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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended July 31, 2004



OR



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



Commission File Number: 0-22369



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BEA SYSTEMS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                       
|-------------------------------------------------------------- |  | --------------------------------------
|Delaware                                                       |  | 77-0394711                            
|(State or other jurisdiction of incorporation or organization) |  | (I. R. S. Employer Identification No.)



2315 North First
Street

San Jose, California 95131

(Address of principal executive offices)



(408) 570-8000

(Registrants telephone number, including area code)



---



Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



Indicate by check mark whether Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes  x    No ̈



As of August 31, 2004, there were approximately 404,374,530
shares of the Registrants common stock outstanding.



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##### Table of Contents

BEA SYSTEMS, INC.



INDEX



|                               |  |                                                                                                                                       |  |         
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | --------
|                               |  |                                                                                                                                       |  | Page No.
|PART I.  FINANCIAL INFORMATION |  |                                                                                                                                      
|                               |  |                                                                                                                                      
|ITEM 1.                        |  | Condensed Consolidated Financial Statements (Unaudited):                                                                              |  |         
|                               |  |                                                                                                                                      
|                               |  | Condensed Consolidated Statements of Income and Comprehensive Income for the three months and six months ended July 31, 2004 and 2003 |  | 3       
|                               |  |                                                                                                                                      
|                               |  | Condensed Consolidated Balance Sheets as of July 31, 2004 and January 31, 2004                                                        |  | 4       
|                               |  |                                                                                                                                      
|                               |  | Condensed Consolidated Statements of Cash Flows for the six months ended July 31, 2004 and 2003                                       |  | 5       
|                               |  |                                                                                                                                      
|                               |  | Notes to Condensed Consolidated Financial Statements                                                                                  |  | 6       
|                               |  |                                                                                                                                      
|ITEM 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                 |  | 16      
|                               |  |                                                                                                                                      
|ITEM 3.                        |  | Quantitative and Qualitative Disclosure about Market Risks                                                                            |  | 43      
|                               |  |                                                                                                                                      
|ITEM 4.                        |  | Controls and Procedures                                                                                                               |  | 45      
|                               | 
|PART II.  OTHER INFORMATION    |  |                                                                                                                                      
|                               |  |                                                                                                                                      
|ITEM 1.                        |  | Legal Proceedings                                                                                                                     |  | 48      
|                               |  |                                                                                                                                      
|ITEM 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                           |  | 48      
|                               |  |                                                                                                                                      
|ITEM 4.                        |  | Submission of Matters to a Vote of Security Holders                                                                                   |  | 49      
|                               |  |                                                                                                                                      
|ITEM 6.                        |  | Exhibits and Reports on Form 8-K                                                                                                      |  | 49      
|                               | 
|Signatures                     |  | 51                                                                                                                                   



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



BEA SYSTEMS, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME



(in thousands, except per share data)

(Unaudited)



|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                       |  | Three months endedJuly 31, |         |   | Six months ended July 31, |  
|                                                                       |  | 2004                       |         |   | 2003                      |   |         | 2004 |  |   | 2003    |  
|Revenues:                                                              |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|License fees                                                           |  | $                          | 116,300 |   |                           | $ | 127,355 |      |  | $ | 236,452 |   |  | $ | 249,694 |  
|Services                                                               |  |                            | 145,988 |   |                           |   | 117,693 |      |  |   | 288,471 |   |  |   | 232,648 |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total revenues                                                         |  |                            | 262,288 |   |                           |   | 245,048 |      |  |   | 524,923 |   |  |   | 482,342 |  
|Cost of revenues:                                                      |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Cost of license fees                                                   |  |                            | 6,334   |   |                           |   | 6,423   |      |  |   | 12,805  |   |  |   | 12,320  |  
|Cost of services                                                       |  |                            | 46,929  |   |                           |   | 47,655  |      |  |   | 95,909  |   |  |   | 94,472  |  
|Amortization of certain acquired intangible assets                     |  |                            | 3,099   |   |                           |   | 5,790   |      |  |   | 6,328   |   |  |   | 10,807  |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total cost of revenues                                                 |  |                            | 56,362  |   |                           |   | 59,868  |      |  |   | 115,042 |   |  |   | 117,599 |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                                           |  |                            | 205,926 |   |                           |   | 185,180 |      |  |   | 409,881 |   |  |   | 364,743 |  
|Operating expenses:                                                    |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Sales and marketing                                                    |  |                            | 99,688  |   |                           |   | 94,524  |      |  |   | 200,299 |   |  |   | 186,433 |  
|Research and development                                               |  |                            | 36,474  |   |                           |   | 34,723  |      |  |   | 71,416  |   |  |   | 69,553  |  
|General and administrative                                             |  |                            | 22,271  |   |                           |   | 19,126  |      |  |   | 43,886  |   |  |   | 37,736  |  
|Facilities consolidation                                               |  |                            | 500     |   |                           |   |        |      |  |   | 8,165   |   |  |   |        |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                               |  |                            | 158,933 |   |                           |   | 148,373 |      |  |   | 323,766 |   |  |   | 293,722 |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Income from operations                                                 |  |                            | 46,993  |   |                           |   | 36,807  |      |  |   | 86,115  |   |  |   | 71,021  |  
|Interest and other, net:                                               |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Interest expense                                                       |  |                            | (7,330  | ) |                           |   | (5,521  | )    |  |   | (14,615 | ) |  |   | (11,064 | )
|Interest income                                                        |  |                            | 5,471   |   |                           |   | 6,025   |      |  |   | 10,148  |   |  |   | 12,387  |  
|Net loss on sale of equity investments                                 |  |                            |        |   |                           |   |        |      |  |   |        |   |  |   | (198    | )
|Other                                                                  |  |                            | (1,459  | ) |                           |   | (255    | )    |  |   | (1,782  | ) |  |   | (154    | )
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total interest and other, net                                          |  |                            | (3,318  | ) |                           |   | 249     |      |  |   | (6,249  | ) |  |   | 971     |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Income before provision for income taxes                               |  |                            | 43,675  |   |                           |   | 37,056  |      |  |   | 79,866  |   |  |   | 71,992  |  
|Provision for income taxes                                             |  |                            | 13,103  |   |                           |   | 11,117  |      |  |   | 23,960  |   |  |   | 21,598  |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                             |  |                            | 30,572  |   |                           |   | 25,939  |      |  |   | 55,906  |   |  |   | 50,394  |  
|Other comprehensive income:                                            |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Foreign currency translation adjustments                               |  |                            | (715    | ) |                           |   | 2,943   |      |  |   | (414    | ) |  |   | 3,026   |  
|Unrealized loss on available-for-sale investments, net of income taxes |  |                            | (741    | ) |                           |   | (1,370  | )    |  |   | (2,435  | ) |  |   | (1,591  | )
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income                                                   |  | $                          | 29,116  |   |                           | $ | 27,512  |      |  | $ | 53,057  |   |  | $ | 51,829  |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net income per share:                                                  |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                  |  | $                          | 0.07    |   |                           | $ | 0.06    |      |  | $ | 0.14    |   |  | $ | 0.13    |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Diluted                                                                |  | $                          | 0.07    |   |                           | $ | 0.06    |      |  | $ | 0.13    |   |  | $ | 0.12    |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Number of shares used in per share calculations:                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                  |  |                            | 408,650 |   |                           |   | 401,040 |      |  |   | 409,160 |   |  |   | 401,875 |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Diluted                                                                |  |                            | 417,400 |   |                           |   | 418,030 |      |  |   | 421,620 |   |  |   | 418,580 |  
|                                                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



See accompanying notes
to condensed consolidated financial statements.



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BEA SYSTEMS, INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS



(in thousands)

(Unaudited)



|                                              |  |               |           |   |                             |   |           |  
|--------------------------------------------- |  | ------------- | --------- | - | --------------------------- | - | --------- | -
|                                              |  | July 31, 2004 |           |   | January 31, 2004 (audited*) |  
|ASSETS                                        |  |               |           |   |                             |   |           |  
|Current assets:                               |  |               |           |   |                             |   |           |  
|Cash and cash equivalents                     |  | $             | 732,762   |   |                             | $ | 683,729   |  
|Restricted cash                               |  |               | 1,633     |   |                             |   | 1,583     |  
|Short-term investments                        |  |               | 846,019   |   |                             |   | 783,288   |  
|Accounts receivable, net                      |  |               | 205,806   |   |                             |   | 268,526   |  
|Other current assets                          |  |               | 35,767    |   |                             |   | 32,480    |  
|                                              |  |               |           |   |                             |   |           |  
|Total current assets                          |  |               | 1,821,987 |   |                             |   | 1,769,606 |  
|Property and equipment, net                   |  |               | 350,726   |   |                             |   | 358,497   |  
|Goodwill, net                                 |  |               | 56,100    |   |                             |   | 56,100    |  
|Acquired intangible assets, net               |  |               | 9,669     |   |                             |   | 15,997    |  
|Long-term restricted cash                     |  |               | 6,380     |   |                             |   | 3,880     |  
|Other long-term assets                        |  |               | 15,100    |   |                             |   | 16,109    |  
|                                              |  |               |           |   |                             |   |           |  
|Total assets                                  |  | $             | 2,259,962 |   |                             | $ | 2,220,189 |  
|                                              |  |               |           |   |                             |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY          |  |               |           |   |                             |   |           |  
|Current liabilities:                          |  |               |           |   |                             |   |           |  
|Accounts payable                              |  | $             | 9,602     |   |                             | $ | 18,534    |  
|Accrued facilities consolidation charges      |  |               | 14,656    |   |                             |   | 9,847     |  
|Accrued payroll and related liabilities       |  |               | 51,753    |   |                             |   | 61,155    |  
|Accrued income taxes                          |  |               | 50,580    |   |                             |   | 43,725    |  
|Other accrued liabilities                     |  |               | 73,022    |   |                             |   | 74,968    |  
|Deferred revenues                             |  |               | 260,758   |   |                             |   | 273,879   |  
|Accrued liabilities related to land lease     |  |               | 20,018    |   |                             |   | 19,656    |  
|Deferred tax liabilities                      |  |               |          |   |                             |   | 600       |  
|Current portion of notes payable              |  |               | 527       |   |                             |   | 493       |  
|                                              |  |               |           |   |                             |   |           |  
|Total current liabilities                     |  |               | 480,916   |   |                             |   | 502,857   |  
|Deferred tax liabilities                      |  |               |          |   |                             |   | 1,522     |  
|Notes payable and other long-term obligations |  |               | 4,093     |   |                             |   | 4,033     |  
|Long-term debt related to land lease          |  |               | 191,639   |   |                             |   | 191,639   |  
|Convertible subordinated notes                |  |               | 550,000   |   |                             |   | 550,000   |  
|Commitments and contingencies                 |  |               |           |   |                             |   |           |  
|Stockholders equity:                         |  |               |           |   |                             |   |           |  
|Common stock                                  |  |               | 409       |   |                             |   | 408       |  
|Additional paid-in capital                    |  |               | 1,159,773 |   |                             |   | 1,112,703 |  
|Treasury stock, at cost                       |  |               | (163,397  | ) |                             |   | (123,303  | )
|Retained earnings (deficit)                   |  |               | 36,905    |   |                             |   | (19,001   | )
|Deferred compensation                         |  |               | (7,319    | ) |                             |   | (10,462   | )
|Accumulated other comprehensive income        |  |               | 6,943     |   |                             |   | 9,793     |  
|                                              |  |               |           |   |                             |   |           |  
|Total stockholders equity                    |  |               | 1,033,314 |   |                             |   | 970,138   |  
|                                              |  |               |           |   |                             |   |           |  
|Total liabilities and stockholders equity    |  | $             | 2,259,962 |   |                             | $ | 2,220,189 |  
|                                              |  |               |           |   |                             |   |           |  

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|*Note: | The condensed consolidated balance sheet at January 31, 2004 has been derived from the audited consolidated financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles for complete financial statements.
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See accompanying notes to condensed consolidated financial statements.



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BEA SYSTEMS, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS



(in thousands)

(Unaudited)



|                                                                                  |  |                           |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Six months ended July 31, |         
|                                                                                  |  | 2004                      |          |   | 2003 |  
|Operating activities:                                                             |  |                           |          |   |      |   |          |  
|Net income                                                                        |  | $                         | 55,906   |   |      | $ | 50,394   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |          |   |      |   |          |  
|Depreciation                                                                      |  |                           | 13,111   |   |      |   | 14,697   |  
|Amortization of deferred compensation                                             |  |                           | 3,143    |   |      |   | 4,531    |  
|Amortization of acquired intangible assets                                        |  |                           | 6,328    |   |      |   | 10,807   |  
|Tax benefit from exercise of stock options                                        |  |                           | 13,933   |   |      |   | 9,318    |  
|Facilities consolidation                                                          |  |                           | 7,414    |   |      |   |         |  
|Changes in operating assets and liabilities                                       |  |                           | 32,895   |   |      |   | (8,459   | )
|Other                                                                             |  |                           | 6,644    |   |      |   | 7,275    |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                           | 139,374  |   |      |   | 88,563   |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Investing activities:                                                             |  |                           |          |   |      |   |          |  
|Purchases of property and equipment                                               |  |                           | (5,703   | ) |      |   | (8,810   | )
|Payments for acquisitions, net of cash acquired                                   |  |                           | (221     | ) |      |   | (12,392  | )
|Purchases of available-for-sale short-term investments                            |  |                           | (509,093 | ) |      |   | (353,674 | )
|Proceeds from maturities of available-for-sale short-term investments             |  |                           | 143,341  |   |      |   | 59,175   |  
|Proceeds from sales of available-for-sale short-term investments                  |  |                           | 293,588  |   |      |   | 252,251  |  
|Other                                                                             |  |                           | (44      | ) |      |   | 407      |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                           | (78,132  | ) |      |   | (63,043  | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Financing activities:                                                             |  |                           |          |   |      |   |          |  
|Increase in restricted cash for collateral on land lease transaction              |  |                           |         |   |      |   | (226     | )
|Net proceeds received for employee stock purchases                                |  |                           | 31,671   |   |      |   | 25,974   |  
|Purchases of treasury stock                                                       |  |                           | (40,094  | ) |      |   | (81,089  | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash used in financing activities                                             |  |                           | (8,423   | ) |      |   | (55,341  | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |  |                           | 52,819   |   |      |   | (29,821  | )
|Effect of exchange rate changes on cash and cash equivalents                      |  |                           | (3,786   | ) |      |   | 9,924    |  
|Cash and cash equivalents at beginning of period                                  |  |                           | 683,729  |   |      |   | 578,717  |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                         | 732,762  |   |      | $ | 558,820  |  
|                                                                                  |  |                           |          |   |      |   |          |  



See accompanying notes
to condensed consolidated financial statements.



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BEA SYSTEMS, INC.



NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



Note 1. Basis of
Presentation



The condensed consolidated financial
statements included herein are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash
flows for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in the BEA Systems, Inc. (BEA or the Company) Annual Report on Form 10-K for the fiscal year ended January 31, 2004. The results of operations for the three months and
six months ended July 31, 2004 are not necessarily indicative of the results to be anticipated for the entire fiscal year ending January 31, 2005 (Fiscal 2005).



The condensed consolidated balance sheet at January 31, 2004 has been derived from the audited financial statements at that
date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.



Principles of consolidation



The condensed consolidated financial statements include the accounts of the Company and all subsidiaries. The Company also consolidated as of August 2003
a variable interest entity of which the Company is the primary beneficiary pursuant to Financial Accounting Standards Board (FASB) Interpretation No. 46R (FIN 46R), a revision to Interpretation 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51. Intercompany accounts and transactions have been eliminated.



Use of estimates



The preparation of the financial statements in accordance with generally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ materially from those estimates.



Revenue recognition



The Company recognizes revenues in accordance with the American Institute of Certified Public Accountants (AICPA) Statement of Position 97-2,
Software Revenue Recognition, as amended. Revenue from software license agreements is recognized when the basic elements of software revenue recognition have been established (i.e. persuasive evidence of an agreement exists, delivery of the product
has occurred, the fee is fixed or determinable, and collection is probable). The Company uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date and vendor specific
objective evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the
fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established.



When licenses are sold together with services, license fees are recognized upon delivery, provided that (1) the basic
elements of software revenue recognition have been met, (2) payment of the license fees is not dependent upon the performance of the services, and (3) the services do not provide significant customization of the software products and are not
essential to the functionality of the software that was delivered. The majority of license fees are sold with services and consequently are recognized in this manner.



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BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



If the fee due from the customer is not fixed or determinable, including in
certain circumstances where terms are extended, revenue is recognized as payment is made, assuming all other revenue recognition criteria have been met. In certain regions or countries where collection risk is considered to be high, such as Latin
America and certain Asian and Eastern European countries, revenue is generally recognized only when full cash payment is received from the customer. Revenue arrangements with resellers are generally recognized when the Company receives persuasive
evidence that the reseller has sold the products to an end user customer. Revenue from sales to independent software vendors (ISVs) who embed BEAs products into their software products is recognized either upon shipment to the ISV
or when the Company receives persuasive evidence that the ISV has sold the products to an end user customer, depending upon the facts and circumstances and BEAs past experience with the particular ISV. License revenue on a majority of ISV
arrangements is recognized upon shipment to the ISV. None of the Companys resellers or ISVs have rights of return.



Services revenue includes consulting services, customer support and education. Consulting revenue and the related cost of services are generally
recognized on a time and materials basis; however, revenues from certain fixed-price contracts are recognized on the percentage of completion basis, which involves the use of estimates. The amount of consulting contracts recognized on a percentage
of completion basis has not been significant to date. Customer support agreements provide technical support and the right to unspecified future upgrades on an if-and-when available basis. Customer support revenue is recognized ratably over the term
of the support period (generally one year) and education revenues are recognized as the related training services are delivered. The unrecognized portion of amounts billed in advance of delivery for services is recorded as deferred revenues.



The Company rarely purchases software products from vendors
who are also customers of BEA. For contemporaneous exchanges of software products, the transaction is generally recorded on a net basis (i.e., revenue or expense is recognized equal to the net cash exchanged in the transaction).



Accounts receivable



Accounts receivable are stated net of allowances for doubtful accounts. The
Company makes judgments as to its ability to collect outstanding receivables and records allowances when collection becomes doubtful. Allowances are made based upon a review of significant outstanding invoices. For those invoices not reviewed,
allowances are provided based upon a percentage of expected uncollectible accounts. In determining these percentages, the Company analyzes its historical collection experience and current economic trends including such factors as geography and
industry of the customer.



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Stock-based compensation



The Company generally grants stock options to its employees for a fixed
number of shares with an exercise price equal to the fair market value of the stock on the date of grant. As permitted under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation(FAS 123),
as amended by SFAS No. 148 Accounting for Stock-Based Compensation  Transition and Disclosure (collectively referred to as SFAS 123, the Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employeesand related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in the Companys financial statements in connection with employee stock
awards where the exercise price of the award is equal to or greater than the fair market value of the stock on the date of grant. When stock options are granted with an exercise price that is lower than the fair market value of the stock on the date
of grant, the difference is recorded as deferred compensation and amortized to expense on a straight-line basis over the vesting term of the stock options.



Pro forma information regarding net income (loss) and net income (loss) per share is required by FAS 123. This information is required to be determined as
if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called stock-based awards), under the fair value method of FAS 123. Stock-based awards have been
valued using the Black-Scholes option pricing model. Among other things, the Black-Scholes model considers the expected volatility of the Companys stock price, determined in accordance with FAS 123, in arriving at an option valuation.



The fair value of the Companys stock-based awards to
employees was estimated assuming no expected dividends and the following weighted-average assumptions:



|                         |  |                            |   |  |                           |   |  |             |   |  |             |  
|------------------------ |  | -------------------------- | - |  | ------------------------- | - |  | ----------- | - |  | ----------- | -
|                         |  | Employee Stock Options     |  
|                         |  | Three months endedJuly 31, |   |  | Six months ended July 31, |  
|                         |  | 2004                       |   |  | 2003                      |   |  | 2004        |   |  | 2003        |  
|Expected life (in years) |  | 5.0                        |   |  | 4.0                       |   |  | 4.0 to 5.0  |   |  | 4.0         |  
|Risk-free interest rate  |  | 3.65                       | % |  | 3.55                      | % |  | 3.65 - 4.08 | % |  | 2.87 - 3.55 | %
|Expected volatility      |  | 60                         | % |  | 50                        | % |  | 60-63       | % |  | 50-65       | %



|                         |  |                              |   |  |                           |   |  |             |   |  |             |  
|------------------------ |  | ---------------------------- | - |  | ------------------------- | - |  | ----------- | - |  | ----------- | -
|                         |  | Employee Stock Purchase Plan |  
|                         |  | Three months ended July 31,  |   |  | Six months ended July 31, |  
|                         |  | 2004                         |   |  | 2003                      |   |  | 2004        |   |  | 2003        |  
|Expected life (in years) |  | 0.5 to 2.0                   |   |  | 0.5 to 2.0                |   |  | 0.5 to 2.0  |   |  | 0.5 to 2.0  |  
|Risk-free interest rate  |  | 1.92 - 2.86                  | % |  | 1.15 - 2.07               | % |  | 1.22 - 2.86 | % |  | 1.15 - 2.07 | %
|Expected volatility      |  | 53-59                        | % |  | 65                        | % |  | 5359       | % |  | 65          | %



The Black-Scholes
option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including the expected volatility of the stock price. Because the Companys stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially
affect the fair value estimates, in the opinion of management, the existing models do not necessarily provide a reliable measure of the fair value of the Companys stock-based awards.



8



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For purposes of pro forma disclosures, the estimated fair value of the
stock-based awards is amortized to expense over the vesting periods of the awards. The pro forma stock-based employee compensation expense has no impact on the Companys cash flows. In the future, the Company may elect, or be required, to use a
different valuation model, which could result in a significantly different impact on pro forma net income (loss). For purposes of this reconciliation, the Company adds back to previously reported net income all stock-based employee compensation
expense that relates to acquisitions or to awards made below fair market value, then deducts the pro forma stock-based employee compensation expense determined under the fair value method for all awards. The Companys pro forma information is
as follows (in thousands, except per share amounts):



|                                                                                                      |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                      |  | Three months ended July 31, |         |   | Six months ended July 31, |  
|                                                                                                      |  | 2004                        |         |   | 2003                      |   |         | 2004 |  |   | 2003    |  
|Net income as reported                                                                                |  | $                           | 30,572  |   |                           | $ | 25,939  |      |  | $ | 55,906  |   |  | $ | 50,394  |  
|Add back:                                                                                             |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Stock-based employee compensation expense included in reported net income                             |  |                             | 1,680   |   |                           |   | 1,917   |      |  |   | 3,361   |   |  |   | 3,834   |  
|Less:                                                                                                 |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total stock-based employee compensation expense determined under the fair value method for all awards |  |                             | (33,743 | ) |                           |   | (45,382 | )    |  |   | (69,758 | ) |  |   | (90,394 | )
|                                                                                                      |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                                    |  | $                           | (1,491  | ) |                           | $ | (17,526 | )    |  | $ | (10,491 | ) |  | $ | (36,166 | )
|                                                                                                      |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net income per share as reported                                                                      |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                                                 |  | $                           | 0.07    |   |                           | $ | 0.06    |      |  | $ | 0.14    |   |  | $ | 0.13    |  
|                                                                                                      |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Diluted                                                                                               |  | $                           | 0.07    |   |                           | $ | 0.06    |      |  | $ | 0.13    |   |  | $ | 0.12    |  
|                                                                                                      |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Pro forma net loss per share                                                                          |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic                                                                                                 |  | $                           | (0.004  | ) |                           | $ | (0.04   | )    |  | $ | (0.03   | ) |  | $ | (0.09   | )
|                                                                                                      |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Diluted                                                                                               |  | $                           | (0.004  | ) |                           | $ | (0.04   | )    |  | $ | (0.02   | ) |  | $ | (0.09   | )
|                                                                                                      |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



Consistent with FAS 109 and the
Companys recognition of its deferred tax assets, the reconciliation above does not include any tax impact on the stock-based employee compensation expense as the resulting deferred tax asset would be offset by an additional valuation
allowance.



Projects funded by third parties



The Company occasionally enters into product development agreements with
third parties that provide funding to BEA, which is intended by BEA and the third party to offset certain operating costs incurred by BEA. Such amounts are recorded as a reduction in BEAs operating expenses. During the six months ended July
31, 2004 and 2003, approximately $5.3 million and $6.4 million, respectively, of third party funding was recorded as a reduction in operating expenses.



Note 2. Related Party Transactions



Loans to executives and officers



We have secured notes receivable from two executives totaling approximately $1.4 million as of July 31, 2004 and as of January 31, 2004. These notes
originated prior to June 30, 2002 and are secured by deeds of trust on real property. They bear interest of 4.75 percent and 7 percent per annum, respectively, and are due and payable on April 3, 2006 and May 10, 2007, respectively, or upon the
termination of employment with us. The notes may be repaid at anytime prior to the due date.



9



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In September 1999, the Company issued an unsecured line of credit to Alfred
Chuang, our Chief Executive Officer, in the amount of $5.0 million. No borrowings were outstanding under this line of credit at July 31, 2004 or January 31, 2004.



Common board members or executive officers



We occasionally sell software products or services to companies that have board members or executive officers that are also
on our Board of Directors. The total revenues recognized by us from such customers in the first six months of fiscal 2005 and 2004 were insignificant.



Note 3. Net Income Per Share



Basic net income per share is computed based on the weighted average number of shares of the Companys common stock less the weighted average number
of shares subject to repurchase and held in escrow. Diluted net income per share is computed based on the weighted average number of shares of the Companys common stock and common equivalent shares (using the treasury stock method for stock
options and using the if-converted method for convertible notes), if dilutive.



The following is a reconciliation of the numerators and denominators of the basic and diluted net income per share computations (in thousands, except per share data):



|                                                                                |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                |  | Three months endedJuly 31, |         |   | Six months ended July 31, |  
|                                                                                |  | 2004                       |         |   | 2003                      |   |         | 2004 |  |   | 2003    |  
|Numerator:                                                                      |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Numerator for basic net income per share:                                       |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net income                                                                      |  | $                          | 30,572  |   |                           | $ | 25,939  |      |  | $ | 55,906  |   |  | $ | 50,394  |  
|                                                                                |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Denominator:                                                                    |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Denominator for basic net income per share:                                     |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding                                             |  |                            | 408,810 |   |                           |   | 401,284 |      |  |   | 409,330 |   |  |   | 402,150 |  
|Weighted average shares subject to repurchase and shares held in escrow         |  |                            | (160    | ) |                           |   | (244    | )    |  |   | (170    | ) |  |   | (275    | )
|                                                                                |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Denominator for basic net income per share, weighted average shares outstanding |  |                            | 408,650 |   |                           |   | 401,040 |      |  |   | 409,160 |   |  |   | 401,875 |  
|Weighted average dilutive potential common shares:                              |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Options and shares subject to repurchase and shares held in escrow              |  |                            | 8,750   |   |                           |   | 16,990  |      |  |   | 12,460  |   |  |   | 16,705  |  
|                                                                                |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Denominator for diluted net income per share                                    |  |                            | 417,400 |   |                           |   | 418,030 |      |  |   | 421,620 |   |  |   | 418,580 |  
|                                                                                |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic net income per share                                                      |  | $                          | 0.07    |   |                           | $ | 0.06    |      |  | $ | 0.14    |   |  | $ | 0.13    |  
|                                                                                |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Diluted net income per share                                                    |  | $                          | 0.07    |   |                           | $ | 0.06    |      |  | $ | 0.13    |   |  | $ | 0.12    |  
|                                                                                |  |                            |         |   |                           |   |         |      |  |   |         |   |  |   |         |  



The computation of
diluted net income per share for the three months ended July 31, 2004 and 2003 excludes the impact of options to purchase 48.4 million and 31.9 million shares of common stock, respectively, and the conversion of the $550 million 4% Convertible
Subordinated Notes due December 15, 2006 (the 2006 Notes) which are convertible into 15.9 million shares of common stock at both July 31, 2004 and 2003, as such impact would be anti-dilutive for these periods.



10



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The computation of diluted net income per share for the six months ended July
31, 2004 and 2003 excludes the impact of options to purchase 34.4 million and 33.6 million shares of common stock, respectively, and the conversion of the 2006 Notes which are convertible into 15.9 million shares of common stock at both July 31,
2004 and 2003, as such impact would be anti-dilutive for these periods.



Note 4. Property and Equipment



Property and
equipment consist of the following (in thousands):



|                                             |  |              |          |   |                 |   |          |  
|-------------------------------------------- |  | ------------ | -------- | - | --------------- | - | -------- | -
|                                             |  | July 31,2004 |          |   | January 31,2004 |  
|Land                                         |  | $            | 306,569  |   |                 | $ | 306,388  |  
|Computer hardware and software               |  |              | 81,956   |   |                 |   | 77,698   |  
|Furniture and equipment                      |  |              | 33,884   |   |                 |   | 33,342   |  
|Leasehold improvements                       |  |              | 41,479   |   |                 |   | 42,677   |  
|Furniture and equipment under capital leases |  |              | 1,538    |   |                 |   | 1,538    |  
|                                             |  |              |          |   |                 |   |          |  
|                                             |  |              | 465,426  |   |                 |   | 461,643  |  
|Accumulated depreciation and amortization    |  |              | (114,700 | ) |                 |   | (103,146 | )
|                                             |  |              |          |   |                 |   |          |  
|                                             |  | $            | 350,726  |   |                 | $ | 358,497  |  
|                                             |  |              |          |   |                 |   |          |  



Note 5. Acquired Intangible Assets



The following tables provide a summary of the carrying
amounts of acquired intangible assets that will continue to be amortized and exclude amounts originally allocated to assembled workforce (in thousands):



|                       |  |                     |         |                         |   |          |                   |  |   |      
|---------------------- |  | ------------------- | ------- | ----------------------- | - | -------- | ----------------- |  | - | -----
|                       |  | July 31, 2004      
|                       |  | Grosscarryingamount |         | Accumulatedamortization |   |          | Netcarryingamount
|Purchased technology   |  | $                   | 120,936 |                         | $ | (111,842 | )                 |  | $ | 9,094
|Non-compete agreements |  |                     | 26,745  |                         |   | (26,170  | )                 |  |   | 575  
|                       |  |                     |         |                         |   |          |                   |  |   |      
|Total                  |  | $                   | 147,681 |                         |   | (138,012 | )                 |  | $ | 9,669
|                       |  |                     |         |                         |   |          |                   |  |   |      



|                       |  |                     |         |                         |   |          |                   |  |   |       
|---------------------- |  | ------------------- | ------- | ----------------------- | - | -------- | ----------------- |  | - | ------
|                       |  | January 31, 2004   
|                       |  | Grosscarryingamount |         | Accumulatedamortization |   |          | Netcarryingamount
|Purchased technology   |  | $                   | 120,936 |                         | $ | (105,914 | )                 |  | $ | 15,022
|Non-compete agreements |  |                     | 26,745  |                         |   | (25,770  | )                 |  |   | 975   
|                       |  |                     |         |                         |   |          |                   |  |   |       
|Total                  |  | $                   | 147,681 |                         | $ | (131,684 | )                 |  | $ | 15,997
|                       |  |                     |         |                         |   |          |                   |  |   |       



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The total expected future amortization related to acquired intangible assets
as of July 31, 2004 is provided in the table below (in thousands):



|                                                    |  |                    |      
|--------------------------------------------------- |  | ------------------ | -----
|                                                    |  | Futureamortization
|Six months ending January 31, 2005                  |  | $                  | 6,148
|Fiscal year ending January 31, 2006 (Fiscal 2006) |  |                    | 3,521
|                                                    |  |                    |      
|Total                                               |  | $                  | 9,669
|                                                    |  |                    |      



Note 6. Facilities Consolidation
Charges



During the fiscal year ended January 31, 2002
(Fiscal 2002), the Company approved a plan to consolidate certain facilities in the United States, Canada, and Germany. The Company recorded a facilities consolidation charge of $20.0 million based on the remaining future lease
commitments for vacant facilities, net of estimated future sublease income. During the first quarter of fiscal 2005, the Company approved a plan to consolidate certain facilities in regions including the United States and Canada. A facilities
consolidation charge of $7.7 million was recorded using managements best estimates and was based upon the present value of the remaining future lease commitments for vacant facilities, net of the present value of the estimated future sublease
income. The facilities consolidation charge also included the write-off of approximately $0.8 million of unamortized leasehold improvements. During the second quarter of fiscal 2005 an additional charge $0.5 million was accrued in association with
the facilities consolidation recorded in Fiscal 2002. This additional expense was recorded due to reassessment of original estimates of abandoning the leased facilities compared to the actual results and future estimates. If the Company was unable
to receive any of its estimated but uncommitted sublease income in the future, the total charge would be approximately $5.3 million (excluding the $0.5 million recorded in the second quarter of Fiscal 2005). The estimated costs of abandoning leased
facilities, including estimated costs to sublease, were based on market information and trend analyses, including information obtained from third party real estate industry sources.



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As a result of these consolidation activities, at July 31, 2004, $14.7
million of lease termination costs remained accrued, net of anticipated sublease income. These accrued costs are expected to be fully expended by Fiscal 2012. If actual circumstances prove to be materially different than the amounts management has
estimated, the Companys total charges for these vacant facilities could be significantly higher. Adjustments to the facilities consolidation charge will be made in future periods, if necessary, based upon then current actual events and
circumstances. The following table summarizes the charge in Fiscal 2002 and Fiscal 2005, and the activity related to the facilities consolidation liability during the fiscal year ended January 31, 2003 (Fiscal 2003), the fiscal year
ended January 31, 2004 (Fiscal 2004), and the six months ended July 31, 2004 (in thousands):



|                                                                                                                                              |  |                          |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | -
|                                                                                                                                              |  | Facilities consolidation |       
|Charges accrued during fiscal 2002 included in operating expenses                                                                             |  | $                        | 20,000 |  
|Write-off of leasehold improvements                                                                                                           |  |                          | (2,152 | )
|Cash payments during fiscal 2002                                                                                                              |  |                          | (1,447 | )
|                                                                                                                                              |  |                          |        |  
|Accrued at January 31, 2002                                                                                                                   |  |                          | 16,401 |  
|Cash payments during fiscal 2003                                                                                                              |  |                          | (3,784 | )
|                                                                                                                                              |  |                          |        |  
|Accrued at January 31, 2003                                                                                                                   |  |                          | 12,617 |  
|Cash payments during fiscal 2004                                                                                                              |  |                          | (2,770 | )
|                                                                                                                                              |  |                          |        |  
|Accrued at January 31, 2004                                                                                                                   |  |                          | 9,847  |  
|Cash payments during the six months ended July 31, 2004                                                                                       |  |                          | (2,605 | )
|Charges accrued during the six months ended July 31, 2004 included in operating expenses (net of write-off of leasehold improvements of
$760) |  |                          | 7,414  |  
|                                                                                                                                              |  |                          |        |  
|Accrued at July 31, 2004                                                                                                                      |  | $                        | 14,656 |  
|                                                                                                                                              |  |                          |        |  



Note 7. Accumulated Other
Comprehensive Income



The components of accumulated other
comprehensive income are as follows (in thousands):



|                                                                            |  |              |        |   |                 |   |      
|--------------------------------------------------------------------------- |  | ------------ | ------ | - | --------------- | - | -----
|                                                                            |  | July 31,2004 |        |   | January 31,2004
|Foreign currency translation adjustments                                    |  | $            | 9,105  |   |                 | $ | 9,519
|Unrealized gain (loss) on available-for-sale investments, net of income tax |  |              | (2,162 | ) |                 |   | 274  
|                                                                            |  |              |        |   |                 |   |      
|Total accumulated other comprehensive income                                |  | $            | 6,943  |   |                 | $ | 9,793
|                                                                            |  |              |        |   |                 |   |      



Note 8. Common Stock and Treasury
Stock



During the six months ended July 31, 2004, the
Company issued 5.9 million shares of common stock and received $31.7 million in proceeds resulting from the exercise of employee stock options and purchases under the employee stock purchase plan.



The Company recorded a tax benefit from stock options of $7.6 million and
$9.8 million for the three months ended July 31, 2004 and 2003, respectively. The Company recorded a tax benefit from stock options of $13.9 million and $9.3 million in the six months ended July 31, 2004 and 2003, respectively.



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In September 2001 and March 2003, the Board of Directors approved an
aggregate repurchase of up to $200.0 million of our common stock under a share repurchase program (the Share Repurchase Program). An insignificant number of shares were repurchased in Fiscal 2002. In Fiscal 2003, 6.9 million shares were
repurchased at a total cost of approximately $42.1 million. In Fiscal 2004, an additional 8.0 million shares were repurchased at a total cost of approximately $81.2 million leaving approximately $76.7 million of the approval limit available for
share repurchases under the Share Repurchase Program. In May 2004, the Board of Directors approved an additional repurchase of up to $200.0 million of our common stock under the Share Repurchase Program. In the quarter ended July 31, 2004, 4.8
million shares were repurchased at a total cost of $40.1 million leaving approximately $236.6 million of the approval limit available for share repurchases under the Share Repurchase Program. No repurchases were done in the first quarter of Fiscal
2005 under the Share Repurchase Program.



Note 9. Commitments and
Contingencies



Litigation and other claims



Beginning on June 9, 2004, several purported class action
shareholder complaints were filed in the United States District Court for the Northern District of California against the Company and several of our officers. The actions were purportedly brought on behalf of purchasers of our publicly-traded
securities from November 13, 2003 through May 13, 2004. The complaints generally alleged that defendants made false statements about our operating results and business, while concealing material information. The plaintiffs seek unspecified monetary
damages.



Beginning on June 15, 2004, several derivative
lawsuits were filed by purported Company shareholders in the United States District Court for the Northern District of California and the Superior Court of California, Santa Clara County. The complaints name certain of the Companys present and
former officers and directors as defendants and name the Company as a nominal defendant. These complaints are based on the same facts and circumstances as the class actions and generally allege that the named directors and offices breached their
fiduciary duties to the Company. Given the nature of derivative litigation, any recovery in a derivative suit would be to the benefit of the Company.



Notice of these matters has been given to our insurers.



The Company is also subject to legal proceedings and other claims that arise, such as those arising from intellectual property disputes, domestic and
foreign tax matters, and employee-related matters, in the ordinary course of its business. While management currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect the Companys
financial position, results of operations, or liquidity, the ultimate outcome of any litigation or claim is uncertain, and the impact of an unfavorable outcome could be material to the Company.



Warranties and indemnification



The Company generally provides a warranty for its software products and
services to its customers and accounts for its warranties under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies(FAS 5). The Companys products are generally warranted to perform substantially
as described in the associated product documentation for a period of 90 days. The Companys services are generally warranted to be performed consistent with industry standards for a period of 90 days from delivery. In the event there is a
failure under such warranties, the Company generally is obligated to correct the product or service to conform to the warranty provision or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the
product or service. The Company has not provided for a warranty accrual as of July 31, 2004 or January 31, 2004. To date, the Companys warranty expense has not been significant.



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company generally agrees to indemnify its customers against legal claims
that the Companys software products infringe certain third-party intellectual property rights and accounts for its indemnification obligations under FAS 5. In the event of such a claim, the Company is generally obligated to defend its customer
against the claim and to either settle the claim at the Companys expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company agrees to modify or
replace the infringing product, or, if those options are not reasonably possible, to refund the cost of the software, as pro-rated over a three-year period. To date, the Company has not been required to make any payment resulting from infringement
claims asserted against its customers. The Company has not recorded a liability for infringement costs as of July 31, 2004 or January 31, 2004.



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##### Table of Contents

ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion of the financial condition and results of operations of BEA Systems, Inc. (referred to herein as we, us, BEA
or the Company) should be read in conjunction with the Managements Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included in the
Companys Annual Report on Form 10-K for the year ended January 31, 2004, and subsequent filings with the Securities and Exchange Commission (the SEC). This quarterly report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as may, will, expects,
plans, anticipates, goals, estimates, potential, or continue, or the negative thereof or other comparable terminology regarding beliefs, plans, expectations or intentions
regarding the future. Forward-looking statements include statements regarding: future company performance; financial and product performance; market growth; revenue mix; future opportunities; performance of geographic and business sectors; foreign
exchange rates; new product features and benefits; assumptions about market growth; financial models; financial assumptions; the use of a different valuation model to value stock options; the utilization of lease termination costs; the amount of
ultimate liability of any litigation; critical accounting policies; the fluctuation of revenues of regions as a percentage of total revenues; adjustments to facilities consolidation charges; the development of further integration technologies and
features; the continuation of certain products accounting for a majority of revenue; the significant advantages of a standards-based approach; use of the application server for essential services, and a tightly integrated platform product; the
construction of additional corporate offices and research and development facilities; the continuation of growth through acquisitions; seasonality of orders and sales; the investment in programs and strategies to attract developers using non-Java
platforms; solutions targeted to market interest; sufficiency of existing cash; future amortization expenses associated with intangible assets; the commitment of substantial resources to product development and engineering; fluctuation of revenues
and operating results; continued investment in and enhancement of WebLogic Platform 8.1 and other new products; continued adoption of Java technologies; strategic partners ability to integrate their software with ours; continued growth in use
of the Web to run software applications; the expansion of relationships with distributors and ISVs; the update of our management information systems to integrate financial and other reporting; the development and roll out of information technology
initiatives; an increase in staff and improvement in financial reporting and controls; the estimate and fluctuation of interest payments; estimates of future cash flows; the evaluation of the realizability of deferred tax assets; the trend toward
increased high dollar transactions; the dependence on continued expansion of international operations; the dependence on our ability to attract and retain highly skilled personnel; our acquisition strategy; completion of structural changes in the
Americas sales organizations; and the goal to sell more broadly inside customer organization. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking
statements. These risks and uncertainties include, but are not limited to, those described under the headings Effect of New Accounting Pronouncements and Risk Factors that May Impact Future Operating Results, as well as risks
described immediately prior to or following some forward-looking statements. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and
we assume no obligation to update any forward-looking statement or risk factor.



Overview



BEA® is the worlds leading application infrastructure software provider. Our
WebLogic Enterprise Platform delivers a highly
reliable, scalable software infrastructure for customers to bring new services to market quickly, to lower operational costs by automating processes, and to automate relationships with suppliers and distributors. The BEA WebLogic Enterprise Platform consists of BEA WebLogic
Server, the worlds leading Java 2
Enterprise Edition (J2EE) application server, which includes security, management, development and deployment features, as well as support for Web services protocols; BEA WebLogic Integration, a standards-based solution for application integration, business process management,
business-to-business integration and Web services; BEA WebLogic Portal, an



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infrastructure for building and deploying robust personalized enterprise portals; BEA Liquid Data for WebLogic, a solution for providing information integration and
data aggregation from various sources in distributed computer systems; BEA WebLogic Workshop, a unified, services-oriented development environment for Java and Web applications, Web services, data and application integration, business processes, and portals; BEA Weblogic
JRockit JVM, a server centric Java Virtual
Machine (JVM); WebLogic Enterprise Security, an application security infrastructure solution; and BEA Tuxedo®, a proven transaction processing platform for mission-critical, large-scale and high-volume distributed enterprise applications. Our products are marketed and sold worldwide primarily
through our direct sales force, and also through systems integrators (SIs), independent software vendors (ISVs) and hardware vendors that are our partners and distributors. Our products have been adopted in a wide variety of
industries, including telecommunications, commercial and investment banking, securities trading, government, manufacturing, retail, airlines, package delivery, pharmaceuticals and insurance. The BEA WebLogic Enterprise Platform provides application
infrastructure for building and deploying distributed, integrated information technology (IT) environments, allowing customers to integrate private client/server networks, the Internet, intranets, extranets, virtual private networks, and
mainframe and legacy systems as system components. Our products serve as a platform, integration tool or portal framework for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading
and settlement, online banking, Internet sales, inventory management, supply chain management, enterprise resource planning, scheduling and logistics, and hotel, airline and rental car reservations. Licenses for our products are typically priced on
a per-central processing unit basis, but we also offer licenses priced on other metrics.



Seasonality.Our first quarter sales are typically lower than sales in the immediately preceding fourth quarter because many of our customers begin a new fiscal year on January 1 and it is common for capital
expenditures to be lower early in an organizations fiscal year. Our commission structure and other sales incentives also tend to result in fewer sales in the first quarter than in the fourth quarter. We anticipate that the negative impact of
seasonality on our first quarter will continue.



Investment
in Distribution. In the first quarter of fiscal 2005, we implemented changes in our Americas distribution organization. These changes included signing relationships with a value-added distributor and several value-added resellers
(VARs), creating a new general accounts region within our Americas sales organization in part to coordinate our efforts with the VARs, reassigning personnel to staff this newly created general accounts region, transitioning customer
relationships for these reassigned personnel, transitioning customer accounts to be focused on by the general accounts region and the VARs, moving the location of our telesales organization, and hiring a significant number of new employees in the
Americas sales organization. We believe these changes disrupted the sales process in our first quarter of our fiscal 2005 more than we anticipated, and contributed significantly to reducing our revenue in North America in the first quarter. We
currently believe the structural changes have been substantially completed, and that the changes have been substantially integrated by the sales force. However, the adverse impact of these changes could continue. For example, it may take more time
to transition customer relationships, to train the new personnel and to train the VARs signed in the first quarter of fiscal 2005. We also need to train the VARs signed in the second quarter of fiscal 2005. In addition, after the close of the second
quarter, BEA announced the creation of a new worldwide field operations organization. This new organization is responsible for all of BEAs worldwide sales, services and marketing functions. The objective of this new organization is to improve
BEAs operations and ability to serve customers by improving coordination among our sales, services and marketing teams. However, creation of this organization changes a variety of reporting relationships, and may cause disruption, especially
in the near term. Based in part on this potential disruption and adverse the impact on our revenue resulting from the disruptions we experienced in our first quarter of our fiscal 2005, we believe that there is a risk that the ongoing impact of
these changes to our Americas sales, services, marketing and distribution organizations could negatively impact our operating results in our second half of our fiscal 2005 and beyond.



Investment in Platform Product.In the fall of 2001, we announced a new focus on a platform approach. Primarily known
as an application server provider, our platform strategy converged application server, integration, portal, security, development and deployment tools, and operations, administration and



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management into a single product offering. Our approach was to unify these technologies into a single code base, with a
single installation, single development and deployment environment and single management console. Delivering a platform product required significant research and development investment in areas that were relatively new to us, such as security,
integration and tools, and also required significant investment in research and development in order to unify various technologies into a single code base. Selling and marketing a platform product also requires significant investment in marketing to
educate customers and prospects, and significant investment to educate our sales force. One goal of the platform approach is to sell more broadly inside customer organizations, and also to sell at higher levels in the customer organizations. This
approach may have the effect of lengthening sales cycles and increasing deal sizes, both of which make it harder to predict the timing and size of large deals. We released our WebLogic Platform 8.1 product in July 2003, and are actively working on the transitions inside the sales
force, product market and customer base.



Investment in
Integration Technologies.In the spring of 2001, we announced a new focus on developing products to address the integration market. To address this market, we introduced BEA WebLogic Integration in July 2001, and a series of BEA branded, sold
and supported adapters in August 2002. We also partner with complementary technology providers to supplement our integration solutions. In addition, we continue to develop further integration technologies and features, both inside the WebLogic® Integration product and in the other elements of the
WebLogic Enterprise Platform. Our strategy for the integration market is characterized by three approaches that we believe are different than how the market was previously being addressed: (i) a standards based approach, built on the J2EE messaging
and connectivity standards, in contrast to other vendors proprietary approaches; (ii) using the application server to provide essential capabilities and underlying services, such as scalability and transaction processing, in contrast to the
messaging approaches offered by most other integration vendors; and (iii) providing Web services support, business process management, business-to-business integration, application integration, information integration, development tools and a
run-time framework all in a single tightly integrated platform product, rather than providing them as separate products with separate tools and separate deployment frameworks. Some of our competitors in the integration market have recently announced
a variety of initiatives similar to one or more of these approaches.



Investment in Developer Programs.Our products are a platform for Java application development and deployment, both packaged applications built and sold by ISVs and custom applications built by our customers and SI partners. Success
in a platform market requires that a large number of developers are trained on and actively using our platform. As a result, we have made a substantial investment in building programs to attract and retain Java developers. In addition, BEA WebLogic
Workshop is designed to allow developers who are not trained in Java, such as developers who primarily use Visual Basic, Power Builder or COBOL, to quickly and easily become productive in Java and on the BEA WebLogic Platform. As a result, we are
investing in programs to go beyond the current community of Java developers and attract developers currently using non-Java platforms. There can be no assurance that our investment in these programs will be successful.



Investment in Solutions. We have historically sold a platform on which
customers implement a solution. Over time, we have observed several solutions that are commonly adopted. Recently, we have begun programs to develop pre-packaged solutions that can be sold on top of our platform. Typically, this approach has
involved our products, our consulting organization, products provided by our ISV partners (such as content management and Web services management), and implementation work done by our SI partners. In addition, this approach has required marketing,
training and sales enablement programs. We anticipate that our solutions are targeted to areas of market interest, such as employee and customer self-service portals and telecommunications service delivery platforms. However, there can be no
assurance that our program to package, market, sell and implement such solutions will be successful.



Acquisitions.Throughout our history, we have acquired product lines, development teams, distributors and companies to expand our business. Our
strategy is to continue to grow our business through acquisitions. Our acquisition strategy is focused primarily on using cash or stock to purchase development teams or technologies to add features or products that complement or expand our products.



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Critical Accounting Policies



We believe there have been no significant changes in our critical accounting policies during the quarter ended July 31, 2004
as compared to our previous disclosures in Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.



Results of Operations



The following table sets forth certain line items in BEAs consolidated statements of income as a percentage of total
revenues for the three and six months ended July 31, 2004 and 2003.



|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  
|------------------------------------------ |  | --------------------------- | -- |  | ------------------------- | - |  | ----- | -- |  | ----- | -
|                                           |  | Three months ended July 31, |    |  | Six months ended July 31, |  
|                                           |  | 2004                        |    |  | 2003                      |   |  | 2004  |    |  | 2003  |  
|Revenues:                                  |  |                             |    |  |                           |   |  |       |    |  |       |  
|License fees                               |  | 44.3                        | %  |  | 52.0                      | % |  | 45.0  | %  |  | 51.8  | %
|Services                                   |  | 55.7                        | %  |  | 48.0                      | % |  | 55.0  | %  |  | 48.2  | %
|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  
|Total revenues                             |  | 100.0                       | %  |  | 100.0                     | % |  | 100.0 | %  |  | 100.0 | %
|Cost of revenues:                          |  |                             |    |  |                           |   |  |       |    |  |       |  
|Cost of license fees (1)                   |  | 5.4                         | %  |  | 5.0                       | % |  | 5.4   | %  |  | 4.9   | %
|Cost of services (1)                       |  | 32.1                        | %  |  | 40.5                      | % |  | 33.2  | %  |  | 40.6  | %
|Amortization of acquired intangible assets |  | 1.2                         | %  |  | 2.4                       | % |  | 1.2   | %  |  | 2.2   | %
|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  
|Total cost of revenues                     |  | 21.5                        | %  |  | 24.4                      | % |  | 21.9  | %  |  | 24.4  | %
|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  
|Gross margin                               |  | 78.5                        | %  |  | 75.6                      | % |  | 78.1  | %  |  | 75.6  | %
|Operating expenses:                        |  |                             |    |  |                           |   |  |       |    |  |       |  
|Sales and marketing                        |  | 38.0                        | %  |  | 38.6                      | % |  | 38.2  | %  |  | 38.7  | %
|Research and development                   |  | 13.9                        | %  |  | 14.2                      | % |  | 13.6  | %  |  | 14.4  | %
|General and administrative                 |  | 8.5                         | %  |  | 7.8                       | % |  | 8.4   | %  |  | 7.8   | %
|Facilities consolidation                   |  | 0.2                         | %  |  |                          |   |  | 1.5   | %  |  |      |  
|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  
|Total operating expenses                   |  | 60.6                        | %  |  | 60.6                      | % |  | 61.7  | %  |  | 60.9  | %
|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  
|Income from operations                     |  | 17.9                        | %  |  | 15.0                      | % |  | 16.4  | %  |  | 14.7  | %
|Interest and other, net                    |  | (1.2                        | )% |  | 0.1                       | % |  | (1.1  | )% |  | 0.2   | %
|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  
|Income before provision for income taxes   |  | 16.7                        | %  |  | 15.1                      | % |  | 15.3  | %  |  | 14.9  | %
|Provision for income taxes                 |  | 5.0                         | %  |  | 4.5                       | % |  | 4.6   | %  |  | 4.5   | %
|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  
|Net income                                 |  | 11.7                        | %  |  | 10.6                      | % |  | 10.7  | %  |  | 10.4  | %
|                                           |  |                             |    |  |                           |   |  |       |    |  |       |  

---

|(1) | Cost of license fees and cost of services are stated as a percentage of license fees and services revenue, respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------



Revenues (in thousands):



|               |  |                            |         |                  |   |         |                           |     |                  |  |   |         |  |   |         |  |     |  
|-------------- |  | -------------------------- | ------- | ---------------- | - | ------- | ------------------------- | --- | ---------------- |  | - | ------- |  | - | ------- |  | --- | -
|               |  | Three Months EndedJuly 31, |         | PercentageChange |   |         | Six Months Ended July 31, |     | PercentageChange | 
|               |  | 2004                       |         | 2003             |   |         | 2004                      |     | 2003             | 
|Total revenues |  | $                          | 262,288 |                  | $ | 245,048 |                           | 7.0 | %                |  | $ | 524,923 |  | $ | 482,342 |  | 8.8 | %



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Our revenues are derived from fees for software licenses, and services, which include customer support,
education and consulting. The revenue growth for the quarter ended July 31, 2004 (the second quarter of fiscal 2005) from the same quarter in the prior fiscal year (the second quarter of fiscal 2004) reflects growth in our
customer support, consulting and education revenues, offset partially by a decrease in license revenues. Services revenue increased by 24.0 percent which was primarily due to the $22.6 million increase (24.9 percent increase) in support revenues
compared to the same quarter in the prior year. The revenue growth for the six months ended July 31, 2004 (the first half of fiscal 2005) from the same period in the prior fiscal year (the first half of fiscal 2004) reflects
growth in our customer support, consulting and education revenues, offset partially by a decrease in license revenues. Services revenue increased by 24.0 percent which was primarily due to the $42.7 million increase (23.9 percent increase) in
support revenues compared to the same quarter in the prior year



Geographically, the total revenue distribution shifted from the Americas to International for the second quarter and the first half of fiscal 2005 compared to the same periods in fiscal 2004. International revenues comprised 48.3 percent of
total revenues compared to 44.9 percent for the second quarter ended July 31, 2005 and 2004, respectively. For the second quarter ended July 31, 2004, total revenues when translated at a constant exchange rate from the same quarter in the prior
fiscal year would have been approximately $254.0 million. International revenues comprised 50.3 percent of total revenues compared to 45.4 percent for the first half of fiscal 2005 and 2004, respectively. For the first half of fiscal 2005, total
revenues when translated at a constant exchange rate from the same period in the prior year would have been approximately $499.5 million. Many factors that impact our revenue levels are beyond our control and there can be no assurance that our
revenues will grow in the future.



License Fees (in
thousands):



|                   |  |                            |         |                  |   |         |                           |      |                  |  |   |         |  |   |         |  |      |   
|------------------ |  | -------------------------- | ------- | ---------------- | - | ------- | ------------------------- | ---- | ---------------- |  | - | ------- |  | - | ------- |  | ---- | --
|                   |  | Three Months EndedJuly 31, |         | PercentageChange |   |         | Six Months Ended July 31, |      | PercentageChange | 
|                   |  | 2004                       |         | 2003             |   |         | 2004                      |      | 2003             | 
|Total license fees |  | $                          | 116,300 |                  | $ | 127,355 |                           | (8.7 | )%               |  | $ | 236,452 |  | $ | 249,694 |  | (5.3 | )%



Management believes
the decrease in license revenues for the second quarter of fiscal 2005 from the same quarter in the prior fiscal year was due in part to the challenging market conditions in the Americas, the decline in average transaction size, a longer sales cycle
for platform transactions, the timing of large transactions and some residual impact from the organizational changes in Americas sales force in the first quarter of fiscal 2005. License fees for the second quarter of fiscal 2005 included 18 product
transactions of high dollar value (transactions with a product value greater than $1.0 million) compared to 19 product transactions in the same quarter of the prior fiscal year. Management believes that the trend toward an increase in the number of
license fee transactions greater than $1.0 million, and the timing of the closing of such transactions, increases the risk that reported results may differ from expected results.



Management believes the decline in license revenue for the first half of fiscal 2005 compared to the same period in the
prior fiscal year was due in part to the challenging market conditions in the Americas, the decline in average transaction size, a longer sales cycle for platform transactions, the timing of large transactions, the organizational changes in the
Americas sales force, greater than anticipated seasonality, and the rate of market acceptance of the WebLogic Platform 8.1. License fees for the first half of fiscal 2005 included 35 product transactions of high dollar value compared to 31 product
transactions in the same period of the prior fiscal year. Management believes that the trend toward an increase in the number of license fee transactions greater than $1.0 million, and the timing of the closing of such transactions, increases the
risk that reported results may differ from expected results.



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Service Revenues



The following table provides a summary of service revenues (in thousands):



|                                  |  |                            |         |                  |   |         |                           |      |                  |  |   |         |  |   |         |  |      |  
|--------------------------------- |  | -------------------------- | ------- | ---------------- | - | ------- | ------------------------- | ---- | ---------------- |  | - | ------- |  | - | ------- |  | ---- | -
|                                  |  | Three Months EndedJuly 31, |         | PercentageChange |   |         | Six Months Ended July 31, |      | PercentageChange | 
|                                  |  | 2004                       |         | 2003             |   |         | 2004                      |      | 2003             | 
|Consulting and education revenues |  | $                          | 32,550  |                  | $ | 26,903  |                           | 21.0 | %                |  | $ | 67,077  |  | $ | 53,956  |  | 24.3 | %
|Customer support revenues         |  |                            | 113,438 |                  |   | 90,790  |                           | 24.9 | %                |  |   | 221,394 |  |   | 178,692 |  | 23.9 | %
|                                  |  |                            |         |                  |   |         |                           |      |                  |  |   |         |  |   |         |  |      |  
|Total services revenues           |  | $                          | 145,988 |                  | $ | 117,693 |                           | 24.0 | %                |  | $ | 288,471 |  | $ | 232,648 |  | 24.0 | %
|                                  |  |                            |         |                  |   |         |                           |      |                  |  |   |         |  |   |         |  |      |  



Consulting and
education revenues consist of professional services related to the deployment and use of our software products, and are typically recognized on a time and materials basis. Customer support revenues consist of fees for annual maintenance contracts,
which are recognized ratably over the term of the agreement (generally one year). Customer support is typically priced as a percentage of license fees. The significant increase in customer support revenues in the second quarter and the first half of
fiscal 2005 compared to the same periods in the prior fiscal year was driven by maintenance renewals of our existing installed base of software licenses as well as maintenance contracts sold together with new sales of software licenses. Consulting
and education revenues increased in the second quarter and the first half of fiscal 2005 compared to the same periods in the prior fiscal year due primarily to an increase in demand for consulting services. The increase in consulting services is
driven by our customers increasing demand for assessments, architecture and implementation services.



Revenues by Geographic Region



The following tables provide a summary of revenues by geographic region (in thousands):



|                                                 |  |                              |         |                            |       |   |                              |   |                            |  |       |                             |  |                            |         |  |                             |   |                            |   |         |  |       |  
|------------------------------------------------ |  | ---------------------------- | ------- | -------------------------- | ----- | - | ---------------------------- | - | -------------------------- |  | ----- | --------------------------- |  | -------------------------- | ------- |  | --------------------------- | - | -------------------------- | - | ------- |  | ----- | -
|                                                 |  | ThreeMonthsEndedJuly 31,2004 |         | Percentageof TotalRevenues |       |   | ThreeMonthsEndedJuly 31,2003 |   | Percentageof TotalRevenues |  |       | Six MonthsEndedJuly 31,2004 |  | Percentageof TotalRevenues |         |  | Six MonthsEndedJuly 31,2003 |   | Percentageof TotalRevenues |  
|Americas                                         |  | $                            | 135,489 |                            | 51.7  | % |                              | $ | 135,017                    |  | 55.1  | %                           |  | $                          | 260,866 |  | 49.7                        | % |                            | $ | 263,169 |  | 54.6  | %
|European, Middle East and Africa region (EMEA) |  |                              | 89,592  |                            | 34.2  | % |                              |   | 76,596                     |  | 31.3  | %                           |  |                            | 188,508 |  | 35.9                        | % |                            |   | 146,847 |  | 30.4  | %
|Asia/Pacific region (APAC)                     |  |                              | 37,207  |                            | 14.1  | % |                              |   | 33,435                     |  | 13.6  | %                           |  |                            | 75,549  |  | 14.4                        | % |                            |   | 72,326  |  | 15.0  | %
|                                                 |  |                              |         |                            |       |   |                              |   |                            |  |       |                             |  |                            |         |  |                             |   |                            |   |         |  |       |  
|Total revenues                                   |  | $                            | 262,288 |                            | 100.0 | % |                              | $ | 245,048                    |  | 100.0 | %                           |  | $                          | 524,923 |  | 100.0                       | % |                            | $ | 482,342 |  | 100.0 | %
|                                                 |  |                              |         |                            |       |   |                              |   |                            |  |       |                             |  |                            |         |  |                             |   |                            |   |         |  |       |  



For each of the twelve
fiscal quarters ended July 31, 2004, EMEA and APAC revenues as a percentage of total revenues have ranged between 29 percent to 38 percent for EMEA and 14 percent to 17 percent for APAC. These ranges may fluctuate in the future depending upon
regional economic conditions, including but not limited to, foreign currency exchange rates, and if a large sale is made in a particular region.



Americas revenues remained flat for the second quarter of fiscal 2005 compared to the same fiscal quarter in 2004 and declined slightly for the first half
of fiscal 2005 compared to the same period in fiscal 2004. Management believes there was a combination of factors that lead to the Americas revenues remaining flat and declining for the second quarter and first half of fiscal 2005 compared to fiscal
2004 including: the challenging market conditions in the Americas, the decline in average transaction size, longer sales cycles for platform transactions, the timing of large transactions, the organizational changes in the Americas sales force,
greater than anticipated seasonality and the rate of market acceptance of the WebLogic Platform 8.1. Exchange rate translation did not materially impact Americas revenues for the



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second quarter or the first half of fiscal 2005 compared to the same periods in fiscal 2004. Management believes the
increase in EMEA revenues for the second quarter and first half of fiscal 2005 compared to fiscal 2004 was due to strong performance across the entire region and virtually all revenue streams. EMEA revenues translated at constant exchange rate would
have been approximately $83.2 million and $169.1 million for the second quarter and first half of fiscal 2005, respectively, when translated at a constant exchange rate year over year. Management believes the increase in APAC revenues for the second
quarter and the first half of fiscal 2005 compared to fiscal 2004 was due in large part to the increase in services revenues. APAC revenues would have been approximately $35.0 million and $70.4 million for the second quarter and first half of fiscal
2005, respectively, when translated at a constant exchange rate year over year.



Cost of Revenues



The following table provides a summary of cost of revenues (in thousands):



|                                           |  |                            |        |                  |   |        |                           |       |                  |  |   |         |  |   |         |  |       |   
|------------------------------------------ |  | -------------------------- | ------ | ---------------- | - | ------ | ------------------------- | ----- | ---------------- |  | - | ------- |  | - | ------- |  | ----- | --
|                                           |  | Three Months EndedJuly 31, |        | PercentageChange |   |        | Six Months Ended July 31, |       | PercentageChange | 
|                                           |  | 2004                       |        | 2003             |   |        | 2004                      |       | 2003             | 
|Cost of license fees                       |  | $                          | 6,334  |                  | $ | 6,423  |                           | (1.4  | )%               |  | $ | 12,805  |  | $ | 12,320  |  | 3.9   | % 
|Cost of services                           |  |                            | 46,929 |                  |   | 47,655 |                           | (1.5  | )%               |  |   | 95,909  |  |   | 94,472  |  | 1.5   | % 
|Amortization of acquired intangible assets |  |                            | 3,099  |                  |   | 5,790  |                           | (46.5 | )%               |  |   | 6,328   |  |   | 10,807  |  | (41.4 | )%
|                                           |  |                            |        |                  |   |        |                           |       |                  |  |   |         |  |   |         |  |       |   
|Total cost of revenues                     |  | $                          | 56,362 |                  | $ | 59,868 |                           | (5.9  | )%               |  | $ | 115,042 |  | $ | 117,599 |  | (2.2  | )%
|                                           |  |                            |        |                  |   |        |                           |       |                  |  |   |         |  |   |         |  |       |   



Cost of License
Fees.Cost of license fees, as referenced in the table above, includes fees paid to third party contractors in connection with our customer license compliance program, royalties and license fees paid to third parties, costs associated with
transferring our software to electronic media, the printing of user manuals, packaging and distribution costs, and localization costs. Cost of license fees for the second quarter increased as a percentage of license revenue, however declined
slightly in absolute dollars year over year. The increase in cost of license fees for the first half of fiscal 2005 as a percentage of license revenue and in absolute dollars year over year is primarily due to increases in royalties paid to third
parties and increased activity in the revenue compliance program primarily in the Americas.



Cost of Services. Cost of services consists primarily of salaries and benefits for consulting, education and product support personnel; cost of third party delivered education and consulting revenues; and
administrative costs in information technology and facilities for the operation of the services organization. The decrease in cost of services in absolute dollars in the second quarter of fiscal 2005 compared to the same quarter in fiscal 2004 is
primarily related to the classification of $1.2 million of rent expense as Other Income, Net in the second quarter of fiscal 2005 in connection with the adoption of Financial Accounting Standards Board Interpretation No. 46 (FIN 46R) in
August 2003; offset by the cost of services increasing in connection with the increase in services revenues and an exchange rate impact of approximately 3 percent. Cost of services represented 32.1 percent, and 40.5 percent of total services
revenues in the second quarter of fiscal 2005 and 2004, respectively. Cost of services as a percentage of service revenues decreased over this period due to a higher mix of higher-margin customer support revenues versus lower-margin consulting and
education revenues.



Cost of services increased slightly in
absolute dollars and decreased as a percentage of services revenues for the first half of fiscal 2005 compared to the same period in fiscal 2004. The increase in cost of services was due to: the associated increase in services revenues and an
exchange rate impact of approximately 4 percent; offset by the classification of $2.4 million of rent expense as Other Income, Net in the first half of fiscal 2005 in connection with the adoption of Financial Accounting Standards Board
Interpretation No. 46 (FIN 46R) in August 2003. Cost of services represented 33.2 percent and 40.6 percent of total services revenues in the first half of fiscal 2005 and 2004, respectively. Cost of services as a percentage of service
revenues decreased over this period due to a higher mix of higher-margin customer support revenues versus lower-margin consulting and education revenues.



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Amortization of Acquired Intangible AssetsIincluded in Cost of Revenues.The amortization of
acquired intangible assets consists of amortization of purchased technology, non-compete agreements, customer base, patents and trademarks and distribution rights. The decrease in amortization for the second quarter and the first half of fiscal 2005
compared to the second quarter and the first half of fiscal 2004 was primarily due to a portion of our acquired intangible assets becoming fully amortized in the early part of the first quarter of fiscal 2005. In the future, amortization expense
associated with intangible assets recorded prior to July 31, 2004 is currently expected to total approximately $6.2 million and $3.5 million for the remainder of fiscal 2005 and for fiscal 2006, respectively. We periodically review the estimated
remaining useful lives of our intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.



Operating Expenses



Sales and Marketing (in thousands):



|                             |  |                            |        |                  |   |        |                           |     |                  |  |   |         |  |   |         |  |     |  
|---------------------------- |  | -------------------------- | ------ | ---------------- | - | ------ | ------------------------- | --- | ---------------- |  | - | ------- |  | - | ------- |  | --- | -
|                             |  | Three Months EndedJuly 31, |        | PercentageChange |   |        | Six Months Ended July 31, |     | PercentageChange | 
|                             |  | 2004                       |        | 2003             |   |        | 2004                      |     | 2003             | 
|Sales and marketing expenses |  | $                          | 99,688 |                  | $ | 94,524 |                           | 5.5 | %                |  | $ | 200,299 |  | $ | 186,433 |  | 7.4 | %



Sales and marketing
expenses include salaries, benefits, sales commissions, travel, information technology and facility costs for our sales and marketing personnel. These expenses also include programs aimed at increasing revenues, such as advertising, public
relations, trade shows and user conferences. The increase in sales and marketing in the second quarter of fiscal 2005 and the first half of fiscal 2005 compared to the same periods in fiscal 2004 is primarily related to: increased hiring in the
sales organization, increased average sales compensation per person and a negative foreign exchange impact of approximately 2 percent and 4 percent, respectively; offset by the classification of rent expense of $0.4 million and $0.9 million as
Interest and Other, Net in the second quarter and first half of fiscal 2005 in connection with the adoption of FIN 46R in August 2003.



Research and Development (in thousands):



|                                  |  |                            |        |                  |   |        |                          |     |                  |  |   |        |  |   |        |  |     |  
|--------------------------------- |  | -------------------------- | ------ | ---------------- | - | ------ | ------------------------ | --- | ---------------- |  | - | ------ |  | - | ------ |  | --- | -
|                                  |  | Three Months EndedJuly 31, |        | PercentageChange |   |        | Six Months EndedJuly 31, |     | PercentageChange | 
|                                  |  | 2004                       |        | 2003             |   |        | 2004                     |     | 2003             | 
|Research and development expenses |  | $                          | 36,474 |                  | $ | 34,723 |                          | 5.0 | %                |  | $ | 71,416 |  | $ | 69,553 |  | 2.7 | %



Research and
development expenses consist primarily of salaries and benefits for software engineers, contract development fees, costs of computer equipment used in software development, information technology and facilities expenses. The increases in research
and development expenses for the second quarter and the first half of fiscal 2005 compared to the same periods in the previous fiscal year were due to increased compensation expenses related to increased headcount; offset by the classification of
rent expense of $0.4 million and $1.0 million as Interest and Other, Net in the second quarter and first half of fiscal 2005 in connection with the adoption of FIN 46R in August 2003. We believe that a significant level of research and development
is required to remain competitive and we expect to continue to commit substantial resources to product development and engineering in future periods.



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General and Administrative (in thousands):



|                                    |  |                            |        |                  |   |        |                          |      |                  |  |   |        |  |   |        |  |      |  
|----------------------------------- |  | -------------------------- | ------ | ---------------- | - | ------ | ------------------------ | ---- | ---------------- |  | - | ------ |  | - | ------ |  | ---- | -
|                                    |  | Three Months EndedJuly 31, |        | PercentageChange |   |        | Six Months EndedJuly 31, |      | PercentageChange | 
|                                    |  | 2004                       |        | 2003             |   |        | 2004                     |      | 2003             | 
|General and administrative expenses |  | $                          | 22,271 |                  | $ | 19,126 |                          | 16.4 | %                |  | $ | 43,886 |  | $ | 37,736 |  | 16.3 | %



General and
administrative expenses include costs for our human resources, finance, legal, information technology, facilities and general management functions, as well as bad debt expense. The increase in expenses for the second quarter and first half of fiscal
2005 compared to the same periods in fiscal 2004 was due primarily to: accounting expenses related to the compliance with the regulations of the Sarbanes-Oxley Act of 2002, legal expenses on intellectual property matters, and compensation expenses;
offset by the classification of rent expense in the second quarter and first half of fiscal 2005 of $0.5 million and $0.8 million as Interest and Other, Net in connection with the adoption of FIN 46R in August 2003.



Other Charges



Facilities Consolidation.



During the fiscal year ended January 31, 2002 (Fiscal 2002), the
Company approved a plan to consolidate certain facilities in the United States, Canada, and Germany. The Company recorded a facilities consolidation charge of $20.0 million based on the remaining future lease commitments for vacant facilities, net
of estimated future sublease income. During the first quarter of fiscal 2005, the Company approved a plan to consolidate certain facilities in regions including the United States and Canada. A facilities consolidation charge of $7.7 million was
recorded using managements best estimates and was based upon the present value of the remaining future lease commitments for vacant facilities, net of the present value of the estimated future sublease income. The facilities consolidation
charge also included the write-off of approximately $0.8 million of unamortized leasehold improvements. During the second quarter of fiscal 2005 an additional charge $0.5 million was accrued in association with the facilities consolidation recorded
in Fiscal 2002. This additional expense was recorded due to reassessment of original estimates of abandoning the leased facilities compared to the actual results and future estimates. If the Company was unable to receive any of its estimated but
un-committed sublease income in the future, the total charge would be approximately $5.3 million (excluding the $0.5 million recorded in the second quarter of fiscal 2005). The estimated costs of abandoning leased facilities, including estimated
costs to sublease, were based on market information and trend analyses, including information obtained from third party real estate industry sources.



Interest and Other, Net



The following table provides a summary of the items included in interest and other, net (in thousands):



|                                       |  |                            |        |   |                  |   |        |                           |      |         |                  |      |   |         |   |  |   |         |   |  |        |   
|-------------------------------------- |  | -------------------------- | ------ | - | ---------------- | - | ------ | ------------------------- | ---- | ------- | ---------------- | ---- | - | ------- | - |  | - | ------- | - |  | ------ | --
|                                       |  | Three Months EndedJuly 31, |        |   | PercentageChange |   |        | Six Months Ended July 31, |      |         | PercentageChange |     
|                                       |  | 2004                       |        |   | 2003             |   |        |                           | 2004 |         |                  | 2003 |   |        
|Interest expense                       |  | $                          | (7,330 | ) |                  | $ | (5,521 | )                         |      | 32.8    | %                |      | $ | (14,615 | ) |  | $ | (11,064 | ) |  | 32.1   | % 
|Net loss on sale of equity investments |  |                            |       |   |                  |   |       |                           |      |         |                  |      |   |        |   |  |   | (198    | ) |  | (100   | ) 
|Foreign exchange gain (loss)           |  |                            | (1,459 | ) |                  |   | 328    |                           |      | (544.8  | )                |      |   | (1,782  | ) |  |   | 1,011   |   |  | (276.3 | ) 
|Interest income and other, net         |  |                            | 5,471  |   |                  |   | 5,442  |                           |      | 0.5     |                  |      |   | 10,148  |   |  |   | 11,222  |   |  | (9.6   | ) 
|                                       |  |                            |        |   |                  |   |        |                           |      |         |                  |      |   |         |   |  |   |         |   |  |        |   
|Total interest and other, net          |  | $                          | (3,318 | ) |                  | $ | 249    |                           |      | (1432.5 | )%               |      | $ | (6,249  | ) |  | $ | 971     |   |  | (743.6 | )%
|                                       |  |                            |        |   |                  |   |        |                           |      |         |                  |      |   |         |   |  |   |         |   |  |        |   



On August 1, 2003 and
in accordance with the adoption of FIN 46R, we recorded the carrying value of leased San Jose land and the related debt that had previously been accounted for as an operating lease. Prior to August 1, 2003, the borrowing costs associated with the
San Jose land of approximately $2.5 million for the second quarter of fiscal 2004 and $5.1 for the first half of fiscal 2004 were accounted for as rent



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expense, which was recorded as operating expenses and cost of services. Subsequent to August 1, 2003, these borrowing
costs are recorded as interest expense and approximately $1.6 million and $3.2 million were recorded for the second quarter and first half of fiscal 2005, respectively.



Our exposure to foreign exchange rate fluctuations arises in part from intercompany accounts between our parent company in
the United States and our foreign subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk. We are also exposed to foreign exchange rate
fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars for consolidation purposes. As exchange rates vary, these results, when translated, may vary from expectations and may adversely impact overall financial
results.



We have a program to reduce the effect of foreign
exchange gains and losses from recorded foreign currency-denominated monetary assets and liabilities. This program involves the use of forward foreign exchange contracts in certain European, Asian and Latin and North American currencies. A forward
foreign exchange contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. Under this
program, foreign currency gains and losses due to exchange rate fluctuations are partially offset by gains and losses on the forward contracts. We do not use foreign currency contracts for speculative or trading purposes. All outstanding forward
contracts are marked-to-market on a monthly basis with gains and losses included in interest income and other, net. Net gains (losses) resulting from foreign currency transactions and hedging foreign currency transactions were approximately ($1.5
million) and $0.3 million for the second quarters of fiscal 2005 and 2004, respectively. Net gains (losses) resulting from foreign currency transactions and hedging foreign currency transactions were approximately ($1.8 million) and $1.0 million for
the first half of fiscal 2005 and 2004, respectively.



Interest
income and other, net remained flat for the second quarter of fiscal 2005 compared to fiscal 2004 and declined for the first half of fiscal 2005 compared to the same period in the prior year due to the decline in short term interest rates in certain
countries combined with the fluctuations in cash balances in certain countries.



Provision for Income Taxes



We have provided for income tax expense of $13.1 million and $11.1 million for the second quarters of fiscal 2005 and 2004, respectively. For the first half of fiscal 2005 and fiscal 2004, we have provided for income
taxes of $24.0 million and $21.6 million respectively. Our effective income tax rate was 30 percent for both the first half of fiscal 2005 and for the first half of fiscal 2004. Our effective tax rate for the first half of fiscal 2005 and for the
first half of fiscal 2004 differed from the U.S. federal statutory rate of 35 percent primarily due to the benefit of low taxed foreign earnings.



Under Statement of Financial Accounting Standards No. 109 Accounting for Income Taxes(FAS 109), deferred tax assets and liabilities
are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. FAS 109 provides
for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the available evidence, which includes our historical levels of U.S. taxable income and stock option deductions, we have provided a
valuation allowance against our net deferred tax assets to the extent that they are dependent upon future taxable income for realization. We evaluate the realizability of the deferred tax assets on a quarterly basis.



Liquidity and Capital Resources



As of July 31, 2004, cash, cash equivalents (excluding all restricted cash)
and short-term investments totaled $1,578.8 million versus $1,467.0 million at January 31, 2004.



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Cash flow from operations increased by $50.8 million from $88.6 million in the first half of fiscal 2004
to $139.4 million in the first half of fiscal 2005. The increase is primarily due to net changes in certain operating assets and liabilities, which generated cash of approximately $32.9 million in the first half of fiscal 2005 compared to consuming
cash of $8.5 million in the first half of fiscal 2004, a net increase of $41.4 million.



Cash used in investing activities increased by $15.1 million from $63.0 million in the first half of fiscal 2004 to $78.1 million in the first half of fiscal 2005. This increase was primarily due to an increase of
$30.0 million in net purchases of available-for-sale short-term investments. We also used $15.3 million less cash in the first half of fiscal 2005 than in the same period of the prior fiscal year for purchases of property and equipment and payments
for acquisitions.



Cash used in financing activities in the
first half of fiscal 2005 of $8.4 million was primarily related to the repurchases of our common stock totaling $40.1 million offset by proceeds of $31.7 million from the issuance of common stock under employee stock compensation plans. Cash used in
financing activities in the first half of fiscal 2004 of $55.3 million was primarily related to the repurchases of our common stock totaling $81.1 million offset by proceeds of $26.0 million from the issuance of common stock under employee stock
compensation plans.



At July 31, 2004, our outstanding short
and long-term debt obligations consisted of $550.0 million of convertible notes, long-term debt related to our San Jose land lease of $211.7 million (of which $20.0 million is recorded as accrued liabilities related to the land lease and $191.6
million is recorded as long-term debt related to the land lease on our balance sheet), and $4.1 million of other obligations. The long-term debt related to the San Jose land lease was recorded on our balance sheet when we adopted the provision of
the Financial Accounting Standards Board (FASB) issued Interpretation No. 46R (FIN 46R, a revision of Interpretation 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research
Bulletin No. 51 on August 1, 2003. The adoption of FIN 46R on August 1, 2003 had no impact on our liquidity because the change in the accounting method for the synthetic lease arrangement did not change the underlying cash flows.



The $550.0 million 4% Convertible Subordinated Notes due December 15, 2006
may be settled in cash or stock, depending upon future prices of our common stock as outlined below:



| |  | If, by December 14, 2004, the price of our common stock exceeds $48.51 for at least 20 trading days within a period of 30 consecutive trading days, we have the option of redeeming
the notes for 28.86 shares of stock per $1,000 face value of the bond (equivalent to a stock price of $34.65 per share) or cash plus a premium of up to 2.3%, at the option of the bondholder.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the period from December 15, 2004 to maturity on December 15, 2006, we have the option of redeeming the notes for 28.86 shares of stock per $1,000 face value of the bond or cash
plus a premium of up to 1.2%, at the option of the bondholder, if the price of our common stock, as calculated above, exceeds $34.65.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If our stock price, as calculated above, does not exceed $48.51 by December 14, 2004, and if the price does not exceed $34.65 during the period from December 15, 2004 to December
15, 2006, then we will likely be required to repay the notes in cash on the maturity date of December 15, 2006.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The total debt related to the San Jose land lease of $211.7 million matures in February 2006. Interest on this debt is calculated based on the London
Interbank Offering Rate (LIBOR) and the effective interest rate will fluctuate based on changes in LIBOR as well as changes in our financial position as specified in the San Jose land lease agreement. The effective annual interest rate
was approximately 2.94 percent as of July 31 2004. Interest payments are made in cash at intervals ranging from thirty days to six months, as elected by us.



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In connection with the long-term debt related to the San Jose land lease, we must maintain certain
covenants, including liquidity, leverage and profitability ratios. As of July 31, 2004, we are in compliance with all such financial covenants.



When we begin to develop the land subject to the land lease, the development will require significant cash and/or financing resources.



The following table of minimum contractual obligations owed has been prepared
assuming that the convertible notes will be repaid in cash upon maturity (in thousands):



|                                                             |  |                  |         |                        |   |                    |  |                    |         |                          |   |        |  |   |       
|------------------------------------------------------------ |  | ---------------- | ------- | ---------------------- | - | ------------------ |  | ------------------ | ------- | ------------------------ | - | ------ |  | - | ------
|Minimum Contractual Obligations                              |  | Totalpaymentsdue |         | Remainderof Fiscal2005 |   | Fiscal2006 and2007 |  | Fiscal2008 and2009 |         | Fiscal2010 andthereafter
|Convertible notes (principal only)                           |  | $                | 550,000 |                        | $ |                   |  | $                  | 550,000 |                          | $ |       |  | $ |      
|Interest related to convertible notes                        |  |                  | 52,250  |                        |   | 11,000             |  |                    | 41,250  |                          |   |       |  |   |      
|Other obligations                                            |  |                  | 4,620   |                        |   | 266                |  |                    | 2,210   |                          |   | 1,356  |  |   | 788   
|Long-term debt and accrued liabilities related to land lease |  |                  | 211,657 |                        |   |                   |  |                    | 211,657 |                          |   |       |  |   |      
|Operating                                                    |  |                  | 163,317 |                        |   | 23,152             |  |                    | 74,587  |                          |   | 35,983 |  |   | 29,595
|                                                             |  |                  |         |                        |   |                    |  |                    |         |                          |   |        |  |   |       
|Total contractual obligations                                |  | $                | 981,844 |                        | $ | 34,418             |  | $                  | 879,704 |                          | $ | 37,339 |  | $ | 30,383
|                                                             |  |                  |         |                        |   |                    |  |                    |         |                          |   |        |  |   |       



The above table
excludes obligations related to accounts payable, accrued liabilities incurred in the ordinary course of business, and any future rate variable interest obligations associated with contractual obligations shown above.



We do not have significant commitments under lines of credit, standby lines
of credit, guarantees, standby repurchase obligations or other such arrangements.



In September 2001 and March 2003, the Board of Directors approved an aggregate repurchase of up to $200.0 million of our common stock under the Share Repurchase Program. An insignificant number of shares were
repurchased in fiscal 2002. In fiscal 2003, 6.9 million shares were repurchased at a total cost of approximately $42.1 million. In fiscal 2004, an additional 8.0 million shares were repurchased at a total cost of approximately $81.2 million leaving
approximately $76.7 million of the approval limit available for share repurchases under the Share Repurchase Program. In May 2004, the Board of Directors approved an additional repurchase of up to $200.0 million of our common stock under the Share
Repurchase Program. In the quarter ended July 31, 2004, 4.8 million shares were repurchased at a total cost of $40.1 million, leaving approximately $236.6 million of the approval limit available for share repurchases under the Share Repurchase
Program. No repurchases were done in the first quarter of fiscal 2005 under the Share Repurchase Program.



Our principal source of liquidity is our cash, cash equivalents and short-term investments, as well as the cash flow that we generate from our operations.
Our liquidity could be negatively impacted by any phenomenon that results in a reduction in demand for our products or services. We believe that our existing cash, cash equivalents, short-term investments and cash generated from operations, if any,
will be sufficient to satisfy our currently anticipated cash requirements through July 31, 2005. However, we may make acquisitions or license products and technologies complementary to our business or we may decide to purchase the land held under
lease, and may need to raise additional capital through future debt or equity financing to the extent necessary to fund any such acquisitions, licenses, or purchase. There can be no assurance that additional financing will be available, at all, or
on terms favorable to us.



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Related Party Transactions



Loans to Executives and Officers



We have secured notes receivable from two executives totaling approximately $1.4 million as of July 31, 2004 and as of
January 31, 2004. These notes originated prior to June 30, 2002 and are secured by deeds of trust on real property. They bear interest of 4.75 percent and 7 percent per annum, respectively, and are due and payable on April 3, 2006 and May 10, 2007,
respectively, or upon the termination of employment with us. The notes may be repaid at anytime prior to the due date.



In September 1999, we issued an unsecured line of credit to Alfred S. Chuang, our Chief Executive Officer, in the amount of $5.0 million. No borrowings
have been made and none were outstanding under this line of credit at July 31, 2004 or January 31, 2004.



Common Board Members or Executive Officers



We occasionally sell software products or services to companies that have board members or executive officers that are also on our Board of Directors. The
total revenues recognized by us from such customers in the first half of fiscal 2005 and fiscal 2004 were insignificant.



Risk Factors that May Impact Future Operating Results



We operate in a rapidly changing environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks
and uncertainties, which may have a material adverse effect on our business, financial condition or results of operations. Investors should carefully consider the following risk factors in evaluating an investment in our common stock.



Significant unanticipated fluctuations in our actual or anticipated
quarterly revenues and operating results have in the past, and may in the future, prevent us from meeting securities analysts or investors expectations and have in the past, and may in the future, result in a decline in our stock
price.



Although we have experienced annual revenue growth
in recent years, our revenues have historically fluctuated. For example, in the quarters ended October 31, 2001, April 30, 2002, April 30, 2003 and April 30, 2004, our revenues declined as compared to the previous fiscal quarter, and in the quarters
ended October 31, 2001, January 31, 2002, April 30, 2002 and July 31, 2002 our revenues declined as compared to the same quarterly periods in the prior fiscal year. If our revenues, operating results, earnings or future projections are below the
levels expected by investors or securities analysts, our stock price is likely to decline. For example, in our quarter ended April 30, 2004, our reported license revenue was several million dollars lower than the level expected by securities
analysts. Our stock price declined by approximately 22.5 percent at the close of trading on the Nasdaq National Market on the day following our announcement of our quarterly financial results providing this information. Our stock price is also
subject to the substantial volatility generally associated with Internet, software and technology stocks and may also be affected by broader market trends unrelated to our performance, such as the substantial declines in the prices of many such
stocks that began in March 2000 through 2003, as well as market declines related to terrorist activities and military actions.



We expect to experience significant fluctuations in our future revenues and operating results as a result of many factors, including:



| |  | difficulty predicting the size and timing of customer orders, particularly as we have become more reliant on larger transactions;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | the rate of customer acceptance of our recently introduced WebLogic Platform 8.1 products, and any order delays caused by customer evaluations of these new products;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  | on-going difficult economic conditions, particularly within the technology industry, as well as economic uncertainties arising out of possible future terrorist activities; military
and security actions in Iraq and the Middle East in general; and geopolitical instability in markets such as the Korean peninsula and other parts of Asia, all of which have increased the likelihood that customers will unexpectedly delay, cancel or
reduce the size of orders, resulting in revenue shortfalls;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in the mix of products and services that we sell or the channels through which they are distributed;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | fluctuations in foreign currency exchange rates, which could have an adverse impact on our international revenue, particularly in the EMEA region if the Euro were to weaken against
the U.S. dollar;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in our competitors product offerings, marketing programs and pricing policies, and customer order deferrals in anticipation of new products and product enhancements
from us or our competitors;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the performance of our international business, which accounts for a substantial part of our consolidated revenues;
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | any increased price sensitivity by our customers, particularly in the face of the continuing uneven economic conditions and increased competition;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to develop, introduce and market new products, such as our WebLogic Platform 8.1 products, on a timely basis and whether any such new products are accepted in the
market;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the lengthy sales cycle for our products, particularly with regard to WebLogic 8.1 Platform sales which typically involve more comprehensive solutions that may require more detailed
customer evaluations;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to further control costs and expenses, particularly in the face of the on-going current difficult economic conditions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | loss of key personnel;
| | - | ----------------------



| |  | the degree of success, if any, of our strategy to further establish and expand our relationships with distributors;
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | the structure, timing and integration of acquisitions of businesses, products and technologies;
| | - | -----------------------------------------------------------------------------------------------



| |  | the terms and timing of financing activities;
| | - | ---------------------------------------------



| |  | potential fluctuations in demand or prices of our products and services;
| | - | ------------------------------------------------------------------------



| |  | technological changes in computer systems and environments;
| | - | -----------------------------------------------------------



| |  | our ability to meet our customers service requirements; and
| | - | ------------------------------------------------------------



| |  | costs associated with acquisitions, including expenses charged for any impaired acquired intangible assets and goodwill.
| | - | ------------------------------------------------------------------------------------------------------------------------



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Our quarterly revenues and operating results are difficult to forecast because of the timing, size and
composition of our customer orders.



An increasingly
material portion of our revenues has been derived from large orders, as major customers deployed our products. For example, in the quarters ended January 31, 2004, April 30, 2004 and July 31, 2004, there were 26, 17 and 18 product transactions each
with a value of greater than $1 million, respectively, including one product transaction with a value of greater than $10 million during the quarter ended July 31, 2003. Increases in the dollar size of some individual license transactions increases
the risk of fluctuation in future quarterly results because the unexpected loss of a small number of larger orders can create a significant revenue shortfall. For example, we believe this reliance on larger transactions adversely impacted our
quarters ended April 30, 2004 and July 31, 2004, where our reported license revenue was several million dollars lower than the level expected by securities analysts. If we cannot generate a sufficient number of large customer orders, turn a
sufficient number of development orders into orders for large deployments or if customers delay or cancel such orders in a particular quarter, it may have a material adverse effect on our revenues and, more significantly on a percentage basis, our
net income or loss in that quarter. Moreover, we typically receive and fulfill most of our orders within the quarter, and a substantial portion of our orders, particularly our larger transactions, are typically received in the last month of each
fiscal quarter, with a concentration of such orders in the final week of the quarter. As a result, even though we may have positive business indicators about customer demand during a quarter, we may not learn of revenue shortfalls until very late in
the fiscal quarter, and possibly on the final day or days of the fiscal quarter. Not only could this significantly adversely affect our revenues, such shortfalls would substantially adversely affect our earnings because they may occur after it is
too late to adjust expenses for that quarter. This is particularly relevant at this time because we have previously implemented significant cost cutting measures, thereby making incremental additional cost cutting more difficult to achieve. The risk
of delayed or cancelled orders is also particularly relevant with respect to our increased dependence on large customer orders, which are more likely to be cancelled, delayed or reduced and also have a greater financial impact on our operating
results. Moreover, ongoing adverse economic conditions worldwide, particularly those related to the technology industry and the economic and political uncertainties arising out of the ongoing U.S. military activity in Iraq, recent and possible
future terrorist activities, other potential military and security actions in the Middle East, and instability in markets such as the Korean peninsula and other parts of Asia, have increased the likelihood that customers will unexpectedly delay,
cancel or reduce orders, resulting in revenue shortfalls. Any revenue shortfall below our expectations could have an immediate and significant adverse effect on our results of operations.



If we do not effectively compete with new and existing competitors, our
revenues and operating margins will decline.



The market
for application server and integration software, and related software infrastructure products and services, is highly competitive. Our competitors are diverse and offer a variety of solutions directed at various segments of this marketplace. These
competitors include IBM, which also offers operating system software and hardware as discussed below, and Oracle, which can bundle its competing product with their database and other software offerings at a discounted price. In addition, certain
application vendors, enterprise application integration vendors and other companies are developing or offering application server, enterprise application integration and portal software products and related services that may compete with products
that we offer. Further, software development tool vendors typically emphasize the broad versatility of their tool sets and, in some cases, offer complementary software that supports these tools and performs basic application server and integration
functions. These tool vendors offer products that may compete with some of the features of our own product offerings. Finally, internal development groups within prospective customers organizations may develop software and hardware systems
that may substitute for those we offer. A number of our competitors and potential competitors have longer operating histories, substantially greater financial, technical, marketing and other resources, greater name recognition and a larger installed
base of customers than we.



Some of our competitors are also
hardware vendors who bundle their own application server, integration software and tool products, or similar products, with their computer systems and database



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vendors that advocate client/server networks driven by the database server. IBM is the primary hardware vendor that we
compete with which offers a line of application server, integration, and related software infrastructure solutions for their customers. Sun Microsystems is another hardware vendor which offers a line of application server and related software
infrastructure solutions. IBMs sale of application server and integration functionality along with its proprietary hardware systems requires us to compete with IBM, particularly with regard to its installed customer base, where IBM has certain
inherent advantages due to its much greater financial, technical, marketing and other resources, greater name recognition and the integration of its enterprise application server and integration functionality with its proprietary hardware and
database systems. These inherent advantages allow IBM to bundle, at a discounted price, application server and integration solutions with computer hardware, software and related service sales. In addition, IBM Global Services, a division of IBM and
a large provider of consulting and information technology services, can influence their service customers choice of software products in favor of IBMs. In addition, these advantages allow IBM to promote their competing products by
selling at a discount their mainframe operating system software to their numerous mainframe hardware customers who purchase on a bundled basis IBM application server and integration software. Due to these factors, if we do not sufficiently
differentiate our products based on functionality, reliability, ease of development, interoperability with non-IBM systems, performance, total cost of ownership and return on investment and establish our products as more effective solutions to
customers technological and economic needs, our business, operating results, and financial condition will suffer.



In addition to its current products which include some application server functionality, Microsoft has announced that it intends to continue to enhance
the application server and integration functionalities in its .NET technologies. Microsofts .NET technologies use a proprietary programming environment that competes with the Java-based environment of our products. A widespread acceptance of
Microsofts .NET technologies, particularly among the large and mid-sized enterprises from which most of our revenues are generated, could curtail the use of Java and therefore adversely impact the sales of our products. The .NET technologies
and the bundling of competing functionality in versions of Windows can require us to compete in certain areas with Microsoft, which has certain inherent advantages due to its much greater financial, technical, marketing and other resources, its
greater name recognition, very large developer community, its substantial installed base and the integration of its broad product line and features into a Web Services environment. We need to differentiate our products from Microsofts based on
scalability, functionality, interoperability with non-Microsoft platforms, performance, total cost of ownership, return on investment, ease of development and reliability, and need to establish our products as more effective solutions to
customers technological and economic needs. We may not be able to successfully or sufficiently differentiate our products from those offered by Microsoft, and Microsofts continued efforts in the application server, integration and Web
Services markets, as well as their on-going efforts to enhance and expand the .NET technology program, could materially adversely affect our business, operating results and financial condition.



In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of their current and prospective customers. Accordingly, it is possible that new
competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could materially adversely affect our ability to sell additional software licenses and maintenance, consulting and
support services on terms favorable to us. Further, competitive pressures could require us to reduce the price of our products and related services, which could materially adversely affect our business, operating results and financial condition. We
may not be able to compete successfully against current and future competitors and any failure to do so would have a material adverse effect upon our business, operating results and financial condition.



The lengthy sales cycle for our products makes our revenues susceptible
to substantial fluctuations.



Many of our customers use
our products to implement large, sophisticated applications that are critical to their business, and their purchases are often part of their implementation of a distributed or Web-based computing environment. Customers evaluating our software
products face complex decisions regarding



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alternative approaches to the integration of enterprise applications, competitive product offerings, rapidly changing
software technologies and standards and limited internal resources due to other information systems requirements. For these and other reasons, the sales cycle for our products is lengthy and is subject to delays or cancellation over which we have
little or no control. We have recently experienced an increase in the number of million and multi-million dollar license transactions. For example, in the quarters ended July 31, 2004, April 30, 2004 and January 31, 2004, we had 18, 17, and 26
product transactions, respectively, each with a value at greater than $1 million. Some of our transactions are significantly larger than $1 million, such as in our quarter ended July 31, 2003, when we had a single transaction with a value of over
$10 million. In some cases, the larger size of the transactions has resulted in more extended customer evaluation and procurement processes, which in turn have lengthened the overall sales cycle for our products. The recent economic downturn in our
key markets has also contributed to increasing the length of our sales cycle, and there is a risk that this could continue or worsen. Finally, the recent introduction of the WebLogic Platform 8.1 has contributed to a longer sales cycle due to the
fact that it offers a more comprehensive solution that may require more detailed customer evaluations. Delays or failures to complete large orders and sales in a particular quarter could significantly reduce revenue that quarter, as well as
subsequent quarters over which revenue for the sale would likely be recognized.



If our WebLogic Platform 8.1 products do not achieve significant market acceptance, or market acceptance is delayed, our revenues will be substantially adversely affected.



In July 2003, we introduced our WebLogic Platform 8.1 group of products, a
major new product release which includes WebLogic Server 8.1, WebLogic Workshop 8.1, WebLogic Integration 8.1 and WebLogic Portal 8.1. We have invested substantial resources to develop and market our WebLogic Platform 8.1 products, and anticipate
that this will continue. If our WebLogic Platform 8.1 products do not achieve substantial market acceptance among new and existing customers, due to factors such as any technological problems, competition, sales execution or market shifts, it will
have a material adverse effect on our revenues and other operating results. For example, we believe the rate of acceptance of, and customer transition to, WebLogic Platform 8.1 were contributing factors to our reported license revenue for our
quarter ended April 30, 2004 being several million dollars lower than the level expected by securities analysts. Moreover, because the WebLogic Platform 8.1 products offer broader solutions and other improvements over our prior products, potential
customers may take additional time to evaluate their purchases, which can delay customer acceptance of our WebLogic Platform 8.1 products. If these delays continue or worsen, it will adversely affect our revenues and other operating results.



Our revenues are derived primarily from a single group of
similar and related products and related services, and a decline in demand or prices for these products or services could substantially adversely affect our operating results.



We currently derive the majority of our license and service revenues from BEA WebLogic Server, BEA Tuxedo and from related
products and services. We expect these products and services to continue to account for the majority of our revenues in the immediate future. As a result, factors adversely affecting the pricing of or demand for BEA WebLogic Server, BEA Tuxedo or
related services, such as a continued or worsened general economic slowdown, future terrorist activities or military actions, any decline in overall market demand, competition, product performance or technological change, could have a material
adverse effect on our business and consolidated results of operations and financial condition. When we increased our focus on using strategic partners to provide services related to the deployment and use of our software solutions, we previously
experienced a slowdown in the growth of our services revenue, particularly a decline in revenue derived from our consulting services, and it is possible this trend could resume. Conversely, if consulting revenue were to increase, as it did in the
quarters ended October 31, 2003, October 31, 2002 and January 31, 2003, it may adversely affect our overall operating margins since our consulting revenue margins are lower than our license revenue margins as well as our other services revenue
margins.



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The changes we made to our Americas sales and distribution organizations in our first quarter of 2005
could adversely affect our future revenues.



In the first quarter of fiscal 2005, we implemented changes in our Americas distribution organization. These changes included signing relationships with a value-added distributor and several value-added resellers (VARs),
creating a new general accounts region within our Americas sales organization in part to coordinate our efforts with the VARs, reassigning personnel to staff this newly created general accounts region, transitioning customer relationships for these
reassigned personnel, transitioning customer accounts to be focused on by the general accounts region and the VARs, moving the location of our telesales organization, and hiring a significant number of new employees in the Americas sales
organization. We believe these changes disrupted the sales process in our first quarter of our fiscal 2005 more than we anticipated, and contributed significantly to reducing our revenue in North America in the first quarter. We currently believe
the structural changes have been substantially completed, and that the changes have been substantially integrated by the sales force. However, the adverse impact of these changes could continue. For example, it may take more time to fully transition
customer relationships, to train the new personnel and to train the VARs signed in our first quarter of our fiscal 2005. We also need to train the VARs we signed in the second quarter of our fiscal 2005. In addition, after the close of the second
quarter, BEA announced the creation of a new worldwide field operations organization. This new organization is responsible for all of BEAs worldwide sales, services and marketing functions. The objective of this new organization is to improve
BEAs operations and ability to serve customers by improving coordination among our sales, services and marketing teams. However, creation of this organization changes a variety of reporting relationships, and may cause disruption, especially
in the near term. Based in part on this potential disruption and the adverse impact on our revenue resulting from the disruptions we experienced in our first quarter of our fiscal 2005, we believe that there is a significant risk that the ongoing
impact of these changes to our Americas sales, services, marketing and distribution organizations could negatively impact our operating results in our third quarter of our fiscal 2005 and beyond.



Our international operations expose us to greater management,
collections, currency, export licensing, intellectual property, tax, regulatory and other risks.



Revenues from markets outside of the Americas accounted 50.3% and 45.4% of our total revenues in the first half of fiscal 2005, and fiscal 2004,
respectively. We sell our products and services through a network of branches and subsidiaries located in 34 countries worldwide. In addition, we also market our products through distributors. We believe that our success depends upon continued
expansion of our international operations. Our international business is subject to a number of risks, including greater difficulties in maintaining and enforcing U.S. accounting and public reporting standards, greater difficulties in staffing and
managing foreign operations, unexpected changes in regulatory practices and tariffs, longer collection cycles, seasonality, potential changes in export licensing and tax laws, and greater difficulty in protecting intellectual property rights. Also,
the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies in markets where we do business can significantly impact our revenues. For example, a strengthening of the U.S. dollar could have an adverse impact on our
international revenue, particularly in the EMEA region if the relative value of the Euro were to decline. Also, we are periodically subject to tax audits by government agencies in foreign jurisdictions. To date, the outcomes of these audits have not
had a material impact on us. It is possible, however, that future audits could result in significant assessments against us or our employees for transfer taxes, payroll taxes, income taxes, or other taxes as well as related employee and other claims
which could adversely effect our operating results. General economic and political conditions in these foreign markets, including the military action in the Middle East and geopolitical instabilities on the Korean peninsula and other parts of Asia
may also impact our international revenues, as such conditions may cause decreases in demand or impact our ability to collect payment from our customers. There can be no assurances that these factors and other factors will not have a material
adverse effect on our future international revenues and consequently on our business and consolidated financial condition and results of operations.



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If our WebLogic Workshop initiative does not successfully broaden the base of developers who utilize
our WebLogic Platform products and drive other WebLogic Platform product sales, our revenues and product margins will be harmed.



Our WebLogic Workshop 8.1 tools product and related developer initiatives are designed to help broaden the base of developers who can utilize our
technologies and products. If WebLogic Workshop and these related initiatives are not successful, or less successful than we anticipate, it will have an adverse impact on our sales of BEA WebLogic products, including WebLogic Platform 8.1, a
principal driver of our revenue, and related products and services, as well as adversely affect our profit margins.



The ongoing U.S. military activity in Iraq and any terrorist activities could adversely affect our revenues and operations.



The U.S. military activity in Iraq, terrorist activities and related
military and security operations have in the past disrupted economic activity throughout the United States and much of the world. This significantly adversely impacted our operations and our ability to generate revenues in the past and may also
again in the future. An unfavorable course of events in the future related to the ongoing U.S. military activity in Iraq; any other military or security operations, particularly with regard to the Middle East; any future terrorist activities; or the
geopolitical tension on the Korean peninsula could have a similar or worse effect on our operating results, particularly if such attacks or operations occur in the last month or weeks of our fiscal quarter or are significant enough to further weaken
the U.S. or global economy. In particular, such activities and operations could result in reductions in information technology spending, order deferrals, and reductions or cancellations of customer orders for our products and services.



Changes in accounting regulations and related interpretations and
policies, particularly those related to revenue recognition, could cause us to defer recognition of revenue or recognize lower revenue and profits.



Although we use standardized license agreements designed to meet current revenue recognition criteria under generally accepted accounting principles, we
must often negotiate and revise terms and conditions of these standardized agreements, particularly in larger license transactions. Negotiation of mutually acceptable terms and conditions can extend the sales cycle and, in certain situations, may
require us to defer recognition of revenue on the license. While we believe that we are in compliance with Statement of Position 97-2, Software Revenue Recognition, as amended, the American Institute of Certified Public Accountants continues
to issue implementation guidelines for these standards and the accounting profession continues to discuss a wide range of potential interpretations. Additional implementation guidelines, and changes in interpretations of such guidelines, could lead
to unanticipated changes in our current revenue accounting practices that could cause us to defer the recognition of revenue to future periods or to recognize lower revenue and profits.



Moreover, policies, guidelines and interpretations related to revenue recognition, accounting for acquisitions, our
synthetic lease for the San Jose land, income taxes, facilities consolidation charges, allowances for doubtful accounts and other financial reporting matters require difficult judgments on complex matters that are often subject to multiple sources
of authoritative guidance. To the extent that managements judgment is incorrect, it could result in an adverse impact on the Companys financial statements. Some of these matters are also among topics currently under reexamination by
accounting standard setters and regulators. These standard setters and regulators could promulgate interpretations and guidance that could result in material and potentially adverse changes to our accounting policies.



In addition, there has been an ongoing public debate whether employee stock
option and employee stock purchase plan shares should be measured at their fair value and treated as a compensation expense and, if so, how to properly value such charges. If we were to elect or were required to record an expense for our stock-based
compensation plans using the fair value method, we could have significant compensation charges. For example, for the quarters ended July 31, 2004 and July 31, 2003, had we accounted for stock-based compensation plans under Financial Accounting
Standards Board (FASB) Statement



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No. 123, as amended by FASB Statement No. 148, diluted earnings per share would have been reduced by $0.07 and $0.10 per
share, respectively. Although we are currently not required to record any compensation expense using the fair value method in connection with option grants that have an exercise price at or above fair market value and for shares issued under our
employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as a compensation expense using the fair value method. See Note 1 of the Notes to Condensed Consolidated Financial
Statements. On March 31, 2004, FASB issued a proposed statement which, if adopted, would eliminate the ability to account for compensation transactions using Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and generally would require instead that such transaction be accounted for using the fair value based method.



If we are required to remit significant payroll taxes, it will have an adverse impact on our future financial results.



When our employees exercise certain stock options, we are subject to
employer payroll taxes on the difference between the price of our common stock on the date of exercise and the exercise price. These payroll taxes are determined by the tax rates in effect in the employees taxing jurisdiction and are treated
as an expense in the period in which the exercise occurs. During a particular period, these payroll taxes could be material, in particular if an increase in our stock price causes a significant number of employees to exercise their options. However,
because we are unable to predict our stock price, the number of exercises, or the country of exercise during any particular period, we cannot predict the amount, if any, of employer payroll tax expense that will be recorded in a future period or the
impact on our future financial results. Although we recently experienced a decline in our stock price following our announcement of our financial results for our quarter ended April 30, 2004, over the preceding several quarters, our stock price
increased and a significant number of stock options with exercise prices below the trading range of our stock during the quarter ended January 31, 2004 have vested and become exercisable. These types of stock price increases would make it more
likely that option holders will exercise their options and, accordingly, that we would incur higher payroll taxes.



Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.



We are in the process of documenting and testing our
internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our
Independent Auditors addressing these assessments. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the
requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us
to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our
reported financial information, and the trading price of our stock could drop significantly.



Any failure to maintain on-going sales through distribution channels could result in lower revenues.



To date, we have sold our products principally through our direct sales force, as well as through indirect sales channels, such as computer hardware
companies, packaged application software developers, independent software vendors (ISVs), systems integrators (SIs) and independent consultants, independent software tool vendors and distributors. Our ability to achieve
revenue growth in the future will depend in large part on our success in maintaining existing relationships and further establishing and expanding relationships with distributors, ISVs, original equipment manufacturers (OEMs) and SIs. In
particular, we have an on-going initiative to further establish and expand relationships with our distributors



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through these sales channels, especially ISVs and SIs. A significant part of this initiative is to recruit and train a
large number of consultants employed by SIs and induce these SIs to more broadly use our products in their consulting practices, as well as to embed our technology in products that our ISV customers offer. We intend to continue this initiative and
to seek distribution arrangements with additional ISVs to embed our WebLogic Server and other products in their products. It is possible that we will not be able to successfully expand our distribution channels, secure agreements with additional SIs
and ISVs on commercially reasonable terms or at all, and otherwise adequately continue to develop and maintain our relationships with indirect sales channels. Moreover, even if we succeed in these endeavors, it still may not increase our revenues.
In particular, we need to carefully monitor the development and scope of our indirect sales channels and create appropriate pricing, sales force compensation and other distribution parameters to help ensure these indirect channels do not conflict
with or curtail our direct sales. If we invest resources in these types of expansion and our overall revenues do not correspondingly increase, our business, results of operations and financial condition will be materially and adversely affected. In
addition, we already rely on formal and informal relationships with a number of consulting and systems integration firms to enhance our sales, support, service and marketing efforts, particularly with respect to implementation and support of our
products as well as lead generation and assistance in the sales process. We will need to expand our relationships with third parties in order to support license revenue growth. Many such firms have similar, and often more established, relationships
with our principal competitors. It is possible that these and other third parties will not provide the level and quality of service required to meet the needs of our customers, or that we will not be able to maintain an effective, long-term
relationship with these third parties.



If we lose key
personnel or cannot hire enough qualified personnel, it will adversely affect our ability to manage our business, develop new products and increase revenue.



We believe our future success will depend upon our ability to attract and retain highly skilled personnel, including our
Chairman, Chief Executive Officer and President, Alfred S. Chuang, other key members of management and other key technical employees. Competition for these types of employees is intense, and it is possible that we will not be able to retain our key
employees and that we will not be successful in attracting, assimilating and retaining qualified candidates in the future. For example, our Chief Marketing Officer has recently resigned from BEA. In addition, as we seek to expand our global
organization, the hiring of qualified sales, technical and support personnel has been, and will continue to be, difficult due to the limited number of qualified professionals. Failure to attract, assimilate and retain key personnel, and to promptly
replace key members of management who have resigned, would have a material adverse effect on our business, results of operations and financial condition.



Third parties could assert that our software products and services infringe their intellectual property rights, which could expose us to increased
costs and litigation.



We have been and continue to be
subject to legal proceedings and claims that arise in the ordinary course of our business, including claims currently being asserted that our products infringe certain patent rights. It is possible that third parties, including competitors,
technology partners, and other technology companies, could successfully claim that our current or future products, whether developed internally or acquired, infringe their rights, including their trade secret, copyright and patent rights. These
types of claims, with or without merit, can cause costly litigation that absorbs significant management time, as well as impede our sales efforts due to any uncertainty as to the outcome, all of which could materially adversely affect our business,
operating results and financial condition. These types of claims, with or without merit, could also cause us to pay substantial damages or settlement amounts, cease offering of any subject technology or products altogether, require us to enter into
royalty or license agreements, compel us to license software under unfavorable terms, and damage our ability to sell products due to any uncertainty generated as to intellectual property ownership. If required, we may not be able to obtain such
royalty or license agreements, or obtain them on terms acceptable to us, which could have a material adverse effect upon our business, operating results and financial condition, particularly if we are unable to ship key products.



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The price of our common stock may fluctuate significantly.



The market price for our common stock may be affected by a number of
factors, including developments in the Internet, changes in the software or technology industry, general market and economic conditions, further terrorist activities, military actions in Iraq and the Middle East in general, geopolitical instability
on the Korean peninsula and other parts of Asia, and other factors, including factors unrelated to our operating performance or our competitors operating performance. In addition, BEA and many other companies in the Internet, technology and
emerging growth sectors have experienced wide fluctuations in their stock prices, including recent rapid rises and declines that often have not been directly related to the operating performance of such companies, such as the declines in the stock
prices of many such companies that started in March 2000. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, may materially adversely affect the market price of our common stock. Our
fluctuating stock price also carries other risks, including the increased risk of shareholder litigation. For example, following the drop of our stock price in May 2004, BEA and a number of our officers and directors were named in class and
derivative lawsuits. These or other similar suits could divert managements attention from the Companys business and have an adverse effect on our financial results and operations.



The seasonality of our sales typically adversely affects our revenues in
our first fiscal quarter.



Our first quarter sales are
typically lower than sales in the immediately preceding fourth quarter because most of our customers begin a new fiscal year on January 1 and it is common for capital expenditures to be lower in an organizations first quarter than in its
fourth quarter. Our commission structure also tends to result in lower sales in the first quarter than the fourth quarter. We anticipate that the negative impact of seasonality on our first quarter will continue.



Because the technological, market and industry conditions in our business
can change very rapidly, if we do not successfully adapt our products to these changes our revenue and profits will be harmed.



The market for our products and services is highly fragmented, competitive with alternative computing architectures, and characterized by continuing
technological developments, evolving and competing industry standards, and changing customer requirements. The introduction of products embodying new technologies, the emergence of new industry standards, or changes in customer requirements could
result in a decline in the markets for our existing products or render them obsolete and unmarketable. As a result, our success depends upon our ability to timely and effectively enhance existing products (such as our WebLogic Server products and
Web Services features), respond to changing customer requirements, and develop and introduce in a timely manner new products (such as our WebLogic Platform 8.1, WebLogic Integration 8.1, WebLogic Workshop 8.1, WebLogic Liquid Data 8.1 and WebLogic
Portal 8.1 products) that keep pace with technological and market developments and emerging industry standards. In addition, the widespread continued adoption of Java technologies and standards is critical to driving sales of our products because
they operate in a Java-based environment. The widespread acceptance of Microsofts .NET technologies, which competes with Java-based environments and technologies, could curtail the use of Java. A decline in the ability or willingness of Sun
Microsystems, Inc., the creator and licensor of a substantial portion of the basic technologies and standards comprising Java, to devote resources to promote and facilitate the adoption and further development of Java technologies and standards, as
well as to make these Java technologies and standards available on sufficiently favorable terms, could also curtail the use of Java by the software industry, including us. If the rate of adoption of Java technologies and standards were to slow or
decline, and we were unable to successfully adapt our products to other technologies and standards, it would adversely affect the sales of our products and services. It is possible that our products will not adequately address the changing needs of
the marketplace and that we will not be successful in developing and marketing enhancements to our existing products or products incorporating new technology on a timely basis. Failure to develop and introduce new products, or enhancements to
existing products, in a timely manner in response to changing market conditions or customer requirements, or lack of customer acceptance of our products, will materially and adversely affect our business, results of operations and



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financial condition. In addition, our success is increasingly dependent on our strategic partners ability to
successfully develop and integrate their software with the BEA products with which it interoperates or is bundled, integrated or marketed. If their software performs poorly, contains errors or defects or is otherwise unreliable, or does not provide
the features and benefits expected or required, it could lower the demand for our solutions and our products and services, result in negative publicity or loss of our reputation, and adversely affect our revenues and other operating results.



We could report a net loss again.



We first reported significant net income under generally accepted accounting
principles for the quarter ended July 31, 2000. However, despite this, we subsequently reported a net loss for the quarter ended October 31, 2001. This was due in part to the asset impairment charges of $80.1 million related to prior acquisitions.
We also implemented a planned consolidation of various facilities and a planned reduction in work force of approximately 10 percent in the third and fourth quarters of our fiscal year ended January 31, 2002 and took charges of $20.7 million and
$19.8 million, respectively, related to these actions. Because of such factors as our limited operating history and on-going expenses associated with our prior acquisitions, the possibility of future impairment charges and the possibility of future
charges related to any future facilities consolidation or work force reductions, we may again experience net losses in future periods.



If the markets for application servers, application platform, application integration and related application infrastructure software and Web services
declines or do not grow as quickly as we expect, our revenues will be harmed.



We sell our products and services in the application server, application platform, application integration and related application infrastructure markets. These markets are evolving and are characterized by continuing
technological developments, evolving industry standards and changing customer requirements. Our success is dependent in large part on acceptance of our products by large customers with substantial legacy mainframe systems, customers establishing or
building out their presence on the Web for commerce, and developers of Web-based commerce applications. Our future financial performance will depend in large part on the continued growth in the use of the Web to run software applications and
continued growth in the number of companies extending their mainframe-based, mission-critical applications to an enterprise-wide distributed computing environment and to the Internet through the use of application server and integration technology.
The markets for application server, application platform, and integration technology and related services may not grow and could decline. Even if they do grow, they may grow more slowly than we anticipate, particularly in view of the recent economic
downturn affecting the technology sector in the United States, Asia and Europe. If these markets fail to grow, grow more slowly than we currently anticipate, or decline, our business, results of operations and financial condition will be adversely
affected.



If we cannot successfully integrate our past and
future acquisitions, our revenues may decline and expenses may increase.



From our inception in January 1995, we have made a substantial number of strategic acquisitions. In connection with acquisitions completed prior to July 31, 2004, we recorded approximately $389.3 million as intangible
assets and goodwill of which approximately $323.5 million has been amortized or written off as of July 31,2004. In the third quarter of fiscal 2002, we recorded asset impairment charges totaling $80.1 million against certain acquired
intangible assets and goodwill. If future events cause additional impairment of any intangible assets acquired in our past or future acquisitions, we may have to record additional charges relating to such assets sooner than we expect which would
cause our profits to decline. In addition, integration of acquired companies, divisions and products involves the assimilation of potentially conflicting operations and products, which diverts the attention of our management team and may have a
material adverse effect on our operating results in future quarters. It is possible that we may not achieve any of the intended financial or strategic benefits of these transactions. While we intend to make additional acquisitions in the future,
there may not be suitable companies, divisions or products available for acquisition. Our acquisitions entail numerous risks, including the risk that we will not successfully



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assimilate the acquired operations and products, retain key employees of the acquired operations, or execute successfully
the product development strategy driving the acquisition. There are also risks relating to the diversion of our managements attention, and difficulties and uncertainties in our ability to maintain the key business relationships that we or the
acquired entities have established. In addition, we may have product liability or intellectual property liability associated with the sale of the acquired companys products. Acquisitions also expose us to the risk of claims by terminated
employees, from shareholders of the acquired companies or other third parties related to the transaction. Finally, if we undertake future acquisitions, we may issue dilutive securities, assume or incur additional debt obligations, incur large
one-time expenses, utilize substantial portions of our cash, and acquire intangible assets that would result in significant future amortization expense. Any of these events could have a material adverse effect on our business, operating results and
financial condition.



On June 29, 2001, the FASB eliminated
pooling of interests accounting for acquisitions. The effect of this change could be to increase the portion of the purchase price for any future acquisitions that must be charged to our cost of revenues and operating expenses in the periods
following any such acquisitions. As a consequence, our results of operations in periods following any such acquisition could be materially adversely affected. Although these changes will not directly affect the purchase price for any of these
acquisitions, they will have the effect of increasing the reported expenses associated with any of these acquisitions. To that extent, these changes may make it more difficult for us to acquire other companies, product lines or technologies. Also on
June 29, 2001, the FASB pronounced under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(FAS 142) that purchased goodwill should not be amortized, but rather, should be periodically
reviewed for impairment. Such impairment could be caused by internal factors as well as external factors beyond our control. The FASB has further determined that at the time goodwill is considered impaired, an amount equal to the impairment loss
should be charged as an operating expense in the statement of operations. The timing of such an impairment (if any) of goodwill acquired in past and future transactions is uncertain and difficult to predict. Our results of operations in periods
following any such impairment could be materially adversely affected. We are required to determine whether goodwill and any assets acquired in past acquisitions have been impaired in accordance with FAS 142 and, if so, charge such impairment as an
expense. In the quarter ended October 31, 2001, we took an asset impairment charge of $80.1 million related to past acquisitions. We have remaining net goodwill and net acquired intangible assets of approximately $65.8 million at July 31, 2004, so
if we are required to take such additional impairment charges, the amounts could have a material adverse effect on our results of operations.



If we fail to adequately protect our intellectual property rights, competitors may use our technology and trademarks, which could weaken our
competitive position, reduce our revenues and increase our costs.



Our success depends upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. It
is possible that other companies could successfully challenge the validity or scope of our patents and that our patents may not provide a competitive advantage to us. As part of our confidentiality procedures, we generally enter into non-disclosure
agreements with our employees, distributors and corporate partners and into license agreements with respect to our software, documentation and other proprietary information. Despite these precautions, third parties could copy or otherwise obtain and
use our products or technology without authorization, or develop similar technology independently. In particular, we have, in the past, provided certain hardware OEMs with access to our source code, and any unauthorized publication or proliferation
of our source code could materially adversely affect our business, operating results and financial condition. It is difficult for us to police unauthorized use of our products, and although we are unable to determine the extent to which piracy of
our software products exists, software piracy is a persistent problem. Effective protection of intellectual property rights is unavailable or limited in certain foreign countries. The protection of our proprietary rights may not be adequate and our
competitors could independently develop similar technology, duplicate our products, or design around patents and other intellectual property rights that we hold.



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If we are unable to manage growth, our business will suffer.



We have experienced substantial growth since our inception in 1995 that has
placed a strain on our administrative and operational infrastructure. Overall, we have increased the number of our employees from 120 employees in three offices in the United States at January 31, 1996 to approximately 3,194 employees in 73 offices
in 34 countries at July 31, 2004. Our ability to manage our staff and growth effectively requires us to continue to improve our operational, financial, disclosure and management controls, reporting systems and procedures, and information technology
infrastructure, particularly in light of the enactment of the Sarbanes-Oxley Act of 2002 and related regulations. In this regard, we are continuing to update our management information systems to integrate financial and other reporting among our
multiple domestic and foreign offices. In addition, we may continue to increase our staff worldwide and continue to improve the financial reporting and controls for our global operations. We are also continuing to develop and roll out information
technology initiatives. It is possible that we will not be able to successfully implement improvements to our management information, control systems, reporting systems and information technology infrastructure in an efficient or timely manner and
that, during the course of this implementation, we could discover deficiencies in existing systems and controls, as well as past errors resulting there from. If we are unable to manage growth effectively, our business, results of operations and
financial condition will be materially adversely affected.



We could incur substantial charges to our consolidated statement of operations if we alter our plan to construct additional corporate offices and research and development facilities on the leased 40-acre parcel of land in San Jose,
California that is recorded in our balance sheet.



We
adopted Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46) on August 1, 2003, and consolidated the entity (the leasing entity) from which we lease the
40-acre parcel of land adjacent to our current corporate headquarters in San Jose, California (the San Jose land) as of that date. Accordingly, we consolidated the San Jose land, which had a carrying value of $303.0 million on August 1,
2003 as well as the related debt obligation of $325.3 million. We had previously accounted for our involvement with the leasing entity as an operating lease and, accordingly, the San Jose land and related debt obligation were not recorded on our
balance sheet prior to August 1, 2003.



We purchased the San
Jose land to construct additional corporate offices and research and development facilities; however, we have suspended our construction initiatives. The land is treated as a held and used asset. If management were to commit to a plan to sell the
land, the plan was put in motion and the sale of the land was probable, the land may then meet the criteria to be treated as a held for sale asset and, if the lands fair market value at that time was less than the carrying value of
$306.5 million, we would have to write-down the carrying value of the San Jose land, which could result in substantial charges to our consolidated statement of operations of up to the carrying value of $306.5 million. We will assess the San Jose
land for impairment under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets(FAS 144), at least annually or whenever events or circumstances indicate that the
value of the San Jose land may be permanently impaired. In accordance with FAS 144, if we determine that one or more impairment indicators are present, indicating the carrying amount may not be recoverable, the carrying amount of the asset would be
compared to net future undiscounted cash flows that the asset, or the relevant asset grouping, is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to
generate, the fair value would be compared to the carrying value of the asset. If the fair value is less than the carrying value, an impairment loss would be recognized. The impairment loss would be the excess of the carrying amount of the asset
over its fair value. To date, no impairment losses on the land have been recorded under FAS 144, however there can be no assurance that we will not be required to record a substantial impairment charge related to the San Jose land of up to $306.5
million if events or circumstances change and we determine that the value of the San Jose land is impaired under FAS 144.



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We have been named as a party to several shareholder class action and derivative action lawsuits, and
we may be named in additional litigation, all of which could require significant management time and attention and result in significant legal expenses. An unfavorable outcome in one or more of these lawsuits could have a material adverse effect on
our business, financial condition, results of operations and cash flows.



Beginning on June 9, 2004, several purported class action shareholder complaints were filed in the United States District Court for the Northern District of California against the Company and several of our officers.
The actions were purportedly brought on behalf of purchasers of our publicly-traded securities from November 13, 2003, through May 13, 2004. The complaints generally alleged that defendants made false statements about our operating results and
business, while concealing material information. The plaintiffs seek unspecified monetary damages.



Beginning on June 15, 2004 several derivative lawsuits were filed by purported Company shareholders in the United States District Court for the Northern
District of California and the Superior Court of California, Santa Clara County. The complaints name certain of the Companys present and former officers and directors as defendants and name the Company as a nominal defendant. These complaints
are based on the same facts and circumstances as the class actions and generally allege that the named directors and officers breached their fiduciary duties to the Company. Given the nature of derivative litigation, any recovery in a derivative
suit would be to the benefit of the Company. The expense of defending such litigation may be costly and divert managements attention from the day-to-day operations of our business, which could adversely affect our business, results of
operations and cash flows. In addition, an unfavorable outcome in such litigation could have a material adverse effect on our business, results of operations and cash flows.



We have a high debt balance and large interest obligations, which constrict our liquidity and could result in substantial
future expenses and substantial cash outflows.



At July
31, 2004,we had approximately $550 million of convertible notes outstanding and debt related to the San Jose land lease of $211.7 million. As a result of this indebtedness, we have substantial principal and interest payment obligations. The
degree to which we are leveraged could significantly harm our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our
debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.



We will require substantial amounts of cash to fund scheduled payments of
principal and interest on the convertible notes, the long-term debt related to the San Jose land lease, and other indebtedness, future capital expenditures, payments on our operating leases and any increased working capital requirements. To the
extent our stock price does not exceed $48.51 per share by December 2004, or does not exceed $34.65 per share between December 2004 and December 2006, for a requisite number of trading days to permit us to effectively force the conversion of the
notes, we will be required to pay $550 million to repay the convertible notes in December 2006. If we are unable to meet our cash requirements out of cash flow from operations, there can be no assurance that we will be able to obtain alternative
financing. In the absence of such financing, our ability to respond to changing business and economic conditions, to make future acquisitions, to absorb adverse operating results or to fund capital expenditures or increased working capital
requirements would be significantly reduced. If we do not generate sufficient cash flow from operations to repay the convertible notes and the long-term debt related to the San Jose land lease at maturity, we could attempt to refinance these debt
obligations, however, no assurance can be given that such a refinancing would be available on terms acceptable to us, if at all. Any failure by us to satisfy our obligations with respect to these debt obligations at maturity (with respect to
payments of principal) or prior thereto (with respect to payments of interest or required repurchases) would constitute a default.



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If our products contain software defects, it could harm our revenues and expose us to litigation.



The software products we offer are internally complex
and, despite extensive testing and quality control, may contain errors or defects, especially when we first introduce them. We may need to issue corrective releases of our software products to fix any defects or errors. Any defects or errors could
also cause damage to our reputation and result in loss of revenues, product returns or order cancellations, or lack of market acceptance of our products. Accordingly, any defects or errors could have a material and adverse effect on our business,
results of operations and financial condition. These risks are all particularly acute with regard to major new product releases, such as WebLogic Platform 8.1, which was introduced in July 2003.



Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is possible, however, that the limitation of liability provisions contained in our license agreements may not be effective as a result of existing or future federal, state or
local laws or ordinances or unfavorable judicial decisions. Although we have not experienced any product liability claims to date, sale and support of our products entails the risk of such claims, which could be substantial in light of our
customers use of such products in mission-critical applications. If a claimant brings a product liability claim against us, it could have a material adverse effect on our business, results of operations and financial condition. Our products
interoperate with many parts of complicated computer systems, such as mainframes, servers, personal computers, application software, databases, operating systems and data transformation software. Failure of any one of these parts could cause all or
large parts of computer systems to fail. In such circumstances, it may be difficult to determine which part failed, and it is likely that customers will bring a lawsuit against several suppliers. Even if our software is not at fault, we could suffer
material expense and material diversion of management time in defending any such lawsuits.



We have adopted a preferred stock rights plan which has anti-takeover effects.



We have implemented a preferred stock rights plan. The plan has the anti-takeover effect of causing substantial dilution to a person or group that
attempts to acquire us on terms not approved by our Board of Directors. The existence of the plan could limit the price that certain investors might be willing to pay in the future for shares of our common stock and could discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable.



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ITEM 3. Quantitative and Qualitative Disclosure About Market Risks



Foreign Exchange



Our
revenues originating outside the Americas were 48.3 percent 44.9 percent for the second quarter and 50.3 percent and 45.4 percent of total revenues in the first half of fiscal 2005 and 2004, respectively. International revenues from each individual
country outside of the United States were less than 10 percent of the total revenues in the three and six months ended July 31, 2004 with the exception of United Kingdom with $31.3 million or 12.0 percent and $68.0 million or 13.0 percent,
respectively. International revenues from each individual country outside of the United States were less than 10 percent of the total revenues in the three and six months ended July 31, 2003 with the exception of United Kingdom with $26.0 million or
10.6 percent and $50.7 million or 10.5 percent, respectively. International sales were made mostly from our foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. These subsidiaries
also incur most of their expenses in the local currency. Accordingly, foreign subsidiaries use the local currency as their functional currency.



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



Our exposure to foreign exchange rate
fluctuations arises in part from intercompany accounts between our parent company in the United States and our foreign subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order
to centralize foreign exchange risk. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars for consolidation purposes. As exchange rates vary, these results, when
translated, may vary from expectations and may adversely impact overall financial results.



We have a program to reduce the effect of foreign exchange gains and losses from recorded foreign currency-denominated monetary assets and liabilities. This program involves the use of forward foreign exchange
contracts in certain European, Asian and Latin and North American currencies. A forward foreign exchange contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to
make an equivalent U.S. dollar payment equal to the value of such exchange. Under this program, foreign currency gains and losses due to exchange rate fluctuations are partially offset by gains and losses on the forward contracts. We do not use
foreign currency contracts for speculative or trading purposes. All outstanding forward contracts are marked-to-market on a monthly basis with gains and losses included in interest and other, net. Net gains (losses) resulting from foreign currency
transactions and hedging foreign currency transactions were approximately ($1.5 million) and $0.3 million for the second quarter of fiscal 2005 and 2004, respectively. Net gains (losses) resulting from foreign currency transactions and hedging
foreign currency transactions were approximately ($1.8 million) and $1.0 million for the first half of fiscal 2005 and 2004, respectively.



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Our outstanding forward contracts as of July 31, 2004 are presented in the table below. This table
presents the net notional amount in U.S. dollars using spot exchange rates in July 2004 and the weighted average contractual foreign currency exchange rates. Notional weighted average exchange rates are quoted using market conventions where the
currency is expressed in units per U.S. dollar. All of these forward contracts mature within 93 days or less as of July 31, 2004. Net sales of foreign currency are stated as a positive net notional amount and net purchases of foreign currency are
stated as a negative net notional amount.



|                                       |  |                    |   |  |                                    
|-------------------------------------- |  | ------------------ | - |  | -----------------------------------
|                                       |  | Net notionalamount |   |  | Notionalweightedaverageexchangerate
|                                       |  | (in thousands)     |   |  |                                    
|Functional CurrencyU.S. Dollar        |  |                    |   |  |                                    
|Australian dollars                     |  | (500               | ) |  | 1.445                              
|Brazilian reals                        |  | (1,600             | ) |  | 3.243                              
|British pounds                         |  | 5,700              |   |  | 0.564                              
|Canadian dollars                       |  | 6,100              |   |  | 1.377                              
|Danish kroners                         |  | 1,800              |   |  | 6.204                              
|Euros                                  |  | (54,000            | ) |  | 0.836                              
|Israeli shekels                        |  | 5,200              |   |  | 4.611                              
|Japanese yen                           |  | (18,200            | ) |  | 113.890                            
|Korean won                             |  | (13,000            | ) |  | 1187.830                           
|New Zealand dollars                    |  | (5,600             | ) |  | 1.661                              
|Singapore dollars                      |  | (3,100             | ) |  | 1.710                              
|Swedish krona                          |  | 2,600              |   |  | 7.613                              
|Swiss francs                           |  | 3,000              |   |  | 1.268                              
|                                       |  |                    |   |  |                                    
|Total                                  |  | (71,600            | ) |  |                                    
|                                       |  |                    |   |  |                                    
|Functional CurrencyEURO               |  |                    |   |  |                                    
|British pounds                         |  | (10,300            | ) |  | 0.549                              
|Israeli shekels                        |  | (5,700             | ) |  | 4.564                              
|                                       |  |                    |   |  |                                    
|Total                                  |  | (16,000            | ) |  |                                    
|                                       |  |                    |   |  |                                    
|Functional Currency Australian Dollar |  |                    |   |  |                                    
|New Zealand dollars                    |  | 2,000              |   |  | 1.652                              
|Singapore dollars                      |  | 5,500              |   |  | 1.701                              
|                                       |  |                    |   |  |                                    
|Total                                  |  | 7,500              |   |  |                                    
|                                       |  |                    |   |  |                                    
|Grand total                            |  | (80,100            | ) |  |                                    
|                                       |  |                    |   |  |                                    



Interest Rates



We invest our cash in a variety of financial instruments, consisting
principally of investments in commercial paper, interest bearing demand deposit accounts with financial institutions, money market funds, highly liquid debt securities of corporations, municipalities and the U.S. Government. These investments are
denominated in U.S. dollars. Cash balances in foreign currencies overseas are operating balances and are primarily invested in interest-bearing bank accounts and money market funds at the local operating banks.



We account for our investment instruments in accordance with Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities(FAS 115). All of the cash equivalents, short-term investments and short and long-term restricted cash are treated as
available-for sale under FAS 115. Investments in both fixed rate and floating rate interest earning



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instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted
due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates
or we may suffer losses in principal if forced to sell securities that have seen a decline in market value due to changes in interest rates. However, we reduce our interest rate risk by investing our cash in instruments with remaining time to
maturity of less than two years. As of July 31, 2004, the average holding period until maturity of our cash equivalents, short and long-term restricted cash, short and long-term investments was approximately 229 days. The table below presents the
principal amount and related weighted average interest rates for our investment portfolio. Short-term investments are all in fixed rate instruments.



Table of investment securities (in thousands) at July 31, 2004:



|                                                |  |            |           |                     |      |  
|----------------------------------------------- |  | ---------- | --------- | ------------------- | ---- | -
|                                                |  | Fair value |           | Averageinterestrate |     
|Cash equivalents                                |  | $          | 517,399   |                     | 1.21 | %
|Short-term investments (0-1 year)               |  |            | 680,500   |                     | 1.93 | %
|Short-term investments (1-2 years)              |  |            | 165,519   |                     | 1.59 | %
|Short-term restricted cash (0-1 year)           |  |            | 1,633     |                     | 1.42 | %
|Long-term restricted cash (0-1 year)            |  |            | 6,380     |                     | 1.42 | %
|                                                |  |            |           |                     |      |  
|Total cash equivalent and investment securities |  | $          | 1,371,431 |                     |      |  
|                                                |  |            |           |                     |      |  



We are exposed to
changes in short-term interest rates through the long-term debt related to the land lease of $211.7 million, which bears a variable short-term interest rate based on the London Interbank Offering Rate (LIBOR). The effective annual
interest rate on this debt was approximately 2.94 percent as of July 31, 2004. The annual interest expense on this debt will fluctuate from time to time depending on changes in LIBOR and changes in our financial position as specified in the lease
agreement. A 1.0 percent (100 basis point) increase in LIBOR will generate an increase in annual interest expense of approximately $2.1 million. We are also exposed to changes in short-term interest rates through our invested balances of cash
equivalents, restricted cash and short-term investments, the yields on which will fluctuate with changes in short-term interest rates. A 1.0 percent (100 basis point) decrease in short-term interest rates would result in an annual reduction of
interest income of approximately $10.4 million. The annual interest rate on our $550 million convertible notes is fixed at 4.0 percent through the maturity date in December 2006.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of
our Disclosure Controls and Internal Controls.



As of the
end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures and our internal controls and procedures for financial reporting. This controls evaluation was done under
the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Rules adopted by the Securities and Exchange Commission (SEC) require that in this section of the Quarterly
Report on Form 10-Q, we present the conclusions of the CEO and the CFO about the effectiveness of our disclosure controls and internal controls based on and as of the date of the controls evaluation.



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CEO and CFO Certifications.



Included as exhibits to this Quarterly Report on Form 10-Q, there are Certifications of the Chief Executive
Officer and the Chief Financial Officer. The first form of Certification is required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Quarterly Report contains the information concerning the controls evaluation
referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.



Disclosure Controls and Internal Controls.



Disclosure controls are procedures that are designed with the objective of
ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 (Exchange Act) such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, our assets are
safeguarded against unauthorized or improper use and our transactions are properly recorded and reported, all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.



Limitations on the Effectiveness of Controls.



Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future
conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.



Scope of the Controls
Evaluation.



The evaluation of our disclosure controls and
our internal controls by our Chief Executive Officer and our Chief Financial Officer included a review of the controls objectives and design, the controls implementation by us and the effect of the controls on the information generated
for use in this Quarterly Report on Form 10-Q. In accordance with SEC requirements, our Chief Executive Officer and our Chief Financial Officer note that, since the date of the controls evaluation to the date of this Quarterly Report, there have
been no significant changes in our internal controls or in other factors that could significantly affect our internal controls.



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Conclusions.



Based upon the controls evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, subject to the limitations noted
above, our disclosure controls are effective to ensure that material information relating to the company is made known to management, including our Chief Executive Officer and our Chief Financial Officer, particularly during the period when our
periodic reports are being prepared, and that our internal controls are effective to provide reasonable assurance that our financial statements are fairly presented in conformity with generally accepted accounting principles.



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PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



Beginning on June 9, 2004, several purported class action shareholder complaints were filed in the United States District Court for the Northern District of California against the Company and several of our officers. The actions were
purportedly brought on behalf of purchasers of our publicly-traded securities from November 13, 2003 through May 13, 2004. The complaints generally alleged that defendants made false statements about our operating results and business, while
concealing material information. The plaintiffs seek unspecified monetary damages.



Beginning on June 15, 2004, several derivative lawsuits were filed by purported Company shareholders in the United States District Court for the Northern District of California and the Superior Court of California,
Santa Clara County. The complaints name certain of the Companys present and former officers and directors as defendants and name the Company as a nominal defendant. These complaints are based on the same facts and circumstances as the class
actions and generally allege that the named directors and offices breached their fiduciary duties to the Company. Given the nature of derivative litigation, any recovery in a derivative suit would be to the benefit of the Company.



Notice of these matters has been given to our insurers.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS



Stock Repurchases:



The
following table summaries our stock repurchase activity including broker commissions for the second quarter ended July 31, 2004



|                         |  |                                             |  |                                          |                |                                                                                          |              |                                                                                           |   |              
|------------------------ |  | ------------------------------------------- |  | ---------------------------------------- | -------------- | ---------------------------------------------------------------------------------------- | ------------ | ----------------------------------------------------------------------------------------- | - | -------------
|Period                   |  | (a) TotalNumber ofShares (orUnitsPurchased) |  | (b) AveragePrice Paid perShare (or Unit) |                | (c) Total Numberof Shares (orUnits) Purchasedas Part ofPubliclyAnnouncedPlans orPrograms |              | (d) MaximumDollar Value ofShares that MayYet BePurchasedUnder the ShareRepurchaseProgram1
|Month #1 May 1-31, 2004  |  | 4,153 shares                                |  | $                                        | 8.21 per share |                                                                                          | 4,153 shares |                                                                                           | $ | 241.9 million
|Month #2 June 1-30, 2004 |  | 619 shares                                  |  | $                                        | 8.58 per share |                                                                                          | 619 shares   |                                                                                           | $ | 236.6 million
|Month #3 July 1-31, 2004 |  |                                            |  |                                          |               |                                                                                          |             |                                                                                           |   |             
|                         |  |                                             |  |                                          |                |                                                                                          |              |                                                                                           |   |              
|Total                    |  | 4,772 shares                                |  |                                          |               |                                                                                          | 4,772 shares |                                                                                           | $ | 236.6 million
|                         |  |                                             |  |                                          |                |                                                                                          |              |                                                                                           |   |              

---

|1 | In September 2001, the Board of Directors approved a share repurchase program for the Company to repurchase up to $100.0 million of its common stock (the Share
Repurchase Program). In March 2003, the Board of Directors approved a repurchase of up to an additional $100.0 million of our common stock under the Share Repurchase Program. In May 2004, the Board of Directors approved a repurchase of up to
an additional $200.0 million of our common stock under the Share Repurchase Program. The Share Repurchase Program does not have an expiration date.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



At the Companys Annual Meeting of Stockholders held on June 11, 2004, the following proposals were approved:



|                                                                                                                                                         |  |                  |  |              
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | -------------
|                                                                                                                                                         |  | AffirmativeVotes |  | VotesWithheld
|1. Election of the following individuals to the Board of Directors as Class III directors, to hold office until the 2007 Annual Meeting of
Stockholders: |  |                  |  |              
|Dean O. Morton                                                                                                                                           |  | 262,839,223      |  | 93,338,197   
|George Reyes                                                                                                                                             |  | 344,147,252      |  | 12,030,168   



|                                                                                                                    |  |                  |  |                |  |          
|------------------------------------------------------------------------------------------------------------------- |  | ---------------- |  | -------------- |  | ---------
|                                                                                                                    |  | AffirmativeVotes |  | NegativesVotes |  | Abstained
|2. Ratify the appointment of Ernst & Young, LLP as independent auditors for the fiscal year ending January 31, 2005 |  | 245,297,891      |  | 110,736,183    |  | 140,685  



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits:



|              |  |                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibitnumber |  | Description                                                                                                                                                          
|3.1           |  | Form of Registrants Amended and Restated Certificate of Incorporation (1)                                                                                           
|              | 
|3.2           |  | Registrants Amended and Restated Bylaws (2)                                                                                                                         
|              | 
|10.1          |  | Separation letter dated August 16, 2004 between the Registrant and Tod Nielsen.                                                                                      
|              | 
|10.2          |  | Employment letter dated July 30, 2004 between the Registrant and Wai Wong.                                                                                           
|              | 
|10.3          |  | Employment Agreement dated September 1, 2004 between the Registrant and Wai Wong.                                                                                    
|              | 
|31.1          |  | Certification of Alfred S. Chuang, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|              | 
|31.2          |  | Certification of William M. Klein, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.1          |  | Certification of Alfred S. Chuang, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification of William M. Klein, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|(1) | Incorporated by reference to such exhibit as filed in the Registrants Annual Report on Form 10-K, filed May 1, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to such exhibit as filed in the Registrants Quarterly Report on Form 10-Q, filed December 16, 2002.
|--- | ------------------------------------------------------------------------------------------------------------------------------



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(b) Reports on Form 8-K:



On May 13, 2004, the Registrant furnished a Current Report on Form 8-K relating to the announcement of its preliminary
results for its first quarter ended April 30, 2004.



On June
30, 2004, the Registrant filed a Current Report on Form 8-K relating to the resignation of William T. Coleman III, a member of the Board of Directors of the Registrant.



On July 26, 2004, the Registrant filed a Current Report on Form 8-K relating to the resignation of Adam Bosworth, Senior VP
of Advanced Development and Chief Architect of the Registrant.



On August 3, 2004, the Registrant furnished a Current Report on Form 8-K relating to the announcement of its preliminary expected results for its second quarter ended July 31, 2004.



On August 12, 2004, the Registrant furnished a Current Report on Form 8-K
relating to the announcement of its preliminary results for its second quarter ended July 31, 2004.



On August 23, 2004, the Registrant filed a Current Report on Form 8-K relating to the resignation of Tod Nielsen, Executive Vice President and Chief
Marketing Officer of the Registrant.



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SIGNATURES



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



BEA SYSTEMS, INC.(Registrant)/s/ William M. KleinWilliam M. KleinExecutive Vice President and Chief Financial Officer(Duly Authorized Officer and Principal Financial Officer)




Dated: September 8, 2004



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