10-K filed by the Registrant on September 16, 2003).*                                                                                                                         |
| 10.6 |   | 1999 Employee Stock Purchase Plan, as amended to  date (incorporated by reference to similarly numbered exhibit to the report  on Form 10-K filed by Registrant on August 8, 2002).                                                                                                                                         |

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| 10.7  |   | Employment  Agreement between Liberate and Mitchell E. Kertzman, dated October 12,  1998, as amended, and January 5, 2000 (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-95139)).* |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14 |   | Technology License Agreement, dated  September 8, 1998, between Liberate and Oracle (incorporated by  reference to similarly numbered exhibit to the Registration Statement on  Form S-1 filed by the Registrant (Reg. No. 333-78781)).                                                  |
| 10.15 |   | Letter Agreement, dated May 16, 1997, among  Liberate, Oracle, and Netscape (incorporated by reference to similarly  numbered exhibit to the Registration Statement on Form S-1 filed  by the Registrant (Reg. No.333-78781)).                                                                |
| 10.16 |   | Source Code License Agreement, dated July 9,  1996, between Netscape and TVSoft, as amended (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                                          |
| 10.17 |   | OEM License Agreement, dated October 17, 1996,  between Oracle and Netscape, as amended (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                                              |
| 10.18 |   | Cooperation Agreement, dated July 1, 1999,  between Liberate and Intel, as amended (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                                                   |
| 10.21 |   | Stockholders Agreement, dated August 11, 1997,  among Liberate and the investors named therein (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                                       |
| 10.29 |   | Circle Star Lease Agreement for San Carlos office  space, dated April 27, 1999 (incorporated by reference to similarly  numbered exhibit to the Registration Statement on Form S-1 filed  by the Registrant (Reg. No. 333-78781)).                                                       |
| 10.31 |   | Tax Allocation and Indemnity Agreement, dated  August 17, 1997, between Liberate and Oracle (incorporated by reference  to similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                                          |
| 10.33 |   | Network Computer, Inc. Stock Option Agreement,  dated October 15, 1998, with Mitchell Kertzman (incorporated by  reference to similarly numbered exhibit to the Registration Statement on  Form S-1 filed by the Registrant (Reg. No. 333-78781)).*                                 |
| 10.37 |   | Master Lease Agreement, dated August 2, 1999,  with Steelcase Financial Services, Inc (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on October 13, 1999).                                                                          |
| 10.38 |   | Irrevocable Letter of Credit dated September 3,  1999 and Standby Letter of Credit Agreement (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the Registrant  on October 13, 1999).                                                                   |
| 10.39 |   | Employment letter between Liberate and Coleman  Sisson, dated November 5, 1999 (incorporated by reference to  Exhibit 10.39 to the Form 10-Q filed by the Registrant on  January 14, 2000).*                                                                                        |
| 10.42 |   | Amendment to Employment Agreement between Liberate  and Coleman Sisson, dated February 28, 2000 (incorporated by reference  to similarly numbered exhibit to the Form 10-Q filed by the  Registrant on April 13, 2000).*                                                                 |
| 10.43 |   | Stock Purchase Agreement dated July 16, 2000,  between Cisco Systems, Inc. and Liberate (incorporated by reference to  similarly numbered exhibit to the Form 8-K filed by the Registrant  on July 28, 2000).                                                                       |
| 10.44 |   | Employment letter between Liberate and Philip A.  Vachon, dated June 30, 2000 (incorporated by reference to similarly  numbered exhibit to the Form 10-K filed by the Registrant on  August 25, 2000).*                                                                                  |

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| 10.45 |   | Employment Retention Agreement between Liberate and  Coleman Sisson, dated January 8, 2001 (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on January 12, 2001).*                                                                                                                  |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.46 |   | Employment Retention Agreement between Liberate and  David Limp, dated January 9, 2001 (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on January 12, 2001).*                                                                                                                      |
| 10.47 |   | Employment Retention Agreement between Liberate and  Donald Fitzpatrick, dated January 3, 2001 (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on January 12, 2001).*                                                                                                              |
| 10.48 |   | Promissory Note, dated January 8, 2001, for  loan extended to Coleman Sisson (incorporated by reference to similarly  numbered exhibit to the Form 10-Q filed by the Registrant on  January 12, 2001).*                                                                                                                                |
| 10.49 |   | Promissory Note, dated January 3, 2001, for  loan extended to David Limp (incorporated by reference to similarly numbered  exhibit to the Form 10-Q filed by the Registrant on  January 12, 2001).*                                                                                                                                    |
| 10.50 |   | Promissory Note, dated April 6, 2001, for loan  extended to Don Fitzpatrick (incorporated by reference to similarly numbered  exhibit to the Form 10-Q filed by the Registrant on April 13,  2001).*                                                                                                                                   |
| 10.52 |   | Amendment to Employment Agreement between Liberate  and Philip A. Vachon, dated November 15, 2000 (incorporated by reference  to similarly numbered exhibit to the Form 10-K filed by the  Registrant on August 24, 2001).*                                                                                                            |
| 10.53 |   | Form of Executive Officer Option Grant Notice  under the 1999 Equity Incentive Plan, effective for grants made on  April 12, 2001 and later (incorporated by reference to similarly  numbered exhibit to the Form 10-K filed by the Registrant on  August 24, 2001).*                                                             |
| 10.54 |   | Amendment to Employee Retention Agreement between  Liberate and David A. Limp, dated February 20, 2002 (incorporated by  reference to similarly numbered exhibit to the Form 10-Q filed by  the Registrant on April 12, 2002).*                                                                                                        |
| 10.55 |   | Separation Agreement and Mutual Release of Claims  between Liberate and David Limp, dated July 19, 2002.* (Incorporated by  reference to similarly numbered exhibit to the Form 10-K filed by  the Registrant on August 8, 2002).*                                                                                                     |
| 10.56 |   | Stock Purchase Agreement among Cisco  Systems, Inc., its wholly owned subsidiary, Cisco Systems Investments  Ltd., and Liberate, dated July 19, 2002 (incorporated by reference to  similarly numbered exhibit to the Form 10-K filed by the  Registrant on August 8, 2002).                                                      |
| 10.57 |   | Form of Employee Retention Agreement, effective  as of June 2002, between Liberate and each of the following officers  (separately): Mitchell Kertzman, Coleman Sisson, Don Fitzpatrick, and Kent  Walker (incorporated by reference to similarly numbered exhibit to the  Form 10-K filed by the Registrant on August 8, 2002).* |
| 10.58 |   | Form of customer warrant, with a list of  customers who have received warrants, exercise prices, and numbers of shares  covered by warrants (incorporated by reference to similarly numbered exhibit  to the Form 10-K filed by the Registrant on August 8, 2002).                                                                     |
| 10.59 |   | Sigma Systems Group (Canada) Inc. Amended and  Restated 2002 Stock Incentive Plan (incorporated by reference to similarly  numbered exhibit to the Registrant’s report on Form 10-Q for the  quarter ended August 31, 2002, filed by the Registrant on  September 16, 2003).                                                      |
| 10.60 |   | Sigma Systems Group (Canada) Inc. Amended and  Restated 2002 California Stock Incentive Plan (incorporated by reference to  similarly numbered exhibit to the Registrant’s report on Form 10-Q  for the quarter ended August 31, 2002, filed by the Registrant on  September 16, 2003).                                           |

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| 10.61 |   | Sigma Systems Group (Canada) Inc. Nonstatutory Stock  Option Agreement, dated August 9, 2002, with Stephen Nicolle  (incorporated by reference to similarly numbered exhibit to the Registrant’s  report on Form 10-Q for the quarter ended August 31, 2002,  filed by the Registrant on September 16, 2003).                                                   |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.62 |   | Sales Commission Plan, dated June 1, 2002,  between Liberate and Donald Fitzpatrick (incorporated by reference to  similarly numbered exhibit to the Registrant’s report on Form 10-Q  for the quarter ended August 31, 2002, filed by the Registrant on  September 16, 2003).*                                                                                 |
| 10.63 |   | Senior Management Bonus Plan, dated June 1,  2002, between Liberate and Mitchell Kertzman, Coleman Sisson, and Kent Walker  (incorporated by reference to similarly numbered exhibit to the Registrant’s  report on Form 10-Q for the quarter ended August 31, 2002,  filed by the Registrant on September 16, 2003).*                                          |
| 10.64 |   | Contractor Agreement dated September 1, 2002  between David Limp and Liberate and Amendment thereto (incorporated by  reference to similarly numbered exhibit to the Registrant’s report on  Form 10-Q for the quarter ended November 30, 2002, filed by  the Registrant on September 16, 2003).*                                                               |
| 10.65 |   | Employment Letter dated November 20, 2002  between Philip A. Vachon and Liberate and Amendment thereto (incorporated by  reference to similarly numbered exhibit to the Registrant’s report on  Form 10-Q for the quarter ended November 30, 2002, filed by  the Registrant on September 16, 2003).*                                                            |
| 10.66 |   | Form of Employment Letter dated March 14,  2003 between Liberate and each of the following executive officers  (separately): David Lockwood, Gregory S. Wood, and Patrick Nguyen  (incorporated by reference to the similarly numbered exhibit to the  Registrant’s report on Form 10-K filed by the Registrant on  September 16, 2003).*                       |
| 10.67 |   | Form of Employment Agreement dated  April 11, 2003 between Liberate and Philip A. Vachon (incorporated by  reference to the similarly numbered exhibit to the Registrant’s report on  Form 10-K filed by the Registrant on September 16, 2003).*                                                                                                                |
| 10.68 |   | Form of Employee Retention Agreement between  Liberate and each of the following officers (separately): David Lockwood,  Coleman Sisson, Philip A. Vachon, Gregory S. Wood, Patrick Nguyen, and Kent  Walker (incorporated by reference to the similarly numbered exhibit to the  Registrant’s report on Form 10-K filed by the Registrant on  September 16, 2003).* |
| 10.69 |   | Form of Notice of Stock Option Grant to each of  the following officers: David Lockwood, Philip A. Vachon, Gregory S. Wood,  and Patrick Nguyen (incorporated by reference to the similarly numbered  exhibit to the Registrant’s report on Form 10-K filed by the  Registrant on September 16, 2003).*                                                              |
| 10.70 |   | Form of Amendment to Stock Option Grant dated  March 14, 2003 between Liberate and each of Coleman Sisson and Kent  Walker (incorporated by reference to the similarly numbered exhibit to the  Registrant’s report on Form 10-K filed by the Registrant on  September 16, 2003).*                                                                              |
| 10.71 |   | Agreement dated June 9, 2003 between Liberate  and Coleman Sisson (incorporated by reference to the similarly numbered  exhibit to the Registrant’s report on Form 10-K filed by the  Registrant on September 16, 2003).*                                                                                                                                            |
| 10.72 |   | Specific Litigation Protection Agreement dated  August 29, 2003 between American International Specialty Lines Insurance  Company and the insured parties named therein (incorporated by reference to  the similarly numbered exhibit to the Registrant’s report on Form 10-K  filed by the Registrant on September 16, 2003).                                       |
| 10.73 |   | Notice of Stock Award dated September 30, 2003  between Liberate and Kent Walker (incorporated by reference to the similarly  numbered exhibit to the Registrant’s quarterly report on Form 10-Q  filed by the Registrant on January 14, 2004).*                                                                                                                     |

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| 10.74 |   | Management Transition Agreement effective  September 30, 2003 between Liberate and Kent Walker (incorporated by  reference to the similarly numbered exhibit to the Registrant’s quarterly  report on Form 10-Q filed by the Registrant on January 14,  2004).*                                                                                                             |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.75 |   | Form of Notice of Stock Unit Award issued to  non-employee directors on and after October 1, 2003 (incorporated  by reference to the similarly numbered exhibit to the Registrant’s quarterly  report on Form 10-Q filed by the Registrant on January 14,  2004).*                                                                                                     |
| 10.76 |   | Office Lease Agreement dated December 12, 2003  between EOP-Peninsula Office Park, L.L.C. and Liberate for the San  Mateo, California office (incorporated by reference to the similarly numbered  exhibit to the Registrant’s report on Form 10-Q filed by the  Registrant on April 14, 2004).                                                                             |
| 10.77 |   | Form of Stock Unit Award dated April 26,  2004, issued to the following executive officers of Liberate: Philip A.  Vachon, Gregory S. Wood, Patrick P. Nguyen (incorporated by reference to the  similarly numbered exhibit to the Registrant’s report on Form 10-K filed by  the Registrant on August 16, 2004).*                                                               |
| 10.78 |   | Form of Stipulation and Agreement of Settlement  dated as of October 19, 2004 among (i) the lead plaintiff, on  behalf of himself and each of the class members; and (ii) Liberate and  other defendants in the class action litigation (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the Registrant on  January 10, 2005). |
| 10.79 |   | Description of Supplemental Compensation Arrangement  with Philip A. Vachon dated November 4, 2004 (incorporated by reference  to similarly numbered exhibit to the Form 10-Q filed by the Registrant  on January 10, 2005).*                                                                                                                                                    |
| 10.80 |   | Addendum No. 1 to the April 11, 2003  Employment Letter—Tax Equalization, dated as of January 5, 2005 between  Liberate and Philip A. Vachon (incorporated by reference to similarly  numbered exhibit to the Form 10-Q filed by the Registrant on  January 10, 2005).*                                                                                           |

 
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                              |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 21.1             |       | Subsidiaries of  Liberate.                                                                                                                                                                                                                                                   |
| 23.1             |       | Consent of Independent  Registered Public Accounting Firm, PricewaterhouseCoopers LLP.                                                                                                                                                                                       |
| 31.1             |       | Rule 13a-14(a)/15d-14(a) Certification  of Liberate’s Chief Executive Officer.                                                                                                                                                                                |
| 31.2             |       | Rule 13a-14(a)/15d-14(a) Certification  of Liberate’s Chief Financial Officer.                                                                                                                                                                                |
| 32.1             |       | Section 1350  Certification of Liberate’s Chief Executive Officer and Chief Financial  Officer.                                                                                                                                                                    |
| 99.1             |       | Stockholder Voting Agreement dated as of  January 14, 2005 by and among David Lockwood, Lockwood Fund LLC and  Double C Technologies, LLC (incorporated by reference to exhibit 99.01  to the Form 8-K filed by the Registrant on January 18, 2005).     |   |
| 99.2             |       | Stockholder Voting Agreement by and among David  Lockwood, Lockwood Fund LLC and SeaChange International, Inc., dated as  of April 15, 2005 (incorporated by reference to exhibit 99.2 to the  Form 8-K filed by the Registrant on April 19, 2005). |   |
|                  |            |                                                                                                                                                                                                                                                                              |  |  |

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*                    Managementcontract or compensatory plan or arrangement.

Note: Schedules notlisted above have been omitted because the information required to be set forththerein is not applicable or is shown in the financial statements or notesthereto.

(b)          Reports on Form 8-Kfurnished during the quarter ended May 31, 2005:

(i)    Liberatefurnished a report on Form 8-K on April 7, 2005 under Items 2,8 and 9 with a press release announcing the completion of the purchase byDouble C Technologies, LLC, a joint venture majority owned and controlled byComcast Corporation (Nasdaq: CMCSA, CMCSK) with a minority investment by CoxCommunications, Inc., of substantially all of the North American assets ofLiberate.

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(ii)   Liberatefurnished a report on Form 8-K/A on April 8, 2005 under Items2, 8 and 9 amending the Form 8-K, filed on April 7, 2005 to addthe conformed signature on the signature page which was inadvertentlymissing on the Form 8-K filed on April 7, 2005.

(iii)  Liberatefiled a report on Form 8-K on April 19, 2005 under Item 1, 3and 9 with (1) a press release announcing that Liberate had reached anagreement to sell substantially all of the assets of its business outside ofNorth America to SeaChange International, Inc. and that David Lockwood andLockwood Fund LLC have entered into a stockholder voting agreement withSeaChange, pursuant to which, among other things, David Lockwood and LockwoodFund agreed to vote their shares of Liberate common stock in favor of thetransaction, and (2) attaching a copy of the asset purchase agreement andthe stockholder voting agreement as exhibits.

97

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, on the 15thday of August 2005.
|                             | Liberate Technologies |
|-----------------------------|-----------------------|
| Date: August 15,  2005 | By:                   | /s/ DAVID LOCKWOOD |
|                        |                  | David Lockwood |
|                        |                  | Chief Executive Officer |
| Date: August 15,  2005 |                  | /s/ GREGORY S. WOOD |
|                        |                  | Gregory S. Wood |
|                        |                  | Executive Vice President and  Chief Financial Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the registrant and in thecapacities indicated below on the 15th day of August 2005.
| Signature               | ** ** | **Title**                                          |
|-------------------------|------------|----------------------------------------------------|
| /s/ DAVID LOCKWOOD      |       | Chief Executive Officer  and Chairman of the Board |
| David Lockwood          |       |                                               |
| /s/ CHARLES N. CORFIELD |       | Director                                           |
| Charles N. Corfield     |       |                                               |
| /s/ PATRICK S. JONES    |       | Director                                           |
| Patrick S. Jones        |       |                                               |
| /s/ DAVID C. NAGEL      |       | Director                                           |
| Dr. David C. Nagel |       |                                               |
| /s/ ROBERT R. WALKER    |       | Director                                           |
| Robert R. Walker        |       |                                               |

 

98

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**SCHEDULE II—VALUATION ANDQUALIFYING ACCOUNTS**

**(Inthousands)**
| ** **                            | ** ** | **Balance at  beginning of  period** | ** ** | **Additions  charged to costs  and expenses** | ** ** | **Deductions** | ** ** | **Balance at  end of period** | ** ** |
|---------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------|------------|----------------------------------------------|------------|
| **Allowance for doubtful  accounts:** |       |                                           |       |                                                         |       |           |       |                                         |       |   |   |   |   |   |   |   |   |
| Year ended May 31, 2005          |       |                                           | $          | 30                                                           |       |           |       | $                                            | (30        | ) |   |   | $ | — |   |   |   | $ | — |   |   |
| Year ended May 31, 2004          |       |                                           | $          | 569                                                          |       |           |       | $                                            | (554       | ) |   |   | $ | (15 | ) |   |   | $ | 30 |   |   |
| Year ended May 31, 2003          |       |                                           | $          | 550                                                          |       |           |       | $                                            | 45         |   |   |   | $ | 326 |   |   |   | $ | 569 |   |   |
| **Revenue reserve:**                  |       |                                           |       |                                                         |       |           |       |                                         |       |   |   |   |   |   |   |   |   |
| Year ended May 31, 2005          |       |                                           | $          | 3                                                            |       |           |       | $                                            | (3         | ) |   |   | $ | — |   |   |   | $ | — |   |   |
| Year ended May 31, 2004          |       |                                           | $          | 785                                                          |       |           |       | $                                            | (782       | ) |   |   | $ | — |   |   |   | $ | 3 |   |   |
| Year ended May 31, 2003          |       |                                           | $          | 859                                                          |       |           |       | $                                            | (14        | ) |   |   | $ | 60 |   |   |   | $ | 785 |   |   |
| **Valuation allowance:**              |       |                                           |       |                                                         |       |           |       |                                         |       |   |   |   |   |   |   |   |   |
| Year ended May 31, 2005               |       |                                           | $          | 268                                                          |       |           |       | $                                            | —     |   |   |   | $ | 240 |   |   |   | $ | 28 |   |   |
| Year ended May 31, 2004               |       |                                           | $          | 254                                                          |       |           |       | $                                            | 14         |   |   |   | $ | — |   |   |   | $ | 268 |   |   |
| Year ended May  31, 2003              |       |                                           | $          | 188                                                          |       |           |       | $                                            | 66         |   |   |   | $ | — |   |   |   | $ | 254 |   |   |

 

99

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**Exhibit Index**
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                   | ** ** | **Description** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|
| 2.1              |       | Agreement and Plan of Merger, dated May 16,  1997, between and Navio (incorporated by reference to similarly numbered  exhibit to the Registration Statement on Form S-1 filed by the  Registrant (Reg. No. 333-78781)).                                                                                                                                                      |
| 2.2              |       | Merger Agreement and Plan of Reorganization with  SourceSuite LLC, dated January 12, 2000 (incorporated by reference  to similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-95139)).                                                                                                                            |
| 2.3              |       | Plan and Agreement of Reorganization with  MoreCom, Inc., dated March 27, 2000 (incorporated by reference to  similarly numbered exhibit to the Form 8-K filed by the Registrant  on July 7, 2000).                                                                                                                                                                      |
| 2.4              |       | Amendment No. 1 to Plan and Agreement of  Reorganization with MoreCom, Inc. (incorporated by reference to  similarly numbered exhibit to the Form 8-K filed by the Registrant  on July 7, 2000).                                                                                                                                                                         |
| 2.5              |       | Share Purchase Agreement, date as of July 24,  2002, by and among Liberate, 2014120 Ontario, Inc., Sigma Systems Group  (Canada) Inc., the shareholders of Sigma Systems and Arjun Jasuja, as the  Shareholders’ Representative (incorporated by reference to similarly numbered  exhibit to the current report on Form 8-K filed by Liberate on  August 22, 2002). |
| 2.6              |       | Asset Purchase Agreement dated as of  January 14, 2005 by and among Liberate Technologies, Liberate  Technologies Canada Ltd. and Double C Technologies, LLC (incorporated by  reference to similarly numbered exhibit to the Form 8-K filed by the Registrant  on January 18, 2005).                                                                                         |
| 2.7              |       | Asset Purchase Agreement, by and among Liberate  Technologies, Liberate Technologies B.V. and SeaChange  International, Inc., dated as of April 15, 2005 (incorporated by  reference to similarly numbered exhibit to the Form 8-K filed by the  Registrant on April 19, 2005).                                                                                          |
| 3.1              |       | Amended and Restated Bylaws of Liberate  (incorporated by reference to the similarly numbered exhibit to the  Registrant’s report on Form 10-K filed by the Registrant on  September 16, 2003).                                                                                                                                                                               |
| 3.2              |       | Sixth Amended and Restated Certificate of  Incorporation of Liberate (incorporated by reference to Exhibit 3.5 to  the Registration Statement on Form S-1 filed by the Registrant  (Reg. No. 333-78781)).                                                                                                                                                                     |
| 3.3              |       | Certificate of Designation, Preferences, and Results  of Series A Junior Participating Preferred Stock (incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K  filed by the Registrant on May 14, 2003).                                                                                                                                           |
| 4.1              |       | Specimen Certificate of Liberate’s common stock  (incorporated by reference to similarly numbered exhibit to the Registration  Statement on Form S-1 filed by the Registrant (Reg. No. 333-78781)).                                                                                                                                                                           |
| 4.2              |       | Standstill Agreement between Liberate, Delphi Asset  Management Corporation, US Trust Company of Delaware, and United States Trust  Company of New York, entered into as of January 23, 2001 (incorporated  by reference to similarly numbered exhibit to the Form 10-Q filed  by the Registrant on October 10, 2001).                                                        |
| 4.3              |       | Rights Agreement dated May 12, 2003, between  Liberate and Equiserve Trust Company, N.A., as Rights Agent (incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K  filed by the Registrant on May 14, 2003).                                                                                                                                        |
| 4.4              |       | Form of Rights Certificate (Incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K  filed by the Registrant on May 14, 2003).                                                                                                                                                                                                                       |

100

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| 4.5   |   | First Amendment to Rights Agreement between Liberate  Technologies and Equiserve Trust Company, N.A., dated as of January 10,  2005 (incorporated by reference to similarly numbered exhibit to the  Form 8-K filed by the Registrant on January 13, 2005).                                                     |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.6   |   | First Amendment to Rights Agreement between Liberate  Technologies and Equiserve Trust Company, N.A., dated as of January 10,  2005 (incorporated by reference to similarly numbered exhibit to the  Form 8-K filed by the Registrant on January 13, 2005).                                                     |
| 9.1   |   | Voting Agreement, dated May 12, 1999, among  Liberate, Oracle, Comcast Technology, Cox Communications and MediaOne  Interactive Services (incorporated by reference to similarly numbered exhibit  to the Registration Statement on Form S-1 filed by the Registrant  (Reg. No. 333-78781)).               |
| 9.2   |   | Amendment to Voting Agreement, dated  December 11, 2000 (incorporated by reference to similarly numbered  exhibit to the Form 10-Q filed by the Registrant on  January 12, 2001).                                                                                                                               |
| 9.3   |   | Irrevocable Trust Agreement between Delphi Asset  Management Corporation, United States Trust Company of New York, and US Trust  Company of Delaware, effective as of January 23, 2001 (incorporated by  reference to similarly numbered exhibit to the Form 10-K filed by  the Registrant on August 24, 2001). |
| 10.1  |   | Form of Indemnification Agreement entered into  between Liberate and its directors and executive officers (incorporated by  reference to similarly numbered exhibit to the Form 10-K filed by  the Registrant on August 24, 2001).*                                                                             |
| 10.2  |   | Network Computer, Inc. 1996 Stock Option Plan,  and form of Option Agreement (incorporated by reference to similarly numbered  exhibit to the Registration Statement on Form S-1 filed by the  Registrant (Reg. No. 333-78781)).                                                                                |
| 10.3  |   | Navio Communications, Inc. 1996 Stock Option  Plan and form of Option Agreement (incorporated by reference to similarly  numbered exhibit to the Registration Statement on Form S-1 filed  by the Registrant (Reg. No. 333-78781)).                                                                             |
| 10.4  |   | Navio Communications, Inc. Non-Qualified  Option Plan, and form of Option Agreement (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                                                                         |
| 10.5  |   | 1999 Equity Incentive Plan, as amended (incorporated  by reference to the similarly numbered exhibit to the Registrant’s report on  Form 10-K filed by the Registrant on September 16, 2003).*                                                                                                                  |
| 10.6  |   | 1999 Employee Stock Purchase Plan, as amended to  date (incorporated by reference to similarly numbered exhibit to the report  on Form 10-K filed by Registrant on August 8, 2002).                                                                                                                                  |
| 10.7  |   | Employment Agreement between Liberate and Mitchell  E. Kertzman, dated October 12, 1998, as amended, and January 5,  2000 (incorporated by reference to similarly numbered exhibit to the Registration  Statement on Form S-1 filed by the Registrant (Reg. No. 333-95139)).*                              |
| 10.14 |   | Technology License Agreement, dated  September 8, 1998, between Liberate and Oracle (incorporated by  reference to similarly numbered exhibit to the Registration Statement on  Form S-1 filed by the Registrant (Reg. No. 333-78781)).                                                                         |
| 10.15 |   | Letter Agreement, dated May 16, 1997, among  Liberate, Oracle, and Netscape (incorporated by reference to similarly  numbered exhibit to the Registration Statement on Form S-1 filed  by the Registrant (Reg. No.333-78781)).                                                                                       |
| 10.16 |   | Source Code License Agreement, dated July 9,  1996, between Netscape and TVSoft, as amended (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                                                                 |

101

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| 10.17 |   | OEM License Agreement, dated October 17, 1996,  between Oracle and Netscape, as amended (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).              |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18 |   | Cooperation Agreement, dated July 1, 1999,  between Liberate and Intel, as amended (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).                   |
| 10.21 |   | Stockholders Agreement, dated August 11, 1997,  among Liberate and the investors named therein (incorporated by reference to  similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).       |
| 10.29 |   | Circle Star Lease Agreement for San Carlos office  space, dated April 27, 1999 (incorporated by reference to similarly  numbered exhibit to the Registration Statement on Form S-1 filed  by the Registrant (Reg. No. 333-78781)).                       |
| 10.31 |   | Tax Allocation and Indemnity Agreement, dated  August 17, 1997, between Liberate and Oracle (incorporated by reference  to similarly numbered exhibit to the Registration Statement on Form S-1  filed by the Registrant (Reg. No. 333-78781)).          |
| 10.33 |   | Network Computer, Inc. Stock Option Agreement,  dated October 15, 1998, with Mitchell Kertzman (incorporated by  reference to similarly numbered exhibit to the Registration Statement on  Form S-1 filed by the Registrant (Reg. No. 333-78781)).* |
| 10.37 |   | Master Lease Agreement, dated August 2, 1999,  with Steelcase Financial Services, Inc (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on October 13, 1999).                                          |
| 10.38 |   | Irrevocable Letter of Credit dated September 3,  1999 and Standby Letter of Credit Agreement (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on October 13, 1999).                                   |
| 10.39 |   | Employment letter between Liberate and Coleman  Sisson, dated November 5, 1999 (incorporated by reference to  Exhibit 10.39 to the Form 10-Q filed by the Registrant on  January 14, 2000).*                                                        |
| 10.42 |   | Amendment to Employment Agreement between Liberate  and Coleman Sisson, dated February 28, 2000 (incorporated by reference  to similarly numbered exhibit to the Form 10-Q filed by the  Registrant on April 13, 2000).*                                 |
| 10.43 |   | Stock Purchase Agreement dated July 16, 2000,  between Cisco Systems, Inc. and Liberate (incorporated by reference to  similarly numbered exhibit to the Form 8-K filed by the Registrant  on July 28, 2000).                                       |
| 10.44 |   | Employment letter between Liberate and Philip A.  Vachon, dated June 30, 2000 (incorporated by reference to similarly  numbered exhibit to the Form 10-K filed by the Registrant on  August 25, 2000).*                                                  |
| 10.45 |   | Employment Retention Agreement between Liberate and  Coleman Sisson, dated January 8, 2001 (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on January 12, 2001).*                                    |
| 10.46 |   | Employment Retention Agreement between Liberate and  David Limp, dated January 9, 2001 (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on January 12, 2001).*                                        |
| 10.47 |   | Employment Retention Agreement between Liberate and  Donald Fitzpatrick, dated January 3, 2001 (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the  Registrant on January 12, 2001).*                                |
| 10.48 |   | Promissory Note, dated January 8, 2001, for  loan extended to Coleman Sisson (incorporated by reference to similarly  numbered exhibit to the Form 10-Q filed by the Registrant on  January 12, 2001).*                                                  |

102

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| 10.49 |   | Promissory Note, dated January 3, 2001, for  loan extended to David Limp (incorporated by reference to similarly numbered  exhibit to the Form 10-Q filed by the Registrant on  January 12, 2001).*                                                                                                                                    |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.50 |   | Promissory Note, dated April 6, 2001, for loan  extended to Don Fitzpatrick (incorporated by reference to similarly numbered  exhibit to the Form 10-Q filed by the Registrant on April 13,  2001).*                                                                                                                                   |
| 10.52 |   | Amendment to Employment Agreement between Liberate  and Philip A. Vachon, dated November 15, 2000 (incorporated by reference  to similarly numbered exhibit to the Form 10-K filed by the  Registrant on August 24, 2001).*                                                                                                            |
| 10.53 |   | Form of Executive Officer Option Grant Notice  under the 1999 Equity Incentive Plan, effective for grants made on  April 12, 2001 and later (incorporated by reference to similarly  numbered exhibit to the Form 10-K filed by the Registrant on  August 24, 2001).*                                                             |
| 10.54 |   | Amendment to Employee Retention Agreement between  Liberate and David A. Limp, dated February 20, 2002 (incorporated by  reference to similarly numbered exhibit to the Form 10-Q filed by  the Registrant on April 12, 2002).*                                                                                                        |
| 10.55 |   | Separation Agreement and Mutual Release of Claims  between Liberate and David Limp, dated July 19, 2002.* (Incorporated by  reference to similarly numbered exhibit to the Form 10-K filed by  the Registrant on August 8, 2002).*                                                                                                     |
| 10.56 |   | Stock Purchase Agreement among Cisco  Systems, Inc., its wholly owned subsidiary, Cisco Systems Investments  Ltd., and Liberate, dated July 19, 2002 (incorporated by reference to  similarly numbered exhibit to the Form 10-K filed by the  Registrant on August 8, 2002).                                                      |
| 10.57 |   | Form of Employee Retention Agreement, effective  as of June 2002, between Liberate and each of the following officers  (separately): Mitchell Kertzman, Coleman Sisson, Don Fitzpatrick, and Kent  Walker (incorporated by reference to similarly numbered exhibit to the  Form 10-K filed by the Registrant on August 8, 2002).* |
| 10.58 |   | Form of customer warrant, with a list of  customers who have received warrants, exercise prices, and numbers of shares  covered by warrants (incorporated by reference to similarly numbered exhibit  to the Form 10-K filed by the Registrant on August 8, 2002).                                                                     |
| 10.59 |   | Sigma Systems Group (Canada) Inc. Amended and  Restated 2002 Stock Incentive Plan (incorporated by reference to similarly  numbered exhibit to the Registrant’s report on Form 10-Q for the  quarter ended August 31, 2002, filed by the Registrant on  September 16, 2003).                                                      |
| 10.60 |   | Sigma Systems Group (Canada) Inc. Amended and Restated  2002 California Stock Incentive Plan (incorporated by reference to similarly  numbered exhibit to the Registrant’s report on Form 10-Q for the  quarter ended August 31, 2002, filed by the Registrant on  September 16, 2003).                                           |
| 10.61 |   | Sigma Systems Group (Canada) Inc. Nonstatutory Stock  Option Agreement, dated August 9, 2002, with Stephen Nicolle  (incorporated by reference to similarly numbered exhibit to the Registrant’s  report on Form 10-Q for the quarter ended August 31, 2002,  filed by the Registrant on September 16, 2003).                |
| 10.62 |   | Sales Commission Plan, dated June 1, 2002,  between Liberate and Donald Fitzpatrick (incorporated by reference to  similarly numbered exhibit to the Registrant’s report on Form 10-Q  for the quarter ended August 31, 2002, filed by the Registrant on  September 16, 2003).*                                              |
| 10.63 |   | Senior Management Bonus Plan, dated June 1,  2002, between Liberate and Mitchell Kertzman, Coleman Sisson, and Kent Walker  (incorporated by reference to similarly numbered exhibit to the Registrant’s  report on Form 10-Q for the quarter ended August 31, 2002,  filed by the Registrant on September 16, 2003).*       |

103

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| 10.64 |   | Contractor Agreement dated September 1, 2002  between David Limp and Liberate and Amendment thereto (incorporated by  reference to similarly numbered exhibit to the Registrant’s report on  Form 10-Q for the quarter ended November 30, 2002, filed by  the Registrant on September 16, 2003).*                                                               |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.65 |   | Employment Letter dated November 20, 2002  between Philip A. Vachon and Liberate and Amendment thereto (incorporated by  reference to similarly numbered exhibit to the Registrant’s report on  Form 10-Q for the quarter ended November 30, 2002, filed by  the Registrant on September 16, 2003).*                                                            |
| 10.66 |   | Form of Employment Letter dated March 14,  2003 between Liberate and each of the following executive officers  (separately): David Lockwood, Gregory S. Wood, and Patrick Nguyen  (incorporated by reference to the similarly numbered exhibit to the  Registrant’s report on Form 10-K filed by the Registrant on  September 16, 2003).*                       |
| 10.67 |   | Form of Employment Agreement dated  April 11, 2003 between Liberate and Philip A. Vachon (incorporated by  reference to the similarly numbered exhibit to the Registrant’s report on  Form 10-K filed by the Registrant on September 16, 2003).*                                                                                                                |
| 10.68 |   | Form of Employee Retention Agreement between  Liberate and each of the following officers (separately): David Lockwood,  Coleman Sisson, Philip A. Vachon, Gregory S. Wood, Patrick Nguyen, and Kent  Walker (incorporated by reference to the similarly numbered exhibit to the  Registrant’s report on Form 10-K filed by the Registrant on  September 16, 2003).* |
| 10.69 |   | Form of Notice of Stock Option Grant to each of  the following officers: David Lockwood, Philip A. Vachon, Gregory S. Wood,  and Patrick Nguyen (incorporated by reference to the similarly numbered  exhibit to the Registrant’s report on Form 10-K filed by the  Registrant on September 16, 2003).*                                                              |
| 10.70 |   | Form of Amendment to Stock Option Grant dated  March 14, 2003 between Liberate and each of Coleman Sisson and Kent  Walker (incorporated by reference to the similarly numbered exhibit to the  Registrant’s report on Form 10-K filed by the Registrant on  September 16, 2003).*                                                                              |
| 10.71 |   | Agreement dated June 9, 2003 between Liberate  and Coleman Sisson (incorporated by reference to the similarly numbered  exhibit to the Registrant’s report on Form 10-K filed by the  Registrant on September 16, 2003).*                                                                                                                                            |
| 10.72 |   | Specific Litigation Protection Agreement dated  August 29, 2003 between American International Specialty Lines Insurance  Company and the insured parties named therein (incorporated by reference to  the similarly numbered exhibit to the Registrant’s report on Form 10-K  filed by the Registrant on September 16, 2003).                                       |
| 10.73 |   | Notice of Stock Award dated September 30, 2003  between Liberate and Kent Walker (incorporated by reference to the similarly  numbered exhibit to the Registrant’s quarterly report on Form 10-Q  filed by the Registrant on January 14, 2004).*                                                                                                                     |
| 10.74 |   | Management Transition Agreement effective  September 30, 2003 between Liberate and Kent Walker (incorporated by  reference to the similarly numbered exhibit to the Registrant’s quarterly  report on Form 10-Q filed by the Registrant on January 14,  2004).*                                                                                                      |
| 10.75 |   | Form of Notice of Stock Unit Award issued to  non-employee directors on and after October 1, 2003 (incorporated  by reference to the similarly numbered exhibit to the Registrant’s quarterly  report on Form 10-Q filed by the Registrant on January 14,  2004).*                                                                                              |
| 10.76 |   | Office Lease Agreement dated December 12, 2003  between EOP-Peninsula Office Park, L.L.C. and Liberate for the San  Mateo, California office (incorporated by reference to the similarly numbered  exhibit to the Registrant’s report on Form 10-Q filed by the  Registrant on April 14, 2004).                                                                      |

104

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| 10.77 |   | Form of Stock Unit Award dated April 26,  2004, issued to the following executive officers of Liberate: Philip A.  Vachon, Gregory S. Wood, Patrick P. Nguyen (incorporated by reference to the similarly  numbered exhibit to the Registrant’s report on Form 10-K filed by the Registrant  on August 16, 2004).*                                                     |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.78 |   | Form of Stipulation and Agreement of Settlement  dated as of October 19, 2004 among (i) the lead plaintiff, on  behalf of himself and each of the class members; and (ii) Liberate and  other defendants in the class action litigation (incorporated by reference to  similarly numbered exhibit to the Form 10-Q filed by the Registrant on  January 10, 2005). |
| 10.79 |   | Description of Supplemental Compensation Arrangement  with Philip A. Vachon dated November 4, 2004 (incorporated by reference  to similarly numbered exhibit to the Form 10-Q filed by the Registrant  on January 10, 2005).*                                                                                                                                                    |
| 10.80 |   | Addendum No. 1 to the April 11, 2003  Employment Letter — Tax Equalization, dated as of January 5, 2005  between Liberate and Philip A. Vachon (incorporated by reference to similarly  numbered exhibit to the Form 10-Q filed by the Registrant on  January 10, 2005).*                                                                                         |
| 21.1  |   | Subsidiaries of Liberate.                                                                                                                                                                                                                                                                                                                                                                       |
| 23.1  |   | Consent of Independent Registered Public Accounting  Firm, PricewaterhouseCoopers LLP.                                                                                                                                                                                                                                                                                                          |
| 31.1  |   | Rule 13a-14(a)/15d-14(a) Certification  of Liberate’s Chief Executive Officer.                                                                                                                                                                                                                                                                                                   |
| 31.2  |   | Rule 13a-14(a)/15d-14(a) Certification  of Liberate’s Chief Financial Officer.                                                                                                                                                                                                                                                                                                   |
| 32.1  |   | Section 1350 Certification of Liberate’s Chief  Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                        |
| 99.1  |   | Stockholder Voting Agreement dated as of  January 14, 2005 by and among David Lockwood, Lockwood Fund LLC and  Double C Technologies, LLC (incorporated by reference to exhibit 99.01 to the  Form 8-K filed by the Registrant on January 18, 2005).                                                                                                                             |
| 99.2  |   | Stockholder Voting Agreement by and among David  Lockwood, Lockwood Fund LLC and SeaChange International, Inc., dated as  of April 15, 2005 (incorporated by reference to exhibit 99.2 to the  Form 8-K filed by the Registrant on April 19, 2005).                                                                                                                         |

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*                    Managementcontract or compensatory plan or arrangement.

105

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