<PAGE>

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549

                               -----------------

                                   FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For the quarterly period ended October 31, 2001

                                      OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

                        Commission File Number: 0-22369

                               -----------------

                               BEA SYSTEMS, INC.
            (Exact name of registrant as specified in its charter)

               Delaware                               77-0394711
    (State or other jurisdiction of               (I. R. S. Employer
    incorporation or organization)                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 [_]

   As of November 30, 2001, there were approximately 400,883,263 shares of the
Registrant's common stock outstanding.

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

<PAGE>

                               BEA SYSTEMS, INC.

                                     INDEX

<TABLE>
<CAPTION>
                                                                                                 Page
                                                                                                 No.
                                                                                                 ----
<S>      <C>                                                                                     <C>
PART I.  FINANCIAL INFORMATION

ITEM 1.  Financial Statements (Unaudited):

         Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the
           three and nine months ended October 31, 2001 and 2000................................   3

         Condensed Consolidated Balance Sheets as of October 31, 2001 and January 31, 2001......   4

         Condensed Consolidated Statements of Cash Flows for the nine months ended October 31,
           2001 and 2000........................................................................   5

         Notes to Condensed Consolidated Financial Statements...................................   6

ITEM 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations..  14

ITEM 3.  Quantitative and Qualitative Disclosure about Market Risks.............................  35

PART II. OTHER INFORMATION

ITEM 2.  Changes in Securities and Use of Proceeds..............................................  38

ITEM 6.  Exhibits and Reports on Form 8-K.......................................................  38

Signatures......................................................................................  39
</TABLE>


                                      2

<PAGE>

                         PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                               BEA SYSTEMS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                        AND COMPREHENSIVE INCOME (LOSS)
                     (in thousands, except per share data)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                  Three months ended   Nine months ended
                                                                      October 31,         October 31,
                                                                  ------------------  ------------------
                                                                    2001      2000      2001      2000
                                                                  --------  --------  --------  --------
<S>                                                               <C>       <C>       <C>       <C>
Revenues:
   License fees.................................................. $126,625  $128,202  $460,029  $317,636
   Services......................................................   92,998    95,812   284,521   246,081
                                                                  --------  --------  --------  --------
       Total revenues............................................  219,623   224,014   744,550   563,717
Cost of revenues:
   Cost of license fees..........................................    4,559     4,894    16,251    13,172
   Cost of services..............................................   42,500    55,702   140,921   144,006
   Amortization of certain acquired intangible assets............    6,627    10,438    19,043    30,605
   Impairment of certain acquired intangible assets..............    7,082        --     7,082        --
                                                                  --------  --------  --------  --------
       Total cost of revenues....................................   60,768    71,034   183,297   187,783
                                                                  --------  --------  --------  --------
Gross profit.....................................................  158,855   152,980   561,253   375,934
Operating expenses:
   Sales and marketing...........................................   93,597    88,838   306,820   234,502
   Research and development......................................   29,660    23,277    90,710    63,730
   General and administration....................................   18,962    15,832    57,098    39,315
   Amortization of goodwill......................................   11,838    15,964    42,956    42,468
   Acquisition-related charges...................................       --        --        --     2,200
   Facilities consolidation and other charges....................   20,666        --    20,666        --
   Impairment of goodwill........................................   73,068        --    73,068        --
                                                                  --------  --------  --------  --------
       Total operating expenses..................................  247,791   143,911   591,318   382,215
                                                                  --------  --------  --------  --------
Income (loss) from operations....................................  (88,936)    9,069   (30,065)   (6,281)
Interest income (expense) and other, net.........................   (6,214)    6,099    11,744    15,792
                                                                  --------  --------  --------  --------
Income (loss) before provision for income taxes..................  (95,150)   15,168   (18,321)    9,511
Provision (benefit) for income taxes.............................   (4,287)    6,925    27,963    11,382
                                                                  --------  --------  --------  --------
Net income (loss)................................................  (90,863)    8,243   (46,284)   (1,871)
Other comprehensive income (loss):
   Foreign currency translation adjustments......................      884    (2,755)   (2,097)   (3,057)
   Unrealized gain (loss) on available-for-sale investments, net
     of income taxes.............................................      278       380       335      (125)
                                                                  --------  --------  --------  --------
Comprehensive income (loss)...................................... $(89,701) $  5,868  $(48,046) $ (5,053)
                                                                  ========  ========  ========  ========
Net income (loss) per share:
   Basic and diluted net income (loss) per share................. $  (0.23) $   0.02  $  (0.12) $  (0.01)
                                                                  ========  ========  ========  ========
Number of shares used in per share calculations:
   Basic.........................................................  397,970   380,950   394,860   374,113
                                                                  ========  ========  ========  ========
   Diluted.......................................................  397,970   430,590   394,860   374,113
                                                                  ========  ========  ========  ========
</TABLE>

                            See accompanying notes.

                                      3

<PAGE>

                               BEA SYSTEMS, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                (in thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                             October 31, January 31,
                                                                2001        2001
                                                             ----------- -----------
<S>                                                          <C>         <C>
                           ASSETS
                           ------
Current assets:
   Cash and cash equivalents................................ $  844,484  $  907,635
   Restricted cash..........................................      6,903       4,998
   Short-term investments...................................    142,539      33,294
   Accounts receivable, net.................................    191,766     214,706
   Deferred tax assets......................................      1,983      20,035
   Other current assets.....................................     33,255      26,223
                                                             ----------  ----------
       Total current assets.................................  1,220,930   1,206,891
Property and equipment, net.................................     78,281      51,223
Goodwill, net...............................................     37,723     138,404
Acquired intangible assets, net.............................     26,797      52,288
Deferred tax assets.........................................         --       9,915
Long-term restricted cash...................................    120,562          --
Other long-term assets......................................    124,280     133,615
                                                             ----------  ----------
       Total assets......................................... $1,608,573  $1,592,336
                                                             ==========  ==========

            LIABILITIES AND STOCKHOLDERS' EQUITY
            ------------------------------------
Current liabilities:
   Accounts payable......................................... $   12,752  $   15,233
   Accrued liabilities......................................    156,677     133,092
   Accrued facilities consolidation and other charges.......     18,194          --
   Accrued income taxes.....................................     33,189      24,307
   Deferred revenues........................................    189,565     203,947
   Current portion of notes payable and other obligations...      3,558      13,321
                                                             ----------  ----------
       Total current liabilities............................    413,935     389,900
Deferred tax liabilities....................................      4,383      32,350
Notes payable and other long-term obligations...............      2,347       2,661
Convertible subordinated notes..............................    550,000     561,421

Commitments and contingencies

Stockholders' equity:
   Common stock.............................................        400         390
   Additional paid-in capital...............................    879,214     793,729
   Accumulated deficit......................................   (232,157)   (185,873)
   Notes receivable from stockholders.......................        (72)       (198)
   Deferred compensation....................................     (6,194)       (523)
   Accumulated other comprehensive loss.....................     (3,283)     (1,521)
                                                             ----------  ----------
       Total stockholders' equity...........................    637,908     606,004
                                                             ----------  ----------
       Total liabilities and stockholders' equity........... $1,608,573  $1,592,336
                                                             ==========  ==========
</TABLE>

                            See accompanying notes.

                                      4

<PAGE>

                               BEA SYSTEMS, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                                                                         Nine months ended
                                                                                            October 31,
                                                                                       --------------------
                                                                                         2001       2000
                                                                                       ---------  ---------
<S>                                                                                    <C>        <C>
Operating activities:
   Net loss........................................................................... $ (46,284) $  (1,871)
   Adjustments to reconcile net loss to net cash provided by operating activities:
       Depreciation and amortization..................................................    16,999      8,346
       Amortization of deferred compensation..........................................     1,176        494
       Amortization of certain acquired intangible assets and acquisition-related
         charges......................................................................    61,999     75,273
       Amortization of debt issuance costs............................................     1,628      1,652
       Write-down of equity investments, net of gains.................................     3,648      1,500
       Facilities consolidation and other charges.....................................    20,346         --
       Impairment of acquired intangible assets and goodwill..........................    80,150         --
       Changes in operating assets and liabilities....................................    35,653     54,271
       Other..........................................................................     2,303      2,598
                                                                                       ---------  ---------
Net cash provided by operating activities.............................................   177,618    142,263
                                                                                       ---------  ---------
Investing activities:
   Purchases of property and equipment................................................   (44,195)   (29,489)
   Payments for acquisitions and equity investments, net of cash acquired.............   (25,989)  (101,890)
   Proceeds from the maturity of a long-term investment security......................    14,908         --
   Purchases of available-for-sale short-term investments.............................  (332,498)  (160,351)
   Proceeds from maturities of available-for-sale short-term investments..............   225,858    122,702
   Other..............................................................................    (1,790)      (357)
                                                                                       ---------  ---------
Net cash used in investing activities.................................................  (163,706)  (169,385)
                                                                                       ---------  ---------
Financing activities:
   Net proceeds (payments) on notes payable and other obligations.....................       282     (8,863)
   Increase in restricted cash for collateral on land lease transaction...............  (120,562)        --
   Net proceeds received for employee stock purchases.................................    48,880     59,530
   Other..............................................................................    (1,033)       955
                                                                                       ---------  ---------
Net cash provided by (used in) financing activities...................................   (72,433)    51,622
                                                                                       ---------  ---------
Net increase (decrease) in cash and cash equivalents..................................   (58,521)    24,500
Effect of exchange rate changes on cash...............................................    (4,630)    (5,349)
Cash and cash equivalents at beginning of period......................................   907,635    763,294
                                                                                       ---------  ---------
Cash and cash equivalents at end of period............................................ $ 844,484  $ 782,445
                                                                                       =========  =========
</TABLE>

                            See accompanying notes.

                                      5

<PAGE>

                               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 only 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. Certain amounts reported in prior periods have been
reclassified to conform to the presentation adopted in the current period. Such
reclassifications did not change the previously reported operating income
(loss) or net income (loss) amounts. 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, 2001. The results of operations for the three and
nine months ended October 31, 2001 are not necessarily indicative of the
results for the entire fiscal year ending January 31, 2002.

   The condensed consolidated balance sheet at January 31, 2001 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.

  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 persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable, and collectibility 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 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,
revenue is deferred and recognized when delivery of those elements occurs or
when fair value can be established. When the Company enters into a license
agreement requiring that the Company provide significant customization of the
software products, the license and related consulting services revenue is
recognized in accordance with AICPA Statement of Position 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type Contracts. If the
fee due from the customer is not fixed or determinable, revenue is recognized
as payments become due from the customer, assuming all other revenue
recognition criteria have been met. Generally, the Company considers all
arrangements with extended payment terms not to be fixed or determinable.
Revenue arrangements with resellers are recognized on a sell-through basis.

   Service revenues include consulting services, post-contract customer support
and training. Consulting revenues and the related cost of services are
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. Actual results could differ from those
estimates and, as a result, future gross margin on such contracts may be more
or less than anticipated. The amount of consulting fixed-price contracts
recognized on a percentage of completion basis has not been material to date.
Software maintenance agreements provide technical support and the right to
unspecified upgrades on an if-and-when-available basis. Post-contract customer
support revenues are recognized ratably over the term of the support period
(generally one year) and training and other service revenues are recognized as
the related services are provided. The unrecognized portion of amounts billed
in advance for licenses and services is recorded as deferred revenues.

                                      6

<PAGE>

                               BEA SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Assessment for impairment of long-lived assets

   The Company periodically assesses the impairment of long-lived assets,
including acquired intangibles and goodwill, in accordance with the provisions
of Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("FAS 121"). An impairment review is performed whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors
the Company considers important which could trigger an impairment review
include, but are not limited to, significant underperformance relative to
historical or projected future operating results, significant changes in the
manner of use of the acquired assets or the strategy for the Company's overall
business, and significant negative industry or economic trends. When the
Company determines that the carrying value of the long-lived assets may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, the Company measures any impairment based on a projected discounted
cash flow method using a discount rate commensurate with the risk inherent in
its current business model.

  Investments in equity securities and related party transaction

   As of October 31, 2001 and January 31, 2001, the Company's net equity
investments in privately-held companies, including the investment in WebGain,
Inc., totaled $29.5 million and $50.9 million, respectively. These investments
are accounted for under the cost method, as ownership is less than 20 percent
and/or the Company does not have the ability to exercise significant influence
over the operations of the investee companies. In accordance with agreements
regarding the sale of the Company's investment in WebGain, Inc. to WP Equity
Partners, Inc., a related party, the Company recorded a net gain of $17.4
million during the nine months ended October 31, 2001, which is included in
interest income (expense) and other, net. The Company regularly reviews its
portfolio of equity investments for impairment. During the nine months ended
October 31, 2001 and 2000, the Company concluded that declines in value of the
portfolio had occurred that were other than temporary. Accordingly, write-downs
of these investments of approximately $9.9 million and $21.0 million were
recorded in interest income (expense) and other, net for the three and nine
months ended October 31, 2001, respectively. Write-downs of these investments
of approximately $500,000 and $1.5 million were recorded in interest income
(expense) and other, net for the three and nine months ended October 31, 2000,
respectively. During the three and nine months ended October 31, 2001 and 2000,
the Company derived revenues from several of these companies representing in
aggregate less than 1 percent of total revenues.

  Effect of new accounting pronouncements

   In June 1998, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 establishes the
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
The Company was required to adopt the provisions of FAS 133 effective February
1, 2001. The adoption of FAS 133 did not have a material impact on the
Company's financial position or results of operations.

   In June 2001, the FASB released Statements of Financial Accounting Standards
No. 141, Business Combinations ("FAS 141") and No. 142, Goodwill and Other
Intangible Assets ("FAS 142"). These statements become effective for fiscal
years beginning after December 15, 2001. Beginning in the first quarter of the
fiscal year ended January 31, 2003, goodwill will no longer be amortized but
will be subject to annual impairment tests. Most other intangible assets will
continue to be amortized over their estimated useful lives. The new rules also
require business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of

                                      7

<PAGE>

                               BEA SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

accounting and goodwill acquired after June 30, 2001 will not be amortized.
Goodwill existing at June 30, 2001, will continue to be amortized through the
end of the fiscal year ended January 31, 2002.

   In connection with the transitional goodwill impairment evaluation under FAS
142, the Company will perform an assessment of goodwill impairment as of the
date of adoption--February 1, 2002. To accomplish this, the Company must
identify its reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing goodwill
and intangible assets, to those reporting units as of the date of adoption. The
Company will then have up to six months from the date of adoption to determine
the fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent that a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill may be
impaired, then the Company must perform the second step of the transitional
impairment test. In the second step, the Company must compare the implied fair
value of the reporting unit's goodwill, determined by allocating the reporting
unit's fair value to all of its assets (recognized and unrecognized) and
liabilities in a manner similar to a purchase price allocation in accordance
with FAS 141, to its carrying amount, both of which would be measured as of the
date of adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in the statement of operations.

   As of the date of adoption of FAS 142 on February 1, 2002, the Company
expects to have an unamortized acquired intangible assets balance of
approximately $15.8 million and an unamortized goodwill balance of
approximately $38.3 million, which includes the estimated amount of assembled
workforce to be reclassified to goodwill of approximately $4.1 million, all of
which will be subject to the transition provisions of FAS 141 and 142.
Transitional impairment losses that may be required to be recognized upon
adoption of FAS 141 and 142 are indeterminable at this time.

Note 2. Supplemental Cash Flow Disclosures, Related Party Receivables and
Subsequent Event

   During the nine months ended October 31, 2001, the Company sold shares of
WebGain, Inc. Series A Preferred Stock to WP Equity Partners, Inc., a related
party, in exchange for notes receivable due from WP Equity Partners, Inc.
totaling approximately $24.6 million, for which the Company recorded a net gain
of $17.4 million. As of October 31, 2001 and January 31, 2001, the balance,
including accrued interest, due from WP Equity Partners, Inc. was $76.3 million
and $50.0 million, respectively. For the nine months ended October 31, 2001 and
2000, convertible debt holders converted approximately $11.4 million and $10.7
million, respectively, of the 4% Convertible Subordinated Notes due June 15,
2005 ("2005 Notes") into common stock. The value of stock issued in business
combinations for the nine months ended October 31, 2001 and 2000 was
approximately $14.3 million and $23.2 million, respectively. The Company
recorded a tax benefit from stock options of $13.8 million and $0 during the
nine months ended October 31, 2001 and 2000, respectively.

   During the quarter ended October 31, 2001, the Company issued an unsecured
advance, pursuant to an employment agreement with William T. Coleman III
entered into in September 1999, of $5.0 million bearing interest at 7 percent
per annum which is included in other current assets. The Company anticipates
that the advance will be repaid to the Company no later than October 31, 2002.
In November 2001, the Company entered into a new employment agreement with Mr.
Coleman and in connection therewith issued a full recourse secured line of
credit of $25.0 million to him. No borrowings are outstanding under the line of
credit at this date.

   In addition, the Company has notes receivable from two other executives
which total $2.1 million and $700,000 as of October 31, 2001 and January 31,
2001, respectively.

                                      8

<PAGE>

                               BEA SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 3. Net Income (Loss) Per Share

   Basic net income (loss) per share is computed based on the weighted average
number of shares of the Company's common stock outstanding less shares subject
to repurchase. Diluted net income (loss) per share is computed based on the
weighted average number of shares of the Company's outstanding common stock and
common equivalent shares (stock options and convertible notes), if dilutive.
The treasury stock method is used to calculate the dilution effect of stock
options. The as-if-converted method is used to calculate the dilution effect of
the 2005 Notes and the $550 million 4% Convertible Subordinated Notes due
December 15, 2006 ("2006 Notes").

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

<TABLE>
<CAPTION>
                                                                     Three months ended   Nine months ended
                                                                         October 31,         October 31,
                                                                     ------------------  ------------------
                                                                       2001      2000      2001      2000
                                                                     --------  --------  --------  --------
<S>                                                                  <C>       <C>       <C>       <C>
Numerator:
   Numerator for basic net income (loss) per share:
       Net income (loss)............................................ $(90,863) $  8,243  $(46,284) $ (1,871)
   Numerator for diluted net income (loss) per share:
       Interest and amortization charges for 2005 Notes, net of
         taxes......................................................       --        80        --        --
                                                                     --------  --------  --------  --------
       Net income (loss) available to common shareholders........... $(90,863) $  8,323  $(46,284) $ (1,871)
                                                                     ========  ========  ========  ========
Denominator:
   Denominator for basic net income (loss) per share:
       Weighted average shares outstanding..........................  398,124   381,283   394,971   375,339
       Weighted average shares subject to repurchase................     (154)     (333)     (111)   (1,226)
                                                                     --------  --------  --------  --------
       Denominator for basic net income (loss) per share,
         weighted average shares outstanding........................  397,970   380,950   394,860   374,113
       Weighted average dilutive potential common shares:
          Options and shares subject to repurchase..................       --     2,120        --        --
          Convertible shares on the 2005 Notes......................       --    47,520        --        --
                                                                     --------  --------  --------  --------
Denominator for diluted net income (loss) per share.................  397,970   430,590   394,860   374,113
                                                                     ========  ========  ========  ========
Basic and diluted net income (loss) per share....................... $  (0.23) $   0.02  $  (0.12) $  (0.01)
                                                                     ========  ========  ========  ========
</TABLE>

   The computation of diluted net loss per share for the three months ended
October 31, 2001 excludes the impact of options to purchase approximately 43.3
million shares of common stock, approximately 154,000 shares of common stock
subject to repurchase, and the conversion of the 2006 Notes, which are
convertible into approximately 15.9 million shares of common stock, as the
impact would be antidilutive.

   The computation of diluted net loss per share for the nine months ended
October 31, 2001 excludes the impact of options to purchase approximately 41.8
million shares of common stock, approximately 111,000 shares of common stock
subject to repurchase, the conversion of the 2005 Notes, which were convertible
into 1.2 million shares of common stock, and the conversion of the 2006 Notes,
which are convertible into approximately 15.9 million shares of common stock,
as the impact would be antidilutive.

                                      9

<PAGE>

                               BEA SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The computation of diluted net income per share for the three months ended
October 31, 2000 excludes the impact of the conversion of the 2006 Notes, which
are convertible into approximately 15.9 million shares of common stock, as the
impact would be antidilutive.

   The computation of diluted net loss per share for the nine months ended
October 31, 2000 excludes the impact of options to purchase approximately 47.2
million shares of common stock, approximately 1.2 million shares of common
stock subject to repurchase, the conversion of the 2005 Notes which were
convertible into approximately 1.9 million shares of common stock, and the
conversion of the 2006 Notes, which are convertible into approximately 15.9
million shares of common stock, as the impact would be antidilutive.

Note 4. Business Combinations

   In July 2001, the Company acquired 100 percent of the equity of CrossGain
Corporation ("CrossGain") for total consideration of $25.1 million, comprising
$10.8 million in cash and $14.3 million in common stock and stock options.
Approximately $6.5 million of consideration is contingent upon the continued
employment of certain employees. These amounts, if earned, will be recorded as
compensation expense. The Company recorded the business combination in
accordance with the accounting guidance set out in FAS 141 and 142.

   The cost of acquisition was allocated as follows (in thousands):

<TABLE>
       <S>                                                       <C>
       Goodwill................................................. $15,625
       Deferred compensation....................................   6,505
       Intangible assets........................................   4,800
       Net tangible assets......................................   2,080
       Deferred tax liability...................................  (3,922)
                                                                 -------
                                                                 $25,088
                                                                 =======
</TABLE>

   The operating results of CrossGain prior to the acquisition were immaterial
and would not have materially altered the results of the Company if presented
on a pro forma basis. The operating results of CrossGain subsequent to the
acquisition date of July 17, 2001 are included in the Company's condensed
consolidated statements of operations and comprehensive income (loss).

Note 5. Facilities Consolidation and Other Charges and Subsequent Event

   During the quarter ended October 31, 2001, the Company approved a plan to
consolidate certain facilities in regions including the United States, Canada,
and Germany. The facilities consolidation charge of $20 million has been
calculated using management's best estimates and is based upon the remaining
future lease commitments and brokerage fees for vacant facilities from the date
of facility consolidation, net of estimated future sublease income. The
facilities consolidation charge also includes the write-off of $2.2 million of
leasehold improvements. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market
information and trend analyses provided by a commercial real estate brokerage
firm retained by the Company. Actual future cash requirements may differ
materially from the reserve balance at October 31, 2001, particularly if
estimated sublease income is significantly different. As of October 31, 2001,
$17.8 million of lease termination costs, net of anticipated sublease income,
remains accrued and is expected to be utilized by fiscal 2012.

   Subsequent to October 31, 2001, the Company announced its plan to reduce its
workforce by approximately 9 to 10 percent. The Company expects to incur
approximately $15.0 million to $20.0 million in total severance charges during
the quarter ended January 31, 2002, the substantial majority of which was
incurred in November 2001.

                                      10

<PAGE>

                               BEA SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following table provides a summary of the accrued facilities
consolidation and other charges (in thousands):

<TABLE>
<CAPTION>
                                              Facilities    Other
                                             Consolidation Charges  Total
                                             ------------- ------- -------
     <S>                                     <C>           <C>     <C>
     Accrued at July 31, 2001...............    $    --     $  --  $    --
     Charges accrued during the quarter.....     20,000       666   20,666
     Write-off of leasehold improvements....     (2,152)       --   (2,152)
     Cash payments during the quarter.......         --      (320)    (320)
                                                -------     -----  -------
     Accrued at October 31, 2001............    $17,848     $ 346  $18,194
                                                =======     =====  =======
</TABLE>

Note 6. Impairment of Certain Acquired Intangible Assets and Goodwill

   In the third quarter ended October 31, 2001, the Company recorded asset
impairment charges totaling $80.1 million against certain acquired intangible
assets and goodwill, $7.1 million of which is included in cost of revenues and
$73.0 million of which is included in operating expenses. The acquired
intangible assets and goodwill that were impaired originated primarily from the
acquisitions of The Theory Center, Inc. ("TTC") in November 1999 and Bauhaus
Technologies, Inc. ("Bauhaus") in October 2000.

   During the third quarter, the Company observed indicators that the acquired
intangible assets and goodwill from TTC and Bauhaus were impaired and,
accordingly, performed an assessment for impairment under FAS 121. During the
quarter ended October 31, 2001, the Company made product and strategic changes
that significantly decreased the importance and value of the technology
acquired from TTC.

   The conclusion of the assessment for impairment under FAS 121 was that the
decline in value of the TTC and Bauhaus intangible assets was significant and
other than temporary. In accordance with FAS 121, the fair values of the TTC
and Bauhaus intangible assets were determined based on discounted future cash
flows for the operating entities that had separately identifiable cash flows.
The cash flow periods used were 39 months for TTC and 51 months for Bauhaus.
The discount rates were 30% for TTC and 20% for Bauhaus. The assumptions
supporting the estimated future cash flows reflect management's best estimates.

   The impairment charge, measured as the amount by which the carrying amounts
exceeded the present value of the estimated future cash flows, was as follows
(in millions):

<TABLE>
      <S>                                                           <C>
      TTC.......................................................... $64.5
      Bauhaus......................................................  10.0
      Other........................................................   5.6
                                                                    -----
                                                                    $80.1
                                                                    =====
</TABLE>

Note 7. Long-Term Restricted Cash

   During the first quarter of fiscal 2002, the Company entered into a lease
agreement for the lease of approximately 40 acres of land adjacent to the
Company's San Jose, California headquarters to construct additional corporate
offices and research and development facilities. The lease has an initial term
of five years with renewal options. Rent obligations commence approximately at
the beginning of the third year. The total approximate minimum lease payments
for the next five years are currently estimated to be approximately $0 in
fiscal 2002 and 2003 and $12.1 million in fiscal 2004, 2005 and 2006,
respectively. The minimum lease

                                      11

<PAGE>

                               BEA SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

payments will fluctuate from time to time depending on short-term interest
rates. The Company has an option to purchase the land at the end of the term of
the lease for the lesser of $331 million, the outstanding lease balance, or
prior to the end of the lease, to arrange for the sale of the property to a
third party with the Company retaining an obligation to the owner for the
difference between the sales price and the guaranteed residual value up to
$328.7 million if the sales price is less than this amount, subject to certain
provisions of the lease. As part of the lease agreement, the Company must
maintain a minimum restricted cash balance consisting of United States
government securities as defined in the lease, which was $120.6 million as of
October 31, 2001. This amount represents collateral for specified obligations
to the lessor under the lease. The cash is restricted as to withdrawal and is
managed by a third party subject to certain limitations. The Company must
maintain certain covenants, as defined in the lease.

Note 8. Accumulated Other Comprehensive Loss

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

<TABLE>
<CAPTION>
                                                  October 31, January 31,
                                                     2001        2001
                                                  ----------- -----------
      <S>                                         <C>         <C>
      Foreign currency translation adjustment....   $(3,272)    $(1,175)
      Unrealized loss on available-for-sale
        investments, net of tax..................       (11)       (346)
                                                    -------     -------
      Total accumulated other comprehensive loss.   $(3,283)    $(1,521)
                                                    =======     =======
</TABLE>

Note 9. Share Repurchase Program

   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 repurchased shares will be used for general corporate purposes, including
the share issuance requirements of the Company's employee stock option and
purchase plans. An insignificant number of shares have been repurchased through
October 31, 2001.

Note 10. Preferred Stock Rights Plan

   In September 2001, the Board of Directors approved a Preferred Stock Rights
Plan which has the anti-takeover effect of causing substantial dilution to a
person or group that attempts to acquire the Company on terms not approved by
the Board of Directors. Under the Plan, the Company issued a dividend of one
right for each share of the Company's common stock, par value of $0.001 per
share, held by stockholders of record as of the close of business on October
12, 2001. Each right will initially entitle stockholders to purchase a
fractional share of the Company's preferred stock for $150.00. The rights are
not immediately exercisable and will become exercisable only upon the
occurrence of certain events. If a person or group acquires, or announces a
tender or exchange offer that would result in the acquisition of, 15 percent or
more of the Company's common stock while the stockholder rights plan remains in
place, the rights will become exercisable, unless redeemed for $0.001 per
right, by all rights holders except the acquiring person or group, for shares
of the Company or of the third party acquirer having a value of twice the
rights' then-current exercise price.

Note 11. Common Stock

   During the nine months ended October 31, 2001, the Company issued $14.3
million of common stock and stock options in connection with the acquisition of
CrossGain (see Note 4.), converted $11.4 million of the 2005 Notes, received
$28.5 million in proceeds resulting from the exercise of employee stock
options, received $17.4 million from purchases under the Company's employee
stock purchase plan, and recorded a tax benefit on stock options of $13.8
million.

                                      12

<PAGE>

                               BEA SYSTEMS, INC.

       NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 12. Commitments and Contingencies

  Litigation and other claims

   The Company is subject to legal proceedings and other claims that arise 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 financial position, results of operations, or liquidity
of the Company, the ultimate outcome of any litigation or claim is uncertain,
and the impact of an unfavorable outcome could be material to the Company.

  Employer payroll taxes

   The Company is subject to employer payroll taxes when employees exercise
stock options. These payroll taxes are assessed on the stock option gain, which
is the difference between the common stock price on the date of exercise and
the exercise price. The tax rate varies depending upon the employees' taxing
jurisdiction. The timing and amount of employer payroll taxes is directly
related to the timing and number of options exercised by employees, the gain
thereon and the tax rate in the applicable jurisdiction. For the three and nine
months ended October 31, 2001, the Company recorded employer payroll taxes
related to stock option exercises of approximately $227,000 and $2.3 million,
respectively. For the three and nine months ended October 31, 2000, the Company
recorded employer payroll taxes related to stock option exercises of
approximately $3.1 million and $8.5 million, respectively. Because the Company
is unable to predict these employer payroll taxes, the Company is unable to
predict what, if any, expense will be recorded in a future period.

                                      13

<PAGE>

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. ("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, 2001, and subsequent SEC filings. 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,"
"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 operating results, the extension of computer systems to the Internet,
opportunity for expansion of our business, additional acquisitions or licensing
of technology, seasonality of orders, continuation of certain products and
services accounting for a majority of revenues, continued investment in product
development, product releases, growth in markets, consolidation among
companies, investing in sales channels and marketing programs, increases in
sales and marketing expenses and research and development expenses, devoting
substantial resources to product development, expected amortization of
goodwill, continuing to make additional acquisitions, satisfaction of cash
requirements, the effects of the adoption of new accounting pronouncements, the
establishment of product distribution arrangements, the increase in staff and
the improvement in financial reporting and controls, the fluctuation of lease
payments, the commencement of construction and the obtaining of financing, the
evaluation of realizability of deferred tax assets, the costs of abandoning
leased facilities and the incurrence of severance charges. 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 "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 BEA as of the date thereof, and BEA
assumes no obligation to update any forward-looking statement or risk factors.

Overview

   BEA is a leading provider of application infrastructure software that helps
companies of all sizes build e-business systems that extend investments in
existing computer systems and provide the foundation for running a successful
integrated e-business. 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 allies
and distributors. Our products have been adopted in a wide variety of
industries, including telecommunications, commercial and investment banking,
securities trading, software, airlines, services, retail, manufacturing,
package delivery, insurance and government. The BEA WebLogic E-Business
Platform(TM) provides application infrastructure for building an integrated
e-business, allowing customers to integrate private client/server networks, the
Internet, intranets, extranets, 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, Web-based
banking, Internet sales, supply chain management, 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 a per-user basis.

   Our core business has been providing application infrastructure for
e-business systems and high-volume transaction systems, such as Web-based
retail sites, enterprise resource planning ("ERP") systems, inventory systems,
telecommunications billing applications, commercial bank ATM networks and
account management systems, credit card billing systems, and securities trading
account management systems. These Web-based and distributed systems must be
highly available, scale to process high transaction volumes and accommodate
large

                                      14

<PAGE>

numbers of users. As the Internet and e-business continue to develop and become
more richly integrated, systems that historically had been strictly internal
are now being extended to the Internet, such as ERP, inventory, and sales force
automation systems.

   We provide the BEA WebLogic E-Business Platform, which is designed to
address this demand and allow companies to quickly connect business processes,
link enterprise and e-commerce applications, and share information across the
enterprise and the Internet. The BEA WebLogic E-Business Platform combines
application server, Web Services, integration, and portal technologies into a
powerful single, integrated, standards-based application infrastructure
solution. The BEA WebLogic E-Business Platform is currently composed of BEA
WebLogic Server(TM), BEA WebLogic Integration(TM) and BEA WebLogic Portal(TM).
BEA WebLogic Server is the market-leading web application server, providing
J2EE services to Web-based applications and also supporting Web services. Web
Services are a set of software components that allow companies to share
applications, business logic, and syndication services from multiple sources
without having to develop the applications themselves or "hard wire"
connections to trading partners who host these applications. BEA WebLogic
Server 6.1 seamlessly bridges J2EE and Web Services by enabling developers to
automatically deploy Enterprise JavaBeans ("EJBs") as Web Services with no
additional programming. BEA WebLogic Server 6.1, which became generally
available in July 2001, supports key Web Services standards, including Simple
Object Access Protocol ("SOAP"), Web Services Description Language ("WSDL") and
Universal Description, Discovery and Integration ("UDDI"). BEA WebLogic
Integration, which became generally available in July 2001, supports standards
such as J2EE Connection Architecture ("J2EE CA"), ebXML, RosettaNet, and Java
Messaging Services, bringing a standards-based approach to the integration
market. BEA WebLogic Integration is the industry's first offering that delivers
application server, enterprise application integration ("EAI"), data
integration, business process management, and B2B integration functionality.
BEA WebLogic Portal, which became generally available in October 2001, includes
portal technologies, user tools, and partner applications to more easily and
cost-effectively deploy e-business portals for employees, customers, partners
and suppliers. This framework technology makes it possible for an enterprise to
deploy all applications with a common, personalized interface for customers,
partners and employees, simplifying and improving their experience while
lowering administrative costs and centralizing customer utilization
information. BEA WebLogic Portal is based on BEA WebLogic Server and includes
an extensive set of features and enabling technologies, including portal
configuration tools, a rules-based entitlement engine, reusable presentation
software components, and a standards-based framework that supports J2EE CA and
Web Services.

   Seasonality. As is common in the software industry, we believe that our
fourth quarter orders have in the past been favorably impacted by a variety of
factors, including year-end capital purchases by large corporate customers and
the commission structure for our sales force. This increase typically results
in first quarter customer orders being lower than orders received in the
immediately preceding fourth quarter. We anticipate that this seasonal impact
on the first quarter is likely to continue. However, it is likely that seasonal
patterns will be disrupted by the current slowdown in the economy generally and
IT spending. In particular we believe that given this slowdown, the favorable
impact, if any, of these factors on our fiscal 2002 fourth quarter may be less
than in the past. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Impact Future Operating
Results--Significant unanticipated fluctuations in our actual or anticipated
quarterly revenues and operating results may prevent us from meeting securities
analysts' or investors' expectations and may result in a decline in our stock
price."

   Investment in Distribution Channels. In August 2000, we announced a major
planned investment in expansion of our indirect distribution network through
stronger relationships with SIs, ISVs, application service providers ("ASPs"),
system platform companies, and distributors. These investments have resulted in
an increase in expenses, especially in sales and marketing. Although we have
invested in our direct and indirect distribution channels more slowly in
response to economic conditions, we expect that we will increase our investment
in the future in anticipation of economic recovery.

   Service Revenues as a Percentage of Total Revenues. Since the quarter ended
April 30, 2000, consulting revenues as a percentage of total revenues have
declined as a percentage of revenues. In early 2000, we believed

                                      15

<PAGE>

that our customer base was in the process of transitioning to mission-critical
applications based on Java, EJB, and CORBA programming models, but that
customers and consultants typically did not have sufficient numbers of system
architects and application developers experienced in building large, reliable
systems on these programming models. Although our long-term strategy was to
partner with SIs to provide these services to customers and to train customers'
information technology departments, we adopted a temporary strategy of
providing these consulting services ourselves. We believed that by providing
our customers with additional services, especially in architecting, building
and deploying Java, EJB and CORBA systems, we could help facilitate customers'
deployment of systems based on our platform products. An important element of
our strategy of investing in an indirect distribution channel, announced in
Summer 2000, is to supplement our service offerings through relationships with
SIs and other strategic partners, allowing us to focus on architecture services
and increase the number of projects available for licensing our products
through SIs' application development efforts. As a result of this strategy, we
and our partners have trained 9,000 developers on our technologies since August
2000. In addition, we believe that our customer base has increased the number
of developers skilled in Java, EJB and CORBA technologies. Due to the increased
number of trained developers at partners and customers, as well as decreased
demand for consulting services due to both the economic slowdown and the
increase in customer capabilities, consulting revenues as a percentage of total
revenues have decreased since the April 30, 2000 quarter and have decreased in
dollars every quarter since the July 2000 quarter. We intend to continue
investing in these indirect distribution channel programs. Investment in these
efforts results in immediate expenses, although the return on such investment,
if any, is not anticipated to occur until future periods. These expenses
adversely affect our operating results in the short-term, and also in the
long-term if the anticipated benefits of such investments do not materialize.

   Product Development. In the first three quarters of fiscal 2002, we
continued to invest in product development, including in the areas of
integration, portal, Web services, development tools, and new features of our
BEA WebLogic Server. Our planned investment in product development and
enhancements may affect our anticipated overall financial results, particularly
research and development expense as a percentage of total revenues, and may
create product transition concerns in our customer base. In addition,
investment in these projects results in an immediate increase in expenses,
especially in research and development, although the return on such investment,
if any, is not anticipated to occur until future periods. These expenses
adversely affect our operating results in the short-term, and also in the
long-term if the anticipated benefits of such investments do not materialize.

   Acquisitions. Since our inception, we have acquired several companies and
products, as well as distribution rights to products. Through these
acquisitions, we have added additional product lines, additional functionality
to our existing products, additional direct distribution capacity and
additional service capacity. These acquisitions have resulted in significant
charges to our operating results in the periods in which the acquisitions were
completed and have added intangible assets to our balance sheet, the values of
which are being amortized and charged to our operating results over periods
ranging from two to five years after completion of the acquisitions. Our
management views the markets for our products as growing and evolving, and that
companies serving those markets are consolidating. This presents an opportunity
for us to further expand our products and functionality, distribution capacity
and service offerings and to add new products. We anticipate that we may make
additional, perhaps material, acquisitions in the future. The timing of any
such acquisition is impossible to predict and the charges associated with any
such acquisition could materially adversely affect our results of operations,
beginning in the periods in which any such acquisition is completed.

   Employer Payroll Taxes. We are subject to employer payroll taxes when
employees exercise stock options. These payroll taxes are assessed on the stock
option gain, which is the difference between the common stock price on the date
of exercise and the exercise price. The tax rate varies depending upon the
employees' taxing jurisdiction. The timing and amount of employer payroll taxes
is directly related to the timing and number of options exercised by employees,
the gain thereon and the tax rate in the applicable jurisdiction. Employer
payroll tax expense incurred by us resulting from employee exercises of stock
options totaled $3.1 million and $8.5 million, respectively, for the three and
nine months ended October 31, 2000 and $227,000 and $2.3 million,

                                      16

<PAGE>

respectively, for the three and nine months ended October 31, 2001. Because we
are unable to predict how many stock options will be exercised, at what price
and in which country, we are unable to predict what, if any, expense will be
recorded in a future period.

Results of Operations

  Three and nine months ended October 31, 2001 and 2000

   Revenues

   Our revenues are derived from fees for software licenses, and services,
which includes customer support, education and consulting. Total revenues
decreased 2.0 percent to $219.6 million in the quarter ended October 31, 2001
from $224.0 million in the same quarter of the prior fiscal year. Total
revenues increased 32.1 percent to $744.6 million in the nine months ended
October 31, 2001 from $563.7 million in the same period of the prior fiscal
year. The decrease in revenues in the third quarter of fiscal 2002 compared to
the same quarter in the prior fiscal year is due to the economic downturn and
the effects of terrorist activities. The growth for the nine months ended
October 31, 2001 compared to the same period in the prior fiscal year reflects
significant increases in sales of our WebLogic(R) products and growth in our
customer support revenues.

   License Revenues. License revenues decreased 1.2 percent to $126.6 million
in the quarter ended October 31, 2001 from $128.2 million in the same quarter
of the prior fiscal year. License revenues increased 44.8 percent to $460.0
million in the nine months ended October 31, 2001 from $317.6 million in the
same period of the prior fiscal year. The quarter on quarter decrease is due to
the economic downturn and the effects of the terrorist activities. The increase
over the nine month period was mainly due to the continued adoption of our BEA
WebLogic Server as well as the adoption of other products in our WebLogic
E-Business Platform, expansion of our direct sales force, introduction of new
products and new versions of existing products, and expansion of our partner
programs. License revenues as a percentage of total revenues increased from
57.2 percent in the third quarter of fiscal 2001 to 57.7 percent in the third
quarter of fiscal 2002 and increased from 56.3 percent in the nine months ended
October 31, 2000 to 61.8 percent in the nine months ended October 31, 2001.
This percentage increase was attributable to increased sales of software
licenses and a decline in consulting service revenues, offset by increases in
support revenues.

   Service Revenues. Service revenues decreased 2.9 percent to $93.0 million in
the quarter ended October 31, 2001 from $95.8 million in the same quarter of
the prior fiscal year. Service revenues increased 15.6 percent to $284.5
million in the nine months ended October 31, 2001 from $246.1 million in the
same period of the prior fiscal year. The increase in revenues for the nine
months ended October 31, 2001 compared to the same period in the prior fiscal
year was mainly attributable to the growth in the customer support portion of
our service business. Support revenues increased to $62.2 million for the
quarter ended October 31, 2001 from $37.8 million in the same quarter of the
prior fiscal year. Support revenues also increased to $173.5 million in the
nine months ended October 31, 2001 from $90.4 million in the same period of the
prior fiscal year. This was driven by maintenance renewals on our existing
installed base of software licenses as well as new maintenance contracts sold
together with our increased sales of software licenses. Service revenues as a
percentage of total revenues decreased from 42.8 percent in the third quarter
of fiscal 2001 to 42.3 percent in the third quarter of fiscal 2002 and
decreased from 43.7 percent in the nine months ended October 31, 2000 to 38.2
percent in the nine months ended October 31, 2001, as we executed our strategy
to increase our focus on using strategic partners to provide services related
to the deployment and use of our software products. As a result of the
increased focus on strategic partners and the impact of the general worldwide
economic slowdown and terrorist activities, we experienced a slowdown in the
growth rate of our service revenues, particularly revenue derived from our
lower margin consulting services. Consulting and education revenues decreased
to $30.8 million for the quarter ended October 31, 2001 from $58.0 million in
the same quarter of the prior fiscal year. Consulting and education revenues
also decreased to $111.0 million in the nine months ended October 31, 2001 from
$155.7 million in the same period of the prior fiscal year.

                                      17

<PAGE>

   International Revenues. International revenues accounted for $112.0 million
or 51.0 percent of total revenue in the quarter ended October 31, 2001 compared
with $91.0 million or 40.6 percent in the same quarter of the prior fiscal
year. The increase in international revenue as a percentage of total revenue is
due to reduced revenue in the U.S. in the quarter ended October 31, 2001 as a
result of terrorist activities. For the nine months ended October 31, 2001 and
2000, international revenues accounted for $342.8 million or 46.0 percent of
total revenues and $232.9 million or 41.3 percent of total revenues,
respectively. Revenues from the European, Middle East and Africa region
("EMEA") and Asia/Pacific region ("APAC") increased in the third quarter of
fiscal 2002 to $70.9 million and $34.4 million, respectively, from $60.4
million and $28.0 million in the same quarter of the prior fiscal year. For the
nine months ended October 31, 2001, revenues from EMEA and APAC increased to
$224.9 million and $99.7 million, respectively, from $163.2 million and $63.6
million, respectively, in the same period of the prior fiscal year. Revenues
from EMEA represented 32.3 percent of total revenues in the third quarter of
fiscal 2002, compared with 27.0 percent in the same quarter of the prior fiscal
year. For the nine months ended October 31, 2001 and 2000, revenues for EMEA
represented 30.2 percent and 29.0 percent, respectively, of total revenues.
Revenues from APAC represented 15.7 percent of total revenues in the third
quarter of fiscal 2002, compared with 12.5 percent in the same quarter of the
prior fiscal year. For the nine months ended October 31, 2001 and 2000,
revenues for APAC represented 13.4 percent and 11.3 percent, respectively, of
total revenues.

  Cost of Revenues

   Total cost of revenues decreased 14.5 percent to $60.8 million in the
quarter ended October 31, 2001 from $71.0 million in the same quarter of the
prior fiscal year. Total cost of revenues decreased 2.4 percent to $183.3
million in the nine months ended October 31, 2001 from $187.8 million in the
same period in the prior fiscal year. Total cost of revenues as a percentage of
total revenues decreased from 31.7 percent in the quarter ended October 31,
2000 to 27.7 percent in the quarter ended October 31, 2001. For the nine months
ended October 31, 2001 total cost of revenues as a percentage of total revenues
decreased to 24.6 percent from 33.3 percent in the same period in the prior
fiscal year. These decreases were primarily due to decreases in our lower
margin consulting service revenues. As a result, service revenues have
decreased as a percentage of total revenues and also consulting revenues have
decreased as a percentage of total service revenues. A decrease in amortization
charges included in cost of revenues also contributed to the decrease in cost
of revenues as a percentage of total revenues. These decreases were offset by
additional expenses from the impairment of acquired intangible assets in the
quarter ended October 31, 2001.

   Cost of Licenses. Cost of licenses includes royalties and license fees paid
to third parties, expenses related to the purchase of compact discs, costs
associated with transferring our software to electronic media, the printing of
user manuals, packaging and distribution costs and localization costs. Cost of
licenses decreased by $335,000 to $4.6 million in the quarter ended October 31,
2001 from $4.9 million in the same quarter of the prior fiscal year. Cost of
licenses increased by $3.1 million to $16.3 million in the nine months ended
October 31, 2001 from $13.2 million in the same period in the prior fiscal
year. Cost of licenses represented 3.6 percent and 3.8 percent of license
revenues in the third quarter of fiscal 2002 and 2001, respectively. For the
nine months ended October 31, 2001 and 2000, cost of licenses represented 3.5
percent and 4.1 percent, respectively, of license revenues. These decreases as
a percentage of revenues are primarily due to a decline in third party
royalties and license fees.

   Cost of Services. Cost of services consists primarily of salaries and
benefits for consulting, education and product support personnel. Cost of
services decreased 23.7 percent to $42.5 million in the quarter ended October
31, 2001 from $55.7 million in the same quarter of the prior fiscal year. For
the nine months ended October 31, 2001, cost of services decreased 2.1 percent
to $140.9 million from $144.0 million in the same period in the prior fiscal
year. Cost of services represented 45.7 percent and 58.1 percent of service
revenues in the third quarters of fiscal 2002 and 2001, respectively. For the
nine months ended October 31, 2001 and 2000, cost of services represented 49.5
percent and 58.5 percent, respectively, of service revenues. Cost of services
in absolute dollars and as a percentage of service revenues has decreased due
to a higher mix of higher margin support revenues versus lower margin
consulting and education revenues. Consulting and education revenues

                                      18

<PAGE>

were 33.1 percent of total service revenues for the quarter ended October 31,
2001, down from 60.5 percent in the same quarter of the prior fiscal year. For
the nine months ended October 31, 2001 and 2000, consulting and education
revenues were 39.0 percent and 63.2 percent, respectively, of service revenues.

   Amortization of Certain Acquired Intangible Assets included in Cost of
Revenues. The amortization of certain acquired intangible assets, consisting
primarily of developed technology, non-compete agreements, assembled workforce,
customer lists, trademarks and trade names, totaled $6.6 million and $10.4
million in the third quarter of fiscal 2002 and 2001, respectively. For the
nine months ended October 31, 2001 and 2000, amortization of certain acquired
intangible assets decreased to $19.0 million from $30.6 million, respectively.
These decreases were primarily due to a portion of our acquired intangible
assets becoming fully amortized in fiscal 2001. In the future, amortization
expense associated with intangible assets recorded prior to October 31, 2001 is
currently expected to total approximately $7.0 million for fourth quarter of
fiscal 2002 and $14.1 million, $1.6 million and $129,000 for the fiscal years
ending January 31, 2003, 2004 and 2005, respectively. The expected amortization
subsequent to January 31, 2002 excludes assembled workforce amortization which
will no longer be amortized effective February 1, 2002 (see Effect of New
Accounting Pronouncements below). We periodically review the estimated
remaining useful lives of our intangible assets. A reduction in our estimate in
remaining useful lives, if any, could result in increased amortization expense
in future periods.

  Operating Expenses

   Sales and Marketing. 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. Sales and marketing expenses increased 5.4 percent
to $93.6 million in the third quarter of fiscal 2002 from $88.8 million in the
same quarter of the prior fiscal year. In addition, sales and marketing
expenses increased 30.8 percent to $306.8 million in the nine months ended
October 31, 2001 from $234.5 million in the same period of the prior fiscal
year. These increases were due to the expansion of our sales force and an
increase in marketing personnel and advertising campaigns to build brand
awareness. Sales and marketing expenses increased as a percentage of total
revenues to 42.6 percent in the third quarter of fiscal 2002 from 39.7 percent
in the third quarter of fiscal 2001 and decreased to 41.2 percent in the nine
months ended October 31, 2001 from 41.6 percent in the nine months ended
October, 31, 2000.

   Research and Development. 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. Total expenditures for research and
development increased 27.4 percent to $29.7 million in the third quarter of
fiscal 2002 from $23.3 million in the same quarter of the prior fiscal year.
Research and development expenses also increased 42.3 percent to $90.7 million
in the nine months ended October 31, 2001 from $63.7 million in the same period
of the prior fiscal year. These increases were due to an increase in product
development personnel and expenses associated with the development and release
of several new products and product versions. Research and development expenses
represented 13.5 percent and 10.4 percent of total revenues in the third
quarter of fiscal 2002 and 2001, respectively. For the nine months ended
October 31, 2001 and 2000, research and development expenses represented 12.2
percent and 11.3 percent of total revenues, respectively. We believe that a
significant level of research and development is required to remain competitive
and expect to continue to commit substantial resources to product development
and engineering in future periods.

   General and Administrative. General and administrative expenses include
costs for our human resources, finance, legal, information technology,
facilities and general management functions. General and administrative
expenses increased 19.8 percent to $19.0 million in the third quarter of fiscal
2002, up from $15.8 million in the same quarter of the prior fiscal year. For
the nine months ended October 31, 2001, general and administrative expenses
increased 45.2 percent to $57.1 million up from $39.3 million from the same
period of the prior fiscal year. These increases were due to the expansion of
our infrastructure, including information systems and

                                      19

<PAGE>

associated expenses necessary to manage our growth. General and administrative
expenses represented 8.6 percent and 7.1 percent of total revenues in the third
quarter of fiscal 2002 and 2001, respectively. For the nine months ended
October 31, 2001 and 2000, general and administrative expenses represented 7.7
percent and 7.0 percent of total revenues, respectively.

   Amortization of Goodwill. Amortization of goodwill decreased in the third
quarter of fiscal 2002 compared to the third quarter of fiscal 2001, due to
certain goodwill balances becoming fully amortized during fiscal 2002.
Amortization of goodwill totaled $11.8 million and $16.0 million in the third
quarters of fiscal 2002 and 2001, respectively. For the nine months ended
October 31, 2001 and 2000, amortization of goodwill totaled $43.0 million and
$42.5 million, respectively. In the future, amortization of goodwill balances
recorded prior to July 1, 2001 is currently expected to total approximately
$3.4 million for the fourth quarter of fiscal 2002. Commencing February 1,
2002, amortization of the net goodwill balance recorded as of January 31, 2002
will cease in accordance with Statement of Financial Accounting Standards No.
142 (see Effect of New Accounting Pronouncements below).

   Acquisition Related Charges. In connection with the acquisition of The
Workflow Automation Corporation in the first quarter of fiscal 2001, we
acquired and expensed the cost of a number of research projects that were in
process on the acquisition date, which amounted to $2.2 million.

   Other Charges

   Facilities Consolidation and Other Charges. During the quarter ended October
31, 2001, the Company approved a plan to consolidate certain facilities in
regions including the United States, Canada, and Germany. The facilities
consolidation charge of $20.0 million has been calculated using management's
best estimates and is based upon the remaining future lease commitments and
brokerage fees for vacant facilities from the date of facility consolidation,
net of estimated future sublease income. The facilities consolidation charge
also includes the write-off of $2.2 million of leasehold improvements. The
estimated costs of abandoning these leased facilities, including estimated
costs to sublease, were based on market information and trend analyses provided
by a commercial real estate brokerage firm retained by the Company. Actual
future cash requirements may differ materially from the reserve balance at
October 31, 2001, particularly if estimated sublease income is significantly
different. As of October 31, 2001, $17.8 million of lease termination costs,
net of anticipated sublease income, remains accrued and is expected to be
utilized by fiscal 2012.

   Subsequent to October 31, 2001, the Company announced its plan to reduce its
workforce by approximately 9 to 10 percent. The Company expects to incur
approximately $15.0 million to $20.0 million in total severance charges during
the quarter ended January 31, 2002, the substantial majority of which was
incurred in November 2001.

   The following table provides a summary of the accrued facilities
consolidation and other charges (in thousands):

<TABLE>
<CAPTION>
                                                Facilities    Other
                                               Consolidation Charges  Total
                                               ------------- ------- -------
   <S>                                         <C>           <C>     <C>
   Accrued at July 31, 2001...................    $    --     $  --  $    --
   Charges accrued during the quarter.........     20,000       666   20,666
   Write-off of leasehold improvements........     (2,152)       --   (2,152)
   Cash payments during the quarter...........         --      (320)    (320)
                                                  -------     -----  -------
   Accrued at October 31, 2001................    $17,848     $ 346  $18,194
                                                  =======     =====  =======
</TABLE>

   Impairment of Certain Acquired Intangible Assets and Goodwill. In the third
quarter ended October 31, 2001, the Company recorded asset impairment charges
totaling $80.1 million against certain acquired intangible assets and goodwill,
$7.1 million of which is included in cost of revenues and $73.0 million of
which is included

                                      20

<PAGE>

in operating expenses. The acquired intangible assets and goodwill that were
impaired primarily originated from the acquisitions of The Theory Center, Inc.
("TTC") in November 1999 and Bauhaus Technologies, Inc. ("Bauhaus") in October
2000.

   During the third quarter, the Company observed indicators that the acquired
intangible assets and goodwill from TTC and Bauhaus were impaired and,
accordingly, performed an assessment for impairment under FAS 121. During the
quarter ended October 31, 2001, the Company made product and strategic changes
that significantly decreased the importance and value of the technology
acquired from TTC.

   The conclusion of the assessment for impairment under FAS 121 was that the
decline in value of the TTC and Bauhaus intangible assets was significant and
other than temporary. In accordance with FAS 121, the fair values of the TTC
and Bauhaus intangible assets were determined based on discounted future cash
flows for the operating entities that had separately identifiable cash flows.
The cash flow periods used were 39 months for TTC and 51 months for Bauhaus.
The discount rates were 30% for TTC and 20% for Bauhaus. The assumptions
supporting the estimated future cash flows reflect management's best estimates.

   The impairment charge, measured as the amount by which the carrying amounts
exceeded the present value of the estimated future cash flows, was as follows
(in millions):

<TABLE>
       <S>                                                         <C>
       TTC........................................................ $64.5
       Bauhaus....................................................  10.0
       Other......................................................   5.6
                                                                   -----
                                                                   $80.1
                                                                   =====
</TABLE>

   Interest Income (Expense) and Other, Net

   Interest income (expense) and other, net decreased 201.9 percent to $(6.2)
million in the third quarter of fiscal 2002, down from $6.1 million in the same
quarter of the prior fiscal year. For the nine months ended October 31, 2001,
interest income (expense) and other, net decreased 25.6 percent to $11.7
million, down from $15.8 million for the same period of the prior fiscal year.

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

<TABLE>
<CAPTION>
                                                     Three       Three       Nine        Nine
                                                    Months      Months      Months      Months
                                                     Ended       Ended       Ended       Ended
                                                  October 31, October 31, October 31, October 31,
                                                     2001        2000        2001        2000
                                                  ----------- ----------- ----------- -----------
<S>                                               <C>         <C>         <C>         <C>
Interest income..................................    $11.9       $10.4      $ 36.7      $ 32.0
Interest expense.................................     (5.4)       (5.6)      (16.7)      (17.2)
Write-down of equity investments, net of gains...     (9.9)       (0.5)       (3.6)       (1.5)
Net other income (expense).......................     (2.8)        1.8        (4.7)        2.5
                                                     -----       -----      ------      ------
Total interest income (expense) and other, net...    $(6.2)      $ 6.1      $ 11.7      $ 15.8
                                                     =====       =====      ======      ======
</TABLE>

   The increase in interest income for both the quarter and nine months ended
October 31, 2001 over the same periods in the prior fiscal year is due to an
increase in the balance of funds invested, offset by lower returns on these
investments. The net gain of $17.4 million recorded by us in the nine months
ended October 31, 2001 is in accordance with agreements regarding the sale of
our investment in WebGain, Inc. ("WebGain") to WP Equity Partners, Inc., a
related party.

                                      21

<PAGE>

   Provision for Income Tax

   We have provided an income tax benefit of $4.3 million and income tax
expense of $6.9 million for the third quarter of fiscal 2002 and 2001,
respectively. For the nine months ended October 31, 2001 and 2000, we have
provided for income tax expense of $28.0 million and $11.4 million,
respectively. Excluding the impact of impairment charges of certain acquired
intangible assets and goodwill, the effective tax rate for the first nine
months of fiscal 2002 is 46 percent, which is greater than the U.S. federal
statutory rate of 35 percent primarily due to non-deductible goodwill
amortization, partially offset by the benefits of low taxed foreign earnings.
No income tax benefit has been recorded on impairment charges of certain
acquired intangible assets and goodwill recorded in the quarter. The income tax
expense provided for the nine months ended October 31, 2000 consisted primarily
of domestic minimum taxes, foreign withholding taxes and foreign income tax
expense incurred as a result of local country profits.

   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 operating performance and the reported cumulative net losses from
prior years, 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 intend to evaluate the realizability of the deferred tax assets
on a quarterly basis.

Liquidity and Capital Resources

   Cash, cash equivalents (excluding all restricted cash) and short-term
investments totaled $987.0 million, which increased from $940.9 million at
January 31, 2001.

   Cash generated from operating activities rose to $177.6 million in the nine
months ended October 31, 2001, compared with $142.3 million in the same period
in the prior fiscal year. The increase was primarily due to net income
excluding non-cash charges, which increased from $85.4 million in the nine
months ended October 31, 2000 to $139.7 million in the same period in the
current fiscal year, an increase of $54.3 million. This increase was partially
offset by an $18.6 million decrease in cash generated from changes in operating
assets and liabilities. Changes in operating assets and liabilities provided
$35.7 million of cash in the nine months ended October 31, 2001 versus $54.3
million in the same period in the prior fiscal year.

   Investing activities used $163.7 million of cash during the nine months
ended October 31, 2001, compared with $169.4 million of cash used in the same
period of the prior fiscal year. Cash used for investing activities in the nine
months ended October 31, 2001 was primarily for net purchases of short-term
investments of $106.6 million and capital expenditures of $44.2 million. Cash
used for investing activities in the nine months ended October 31, 2000 was
primarily for strategic acquisitions and equity investments in privately-held
companies amounting to an aggregate of $101.9 million, capital expenditures of
$29.5 million and net purchases of short-term investments of $37.6 million.

   We used $72.4 million of cash in financing activities in the nine months
ended October 31, 2001, compared with $51.6 million of cash generated in the
same period in the prior fiscal year. Cash used in financing activities in the
nine months ended October 31, 2001 primarily related to the increase in
restricted cash of $120.6 million, which was offset by proceeds of $48.9
million received from employee stock purchases and stock option exercises. The
primary source of cash from financing activities in the nine months ended
October 31, 2000 was proceeds of $59.5 million received from employee stock
purchases and stock option exercises.

   As of October 31, 2001, our outstanding short and long-term obligations were
$555.9 million, down from $577.4 million at January 31, 2001. At October 31,
2001, our outstanding obligations consisted of $550.0 million

                                      22

<PAGE>

of convertible notes and $5.9 million of other short-term and long-term
obligations. At January 31, 2001, our outstanding obligations consisted of
$561.4 million of convertible notes and $16.0 million of other short-term and
long-term obligations.

   During the first quarter of fiscal 2002, we entered into a lease agreement
for the lease of approximately 40 acres of land adjacent to our San Jose,
California headquarters to construct additional corporate offices and research
and development facilities. The lease has an initial term of five years with
renewal options. Rent obligations commence approximately at the beginning of
the third year. The total approximate minimum lease payments for the next five
years are currently estimated to be approximately $0 in fiscal 2002 and 2003
and $12.1 million in fiscal 2004, 2005 and 2006, respectively. The minimum
lease payments will fluctuate from time to time depending on short-term
interest rates. We have an option to purchase the land at the end of the term
of the lease for the lesser of $331 million, the outstanding lease balance, or
prior to the end of the lease, to arrange for the sale of the property to a
third party with us retaining an obligation to the owner for the difference
between the sales price and the guaranteed residual value up to $328.7 million
if the sales price is less than this amount, subject to certain provisions of
the lease. As part of the lease agreement, we must maintain a minimum
restricted cash balance consisting of United States government securities as
defined in the lease which was $120.6 million as of October 31, 2001. This
amount represents collateral for specified obligations to the lessor under the
lease. The cash is restricted as to withdrawal and is managed by a third party
subject to certain limitations. We must maintain certain covenants, as defined
in the lease.

   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 October 31, 2002. However, we
may make acquisitions or license products and technologies complementary to our
business and may need to raise additional capital through future debt or equity
financings to the extent necessary to fund any such acquisitions or licenses.
There can be no assurance that additional financing will be available, at all,
or on terms favorable to us.

Effect of New Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 establishes the
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measures those instruments at fair value.
We were required to adopt the provisions of FAS 133 effective February 1, 2001.
The adoption of FAS 133 did not have a material impact on our financial
position or results of operations.

   In June 2001, the FASB released Statements of Financial Accounting Standards
No. 141, Business Combinations ("FAS 141") and No. 142, Goodwill and Other
Intangible Assets ("FAS 142"). These statements become effective for fiscal
years beginning after December 15, 2001. Beginning in the first quarter of the
fiscal year ended January 31, 2003, goodwill will no longer be amortized but
will be subject to annual impairment tests. Most other intangible assets will
continue to be amortized over their estimated useful lives. The new rules also
require business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting and goodwill acquired after June 30,
2001 will not be amortized. Goodwill existing at June 30, 2001, will continue
to be amortized through the end of the fiscal year ended January 31, 2002.

   In connection with the transitional goodwill impairment evaluation under FAS
142, we will perform an assessment of goodwill impairment as of the date of
adoption--February 1, 2002. To accomplish this, we must identify our reporting
units and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units as of the date of adoption. We will then have up to
six months from the date of adoption to determine the fair value of each

                                      23

<PAGE>

reporting unit and compare it to the reporting unit's carrying amount. To the
extent that a reporting unit's carrying amount exceeds its fair value, an
indication exists that the reporting unit's goodwill may be impaired and we
must perform the second step of the transitional impairment test. In the second
step, we must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation in accordance with FAS 141, to its carrying amount, both of
which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the statement of
operations.

   As of the date of adoption of FAS 142 on February 1, 2002, we expect to have
an unamortized acquired intangible assets balance of approximately $15.8
million and an unamortized goodwill balance of approximately $38.3 million,
which includes the reclassification of assembled workforce to goodwill of
approximately $4.1 million, all of which will be subject to the transition
provisions of FAS 141 and 142. Transitional impairment losses that will be
required to be recognized upon adoption of FAS 141 and 142 are indeterminable
at this time.

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 may prevent us from meeting securities
  analysts' or investors' expectations and may result in a decline in our stock
  price

   Although we have experienced significant revenue growth in recent years,
this growth rate has declined substantially in recent quarters. In the quarter
ended October 31, 2001, our revenues declined. In addition, in our second
quarter earnings release in August 2001 and again in our third quarter earnings
announcements in November 2001, we revised downward our financial guidance for
revenue and earnings for the remainder of fiscal 2002. 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. Our
stock price is also subject to the 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 declines in the prices
of many such stocks from March 2000 through the present.

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

  .  recent adverse economic conditions, particularly within the technology
     industry, as well as economic uncertainties arising out of recent
     terrorist activities and related military and security actions, which have
     increased the likelihood that customers will unexpectedly delay, cancel or
     reduce the size of orders, resulting in revenue shortfalls;

  .  difficulty predicting the size and timing of customer orders, particularly
     as a greater percentage of our revenues has shifted from service revenues
     to license revenues;

  .  our ability to control costs and expenses, particularly in the face of
     current adverse economic conditions which may adversely impact our
     operating results;

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

                                      24

<PAGE>

  .  any increased price sensitivity by our customers, particularly in the face
     of current adverse economic conditions and increased competition;

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

  .  introduction or enhancement of our products or our competitors' products;

  .  changes in our competitors' product offerings and pricing policies, and
     customer order deferrals in anticipation of new products and product
     enhancements from us or our competitors;

  .  our ability to develop, introduce and market new products on a timely
     basis and whether any new products are accepted in the market;

  .  any slowdown in use of the Internet for business or commerce;

  .  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;

  .  the lengthy sales cycle for our products;

  .  technological changes in computer systems and environments;

  .  our ability to successfully expand our sales and marketing programs;

  .  our ability to meet our customers' service requirements;

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

  .  loss of key personnel; and

  .  fluctuations in foreign currency exchange rates.

   As a result of all of these factors, we believe that quarterly revenues and
operating results are difficult to forecast and that period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of trends or future performance.

   A material portion of our revenues has been derived from large orders, as
major customers deployed our products. Increases in the dollar size of some
individual license transactions would also increase the risk of fluctuation in
future quarterly results. The majority of our revenue originates from a large
number of small orders with the potential to turn into large deployments. If we
cannot generate large customer orders, turn development orders into 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, with the substantial majority of our orders typically received in the
last month of each fiscal quarter. As a result, we may not learn of revenue
shortfalls until late in a fiscal quarter, after it is too late to adjust
expenses for that quarter. Moreover, recent adverse economic conditions
worldwide, particularly those related to the technology industry and the
economic and political uncertainties arising out of recent terrorist activities
and related military and security actions, have increased the likelihood that
customers will unexpectedly delay, cancel or reduce orders, resulting in
revenue shortfalls. This risk is particularly relevant with respect to large
customer orders which are more likely to be cancelled, delayed or reduced and
also have a greater financial impact on our operating results. A number of
technology companies, particularly software companies that, like us, sell
enterprise-wide software solutions, have recently announced that these
conditions have adversely affected their financial results. Additionally, our
operating expenses are based in part on our expectations for future revenues
and are difficult to adjust in the short term. Any revenue shortfall below our
expectations could have an immediate and significant adverse effect on our
results of operations.

                                      25

<PAGE>

  Recent terrorist activities and related military and security operations
  could adversely affect our revenues and operations

   As a result of the recent terrorist activities and related military and
security operations, economic activity throughout the United States and much of
the world was substantially disrupted. This significantly adversely impacted
our operations and our ability to generate revenues. Any future terrorist
activities or any continued military or security operations involving the U.S.
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, and deferrals, reductions or cancellations of
customer orders for our products and services.

  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 components 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 operating system vendors such as IBM,
Sun Microsystems and Hewlett-Packard and database vendors such as Oracle. In
addition, Microsoft has released products that include some application server
functionality and has announced that it intends to include application server
and integration functionality in future versions of its operating systems. In
addition, certain application vendors, integration vendors and other companies
are developing or offering application server, integration and portal software
products and related services that directly 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. Finally, internal development groups within prospective customers'
organizations may develop software and hardware systems that may substitute for
those that we offer. A number of our competitors and potential competitors have
longer operating histories, significantly greater financial, technical,
marketing and other resources, greater name recognition and a larger installed
base of customers than we.

   Some of our principal competitors currently are also hardware vendors who
bundle their own application server and integration software products, or
similar products, with their computer systems and database vendors that
advocate client/server networks driven by the database server. IBM, Sun
Microsystems and Hewlett-Packard are the primary hardware vendors who offer a
line of application server and integration solutions for their customers. IBM's
sale of application server and integration functionality along with its IBM
proprietary hardware systems requires us to compete with IBM in its installed
base, where IBM has certain inherent advantages due to its significantly
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 functionality with computer hardware and software sales. Due to
these factors, if we do not sufficiently differentiate our products based on
functionality, interoperability with non-IBM systems, performance, total cost
of ownership, return on investment and reliability, and establish our products
as more effective solutions to customers' technological and economic needs, our
revenues and operating results will suffer.

   Microsoft has announced that it intends to include certain application
server and integration functionality in its .NET initiative. Microsoft's .NET
initiative is a proprietary programming environment that competes with the
Java-based environment of our products. A widespread acceptance of Microsoft's
 .NET initiative, 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 initiative and
the bundling of competing functionality in versions of Windows requires us to
compete 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

                                      26

<PAGE>

Microsoft's based on scalability, functionality, interoperability with
non-Microsoft platforms, performance, total cost of ownership, return on
investment 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 entry into the application server,
integration and Web Services markets or their proposed .NET alternative to Java
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.

  Our revenues are derived primarily from two main products and related
  services, and a decline in demand or prices for either products or services
  could substantially adversely affect our operating results

   We currently derive the majority of our license and service revenues from
BEA WebLogic, BEA Tuxedo(R) 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, BEA Tuxedo or related services, such as
a continued or worsened general economic slowdown, future terrorist activities
or military actions, competition, product performance or technological change,
could have a material adverse effect on our business and consolidated results
of operations and financial condition. As we have increased our focus on using
strategic partners to provide services related to the deployment and use of our
software solutions, we have experienced a slowdown in the growth rate of our
services revenue, particularly revenue derived from our consulting services.
This trend may continue, particularly if the recent industry-wide oversupply in
software infrastructure consultants further increases the willingness and
ability of our strategic partners to provide such services or if the current
economic slowdown continues or worsens. If this trend reverses, it may
adversely affect our overall operating margins since our services revenue
margins are lower than our product revenue margins. In addition, as we
introduce new versions of our two main products, such as BEA Tuxedo and
WebLogic Server, any delay or failure of such new versions to gain market
acceptance among new and existing customers would have an adverse affect on our
revenues and other operating results.

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

   As is common in the software industry, we believe that our fourth quarter
orders have in the past been favorably impacted by a variety of factors,
including year-end capital purchases by larger corporate customers and the
commission structure for our sales force. This increase typically results in
first quarter customer orders being lower than orders received in the
immediately preceding fourth quarter. We anticipate that this seasonal impact
on our first quarter is likely to continue. We also believe that given the
current economic slowdown and reductions in IT spending, the favorable impact,
if any, of these factors on our fiscal 2002 fourth quarter may be significantly
less than in the past.

  Changes in accounting regulations 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

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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,
("SOP 97-2") 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. In addition, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements ("SAB 101"). We adopted the provisions of SAB 101 in our fourth
fiscal quarter of 2001. 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.

  Any failure to maintain ongoing 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
expanding our direct sales force and in further establishing and expanding
relationships with distributors, ISVs, original equipment manufacturers
("OEMs") and SIs. In particular, in August 2000, we announced a significant
initiative to further establish and expand relationships with our distributors
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 Web application
servers in their products. It is possible that we will not be able to
successfully expand our direct sales force or other distribution channels,
secure agreements with additional SIs and ISVs on commercially reasonable terms
or at all, and otherwise adequately develop 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 complement our direct channels. 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,
that we will not be able to maintain an effective, long term relationship with
these third parties, and that these third parties will not successfully meet
the needs of our customers.

  It is difficult to predict our future results for a variety of reasons
  including our limited operating history and need to continue to integrate our
  acquisitions

   We were incorporated in January 1995 and therefore we have a relatively
limited operating history. We have generated revenues to date primarily from
sales of BEA WebLogic, a software product that we acquired in September 1998,
and from BEA Tuxedo, a software product to which we acquired worldwide
distribution rights in February 1996, and fees for software products and
services related to WebLogic and Tuxedo. We have also acquired a number of
additional businesses, technologies and products. Our limited operating history
and the need to continue to integrate a number of separate and independent
business operations subject our business to numerous risks. At October 31,
2001, we had an accumulated deficit of approximately $232.2 million. In
addition, in connection with certain acquisitions completed prior to October
31, 2001, we recorded approximately

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$528.5 million as intangible assets and goodwill of which approximately $464.0
million has been amortized as of October 31, 2001. In the third quarter of
fiscal 2002, we recorded asset impairment charges totaling $80.1 million
against certain acquired intangible assets and goodwill. If we acquire
additional businesses, products and technologies in the future, we may report
additional, potentially significant expenses, particularly in light of recent
changes in regulations governing how we account for such transactions. See
below "If we cannot successfully integrate our past and future acquisitions,
our revenues may decline and expenses may increase." If future events cause the
impairment of any intangible assets acquired in our past or future
acquisitions, we may have to expense such assets sooner than we expect.
Although we first reported a net profit under generally accepted accounting
principles in the second quarter of fiscal 2001, we reported a net loss under
generally accepted accounting principles for the quarter ended October 31,
2001, due in part to the asset impairment charges discussed above. Because of
our limited operating history and ongoing expenses associated with our prior
acquisitions, there can be no assurance that we will again become, or continue
to be, profitable in any future period.

  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. However, because we
are unable to predict the number, price or country of exercises during any
particular period, we cannot predict the amount, if any, of employer payroll
expense that will be recorded in a future period or the impact on our future
financial results.

  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, software or technology
industry, general market conditions, further terrorist activities and related
military actions, and other factors, including factors unrelated to our
operating performance or our competitors' operating performance. In addition,
stock prices for BEA and many other companies in the Internet, technology and
emerging growth sectors have experienced wide fluctuations including recent
rapid rises and declines in their stock prices that often have not been
directly related to the operating performance of such companies, such as the
declines in the stock prices of BEA and many such companies from March 2000
through the present. 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.

  If we do not develop and enhance new and existing products to keep pace with
  technological, market and industry changes, our revenues may decline

   The market for our products 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 render our existing products 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 Portal and WebLogic
Integration products) that keep pace with technological and market developments
and emerging industry standards. 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

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<PAGE>

business, results of operations and 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, result in negative publicity or loss of reputation
regarding us and our products and services and adversely affect our revenues
and other operating results.

  If the market for application servers, application integration and
  application component software and Web services does not grow as quickly as
  we expect, our revenues will be harmed

   We sell our products and services in the application server, application
integration and application component markets. These markets are emerging 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 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 and
the growth in the use of the Web to run software applications. There can be no
assurance that the markets for application server and integration technology
and related services will continue to grow. 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. If these markets
fail to grow or grow more slowly than we currently anticipate, or if we
experience increased competition in these markets, 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 number of strategic
acquisitions. Integration of acquired companies, divisions and products
involves the assimilation of potentially conflicting operations and products,
which divert 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 assimilate the acquired operations and products, or
retain key employees of the acquired operations. 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
the acquired entities have established. In addition, if we undertake future
acquisitions, we may issue dilutive securities, assume or incur additional debt
obligations, incur large one-time expenses, 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 Financial Accounting Standards Board ("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 BEA's 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 acquisitions 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, it should be periodically reviewed for impairment. Such

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<PAGE>

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. Effective
as of February 1, 2002, we will be 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. We cannot predict
whether we will be required to take a charge for any such impairment for past
acquisitions under FAS 142, as well as whether we would be required to take
such a charge under the appropriate pre-FAS 142 accounting principles prior to
February 1, 2002. 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
$64.5 million at October 31, 2001, so if we are required to take such
additional impairment charges, the amounts could be material to our results of
operations.

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

   Our customers typically 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 alternative approaches to the integration of enterprise applications,
competitive product offerings, rapidly changing software technologies 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 experienced an increase in the number of million and multimillion dollar
license transactions. In some cases, this 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 has also
contributed to increasing our sales cycle, and there is a risk this will
continue or worsen. This delay or failure 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.

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

   It is possible that third parties, including competitors or our technology
partners, could claim our current or future products, whether developed
internally or acquired, infringe their rights, including their trade secret and
patent rights. Any such claims, with or without merit, could cause costly
litigation that could absorb significant management time, which could
materially adversely affect our business, operating results and financial
condition. These types of claims could cause us to pay substantial damages or
settlement amounts, cease offering any subject technology or products
altogether or require us to enter into royalty or license agreements. 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.

  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

                                      31

<PAGE>

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 this
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.

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

   International revenues accounted for 46.0 percent and 41.3 percent of our
consolidated revenues for the nine months ended October 31, 2001 and 2000,
respectively. We sell our products and services through a network of branches
and subsidiaries located in 34 countries worldwide. In addition, we also market
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 unexpected changes in regulatory
practices and tariffs, greater difficulties in staffing and managing foreign
operations, greater difficulties in maintaining U.S. accounting standards,
longer collection cycles, seasonality, potential changes in tax laws, greater
difficulty in protecting intellectual property and the impact of fluctuating
exchange rates between the U.S. dollar and foreign currencies in markets where
we do business. In particular, BEA is 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 the Company. It is possible, however,
that future audits could result in significant assessments for transfer taxes,
payroll taxes or other taxes which could adversely effect our operating
results. General economic and political conditions in these foreign markets may
also impact our international revenues. 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.

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

   Until last quarter we had experienced a period of rapid and substantial
growth that placed, and if such growth were renewed would again place, a strain
on our administrative and operational infrastructure, particularly in view of
our recent workforce reduction announced in November 2001. We have increased
the number of our employees from 120 employees in three offices in the United
States at January 31, 1996 to over 3,370 employees in 96 offices in 34
countries at October 31, 2001. Our ability to manage our staff and growth
effectively requires us to continue to improve our operational, financial and
management controls; reporting systems and procedures; and information
technology infrastructure. In this regard, we are currently updating 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 to 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 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 therefrom. If we are unable to manage growth effectively, our
business, results of operations and financial condition will be materially
adversely affected.

  We have a high debt balance, large interest obligations and a real estate
  leasing structure which could result in substantial expenses

   At October 31, 2001, we had approximately $550.0 million of convertible
notes outstanding. 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

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<PAGE>

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.

   In connection with a lease transaction for real estate in San Jose,
California, we have restricted approximately $120.6 million out of our total
cash, cash equivalents and investment securities as of October 31, 2001, as
collateral for specified obligations to the lessor under the lease. The
investment securities are restricted as to withdrawal and are managed by a
third party subject to a number of limitations. We currently anticipate that,
commencing in fiscal 2004, we will be required under this real estate
transaction to make annual lease payments of approximately $12.1 million, which
will fluctuate from time to time depending on short-term interest rates. If we
determine to delay the construction of corporate offices and research and
development facilities on this real estate, we may also be required to begin
recognizing rent expense prior to fiscal 2004. In addition, in the event that
it became probable that the value of the property at the end of the lease term
would be less than the residual value of up to $328.7 million guaranteed by us,
the deficiency would be expensed over the remaining term of the lease which
expires in fiscal 2006. Moreover, if the Company determines to abandon,
completely or in part, the construction, this could result in a material charge
to earnings.

   We will require substantial amounts of cash to fund scheduled payments of
interest on the convertible notes, payment of the principal amount of the
convertible notes, payment of principal and interest on our other indebtedness,
the lease payments discussed above, future capital expenditures, payments on
our lease and any increased working capital requirements. 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 notes at maturity, we could attempt to refinance the
notes; 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 the notes at maturity (with respect to payments
of principal) or prior thereto (with respect to payments of interest or
required repurchases) would constitute a default under the indenture and could
cause a default under agreements governing our other indebtedness.

  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 founders, Alfred S. Chuang and
Messrs. William T. Coleman III, and other key members of management.
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.
As we seek to expand our global organization, the hiring of qualified sales,
technical and support personnel will be difficult due to the limited number of
qualified professionals. Failure to attract, assimilate and retain key
personnel would have a material adverse effect on our business, results of
operations and financial condition.

  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.

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   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 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.

  Our investments in development-stage companies involve a number of risks and
  uncertainties

   We have invested in development-stage companies. Each of these investments
involves risks and uncertainties, including:

  .  diversion of management attention from our core business;

  .  failure to leverage our relationship with these companies to access new
     technologies and new markets;

  .  inability to value investments appropriately or to predict changes to the
     future value of investments;

  .  inability to manage investments effectively; and

  .  loss of cash invested.

   During the nine months ended October 31, 2001, we recorded a charge to
earnings of $21.0 million related to impaired assets acquired as part of our
development stage company investment program. We have an investments balance of
$29.5 million at October 31, 2001, and there is a risk that such investments
may also become impaired, particularly in view of the difficulties many such
companies have had in raising additional capital in the current unfavorable
economic climate.

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

   We recently entered into 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

   BEA's revenues originating outside the United States were 51.0 percent and
40.6 percent of total revenues in the third quarter of fiscal 2002 and 2001,
respectively, and 46.0 percent and 41.3 percent of total revenues in the nine
months ended October 31, 2001 and 2000, respectively. The only geographic
sub-region outside of the United States with revenues greater than 10 percent
of total revenues in the three months ended October 31, 2001 was the United
Kingdom with $22.0 million or 10.0 percent of total. International revenues
from each geographic sub-region were less than 10 percent of total revenues in
the nine months ended October 31, 2001 and the three months ended October 31,
2000. The only geographic sub-region outside of the United States with revenues
greater than 10 percent of total revenues in the nine months ended October 31,
2000 was the United Kingdom with $58.8 million or 10.4 percent of total
revenues. International sales were made mostly from the Company's 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.

   The Company's 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, other
regulations and restrictions, and foreign exchange volatility. Accordingly, the
Company's future results could be materially adversely impacted by changes in
these or other factors.

   Effective February 1, 2001, the Company adopted the Financial Accounting
Standards Board Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of
the derivative are recorded in accumulated other comprehensive loss.

   The Company uses derivative instruments to manage exposures to foreign
currency. The Company's objectives in holding derivatives are to minimize the
risks using the most effective methods to eliminate or reduce the impacts of
these exposures.

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

   The Company has a program to reduce the effect of foreign exchange
transaction gains and losses from recorded foreign currency-denominated assets
and liabilities. This program involves the use of forward foreign exchange
contracts in certain European and Asian currencies. A forward foreign exchange
contract obligates the Company 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, increases or decreases in the Company's foreign currency transactions
are partially offset by gains and losses on the forward contracts, so as to
mitigate the possibility of significant foreign currency transaction gains and
losses. The Company does not use foreign currency contracts for trading
purposes. All foreign currency transactions and all outstanding forward
contracts are marked-to-market on a monthly basis with realized gains

                                      35

<PAGE>

and losses included in interest income (expense) and other, net. Net losses
resulting from foreign currency transactions were approximately $526,000 for
the third quarter in fiscal 2002 and $1.3 million for the nine months ended
October 31, 2001.

   The Company's outstanding forward contracts as of October 31, 2001 are
presented in the table below. This table presents the notional amount in U.S.
dollars using the spot exchange rate in October 2001 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 30 days or
less as of October 31, 2001.

<TABLE>
<CAPTION>
                                                                    Notional
                                                                    Weighted
                                                                    Average
                                                        Notional    Exchange
                                                         Amount       Rate
                                                     -------------- ---------
                                                     (in thousands)
   <S>                                               <C>            <C>
   Functional Currency--U.S. Dollar
   Euros............................................    $145,200        1.117
   British pounds...................................       9,300        0.683
   Japanese yen.....................................      18,000      120.198
   Swedish krona....................................      38,600       10.643
   Canadian dollars.................................      16,500        1.561
   Korean won.......................................       9,400    1,296.335
   Australian dollars...............................       1,800        1.926
   Mexican pesos....................................       1,000        9.480
   Israeli shekels..................................       1,100        4.304
   Brazilian reals..................................       2,600        2.630
   Singapore dollar.................................       1,300        1.774
   Swiss francs.....................................       1,000        1.664
   Norwegian kron...................................         400        8.999
                                                        --------
      Total.........................................    $246,200
                                                        --------
   Functional Currency--EURO
   British pounds...................................      17,800        0.665
   Swiss francs.....................................       4,400        1.627
   Norwegian kron...................................       2,900        8.720
   Swedish krona....................................       2,700       10.470
   Israeli shekels..................................       3,100        4.152
                                                        --------
      Total.........................................    $ 30,900
                                                        --------
      Grand total...................................    $277,100
                                                        ========
</TABLE>

Interest Rates

   The Company invests its 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 and
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 invested in
interest-bearing bank accounts and money market funds at the local operating
banks.

   The Company accounts for its 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-term and long-term restricted
cash are treated as "available-for-sale" under FAS 115. Investments in both
fixed rate and floating rate interest earning instruments

                                      36

<PAGE>

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, the Company's future investment income may fall
short of expectations due to changes in interest rates or the Company may
suffer losses in principal if forced to sell securities which have seen a
decline in market value due to changes in interest rates. However, the Company
reduces its interest rate risk by investing its cash in instruments with short
maturities. As of October 31, 2001, the average holding period until maturity
of the Company's cash equivalents, restricted cash and short-term investments
was approximately 22 days. The table below presents the principal amount and
related weighted average interest rates for the Company's investment portfolio.
Short-term investments are all in fixed rate instruments.

   Table of investment securities (in thousands) at October 31, 2001:

<TABLE>
<CAPTION>
                                                                    Average
                                                                    Interest
                                                         Fair Value   Rate
                                                         ---------- --------
   <S>                                                   <C>        <C>
   Cash equivalents..................................... $  844,484   2.57%
   Short-term investments (0-1 year)....................    142,539   2.72%
   Short-term restricted cash (0-1 year)................      6,903   2.89%
   Long-term restricted cash (1-5 years)................    120,562   2.92%
                                                         ----------
   Total cash and investment securities................. $1,114,488
                                                         ==========
</TABLE>

   The Company is exposed to changes in short-term interest rates through a
lease that the Company entered into on February 13, 2001, which includes a
variable short-term interest rate based on LIBOR. The annual lease expense will
fluctuate from time to time depending on changes in LIBOR. A 1.0 percent
increase in LIBOR will generate an increase in annual lease expense of
approximately $3.3 million beginning in year 3 of the lease. The Company is
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 decrease in short-term interest rates would result in an annual
reduction of interest income of approximately $10.0 million.

Investments in equity securities

   The Company has made net investments in several privately-held companies
totaling $29.5 million as of October 31, 2001, several of which can still be
considered in the start-up or development stages. These nonmarketable
investments are accounted for under the cost method, as ownership is less than
20 percent and/or the Company does not have the ability to exercise significant
influence over the operations of the investee companies. These investments are
inherently risky as the market for the technologies or products they have under
development are typically in the early stages and may never materialize. It is
possible that the Company could lose its entire initial investment in these
companies. As a part of management's process of regularly reviewing these
investments for impairment, the Company recorded write-downs of $21.0 million
of certain investments, which were determined to be other than temporarily
impaired in the nine months ended October 31, 2001.

                                      37

<PAGE>

                          PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

   In connection with the acquisition of CrossGain Corporation ("CrossGain"),
effective July 17, 2001, the Company exchanged approximately $10.8 million in
cash and issued 458,466 shares of its common stock, valued at $26.67 per share,
and options to purchase 87,950 shares of common stock to former shareholders of
CrossGain at a conversion ratio of .036684 shares of BEA common stock for each
share of CrossGain stock. The shares were issued in reliance on Section 4(2) of
the Securities Act of 1933, as amended, and were registered for resale on a
form S-3 (File No. 333-67644) registration statement, declared effective on
September 4, 2001, and form S-8 (File No. 333-67646) registration statement.

   On September 14, 2001, pursuant to a Preferred Stock Rights Agreement
between BEA Systems, Inc. and Equiserve Trust Company, N.A., as Rights Agent,
the Company's Board of Directors declared a dividend of one right to purchase
one one-thousandth share of the Company's Series A Participating Preferred
Stock for each outstanding share of common stock, par value $0.001 per share of
the Company. The dividend was payable on October 12, 2001, to stockholders of
record as of the close of business on that date. Each right entitles the
registered holder to purchase from the Company one one-thousandth of a share of
Series A Participating Preferred Stock at an exercise price of $150.00, subject
to adjustment.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

   (a) Exhibits:

<TABLE>
<CAPTION>
    Exhibit
    Number                            Description
    ------                            -----------
    <C>     <S>

     3.1(1) Amended and Restated Certificate of Incorporation of the
              Registrant.

     3.2(2) Registrant's Amended and Restated Bylaws.

     4.1    Reference is made to Exhibit 3.1.

     4.2(3) Preferred Stock Rights Agreement.

    10.1    Form of Employment Agreement between the Registrant and William
              T. Coleman III dated as of November 2, 2001.

    10.2    Form of Secured Full Recourse Promissory Note entered into
              between the Registrant and William T. Coleman III dated as of
              November 2, 2001.
</TABLE>
--------
(1) Incorporated by reference to Exhibit 3.2 previously filed with the
    Registrant's registration statement on Form SB-2 (Registration No.
    333-20791).
(2) Incorporated by reference to Exhibit 3.4 previously filed with the
    Registrant's registration statement on Form SB-2 (File No. 333-20791)
(3) Incorporated by reference to Exhibit 4.1 previously filed with the
    Registrant's registration statement on Form 8-A12G (File No. 000-22369)

   (b) Reports on Form 8-K:

   A report on Form 8-K was filed by the Registrant on September 19, 2001 under
Item 5 reporting the issuance of a press release on September 17, 2001
announcing the adoption of the Preferred Stock Rights Agreement by the
Company's Board of Directors.

                                      38

<PAGE>

                                  SIGNATURES

   Pursuant to the requirement of the Security 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. Klein
                                          _____________________________________
                                          William M. Klein
                                          Chief Financial Officer and
                                            Executive Vice
                                            President--Administration
                                          (Duly Authorized Officer and
                                            Principal Financial Officer)

Dated: December 17, 2001

                                      39