##### Table of Contents

---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



---



FORM 10-Q



---



(Mark One)

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



For the quarterly period ended April 30, 2004



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 incorporation or organization) |  | (I. R. S. Employer Identification No.)



2315 North First
Street

San Jose, California 95131

(Address of principal executive offices)



(408) 570-8000

(Registrants telephone number, including area code)



---



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



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



As of May 31, 2004, there were approximately 407,190,421 shares of the
Registrants common stock outstanding.



---



---

##### Table of Contents



BEA SYSTEMS, INC.



INDEX



|                               |  |                                                                                                                             |  |        
|------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------- |  | -------
|                               |  |                                                                                                                             |  | PageNo.
|PART I.  FINANCIAL INFORMATION
|                               |  |                                                                                                                            
|Item 1.                        |  | Condensed Consolidated Financial Statements (Unaudited):                                                                    |  |        
|                               |  |                                                                                                                            
|                               |  | Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended April 30, 2004 and 2003 |  | 3      
|                               |  |                                                                                                                            
|                               |  | Condensed Consolidated Balance Sheets as of April 30, 2004 and January 31, 2004                                             |  | 4      
|                               |  |                                                                                                                            
|                               |  | Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2004 and 2003                          |  | 5      
|                               |  |                                                                                                                            
|                               |  | Notes to Condensed Consolidated Financial Statements                                                                        |  | 6      
|                               |  |                                                                                                                            
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 14     
|                               |  |                                                                                                                            
|Item 3.                        |  | Quantitative and Qualitative Disclosure about Market Risks                                                                  |  | 37     
|                               |  |                                                                                                                            
|Item 4.                        |  | Controls and Procedures                                                                                                     |  | 39     
|                              
|PART II.  OTHER INFORMATION   
|                               |  |                                                                                                                            
|Item 2.                        |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                            |  | 42     
|                               |  |                                                                                                                            
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                                                            |  | 42     
|                               | 
|SIGNATURES                     |  | 43                                                                                                                         



2



---

##### Table of Contents



PART I. FINANCIAL
INFORMATION



|ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|------- | -------------------------------------------



BEA SYSTEMS, INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME



(in thousands, except per share data)

(Unaudited)



|                                                                       |  |                              |         |   |      |   |         |  
|---------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                       |  | Three months ended April 30, |        
|                                                                       |  | 2004                         |         |   | 2003 |  
|Revenues:                                                              |  |                              |         |   |      |   |         |  
|License fees                                                           |  | $                            | 120,152 |   |      | $ | 122,339 |  
|Services                                                               |  |                              | 142,483 |   |      |   | 114,955 |  
|                                                                       |  |                              |         |   |      |   |         |  
|Total revenues                                                         |  |                              | 262,635 |   |      |   | 237,294 |  
|Cost of revenues:                                                      |  |                              |         |   |      |   |         |  
|Cost of license fees                                                   |  |                              | 6,471   |   |      |   | 5,897   |  
|Cost of services                                                       |  |                              | 48,981  |   |      |   | 46,817  |  
|Amortization of certain acquired intangible assets                     |  |                              | 3,228   |   |      |   | 5,017   |  
|                                                                       |  |                              |         |   |      |   |         |  
|Total cost of revenues                                                 |  |                              | 58,680  |   |      |   | 57,731  |  
|                                                                       |  |                              |         |   |      |   |         |  
|Gross profit                                                           |  |                              | 203,955 |   |      |   | 179,563 |  
|Operating expenses:                                                    |  |                              |         |   |      |   |         |  
|Sales and marketing                                                    |  |                              | 100,611 |   |      |   | 91,909  |  
|Research and development                                               |  |                              | 34,942  |   |      |   | 34,830  |  
|General and administrative                                             |  |                              | 21,615  |   |      |   | 18,610  |  
|Facilities consolidation                                               |  |                              | 7,665   |   |      |   |        |  
|                                                                       |  |                              |         |   |      |   |         |  
|Total operating expenses                                               |  |                              | 164,833 |   |      |   | 145,349 |  
|                                                                       |  |                              |         |   |      |   |         |  
|Income from operations                                                 |  |                              | 39,122  |   |      |   | 34,214  |  
|Interest and other, net:                                               |  |                              |         |   |      |   |         |  
|Interest expense                                                       |  |                              | (7,285  | ) |      |   | (5,543  | )
|Net loss on sale of equity investments                                 |  |                              |        |   |      |   | (198    | )
|Interest income and other, net                                         |  |                              | 4,354   |   |      |   | 6,463   |  
|                                                                       |  |                              |         |   |      |   |         |  
|Total interest and other, net                                          |  |                              | (2,931  | ) |      |   | 722     |  
|                                                                       |  |                              |         |   |      |   |         |  
|Income before provision for income taxes                               |  |                              | 36,191  |   |      |   | 34,936  |  
|Provision for income taxes                                             |  |                              | 10,857  |   |      |   | 10,481  |  
|                                                                       |  |                              |         |   |      |   |         |  
|Net income                                                             |  |                              | 25,334  |   |      |   | 24,455  |  
|Other comprehensive income:                                            |  |                              |         |   |      |   |         |  
|Foreign currency translation adjustments                               |  |                              | 301     |   |      |   | 83      |  
|Unrealized loss on available-for-sale investments, net of income taxes |  |                              | (1,576  | ) |      |   | (221    | )
|                                                                       |  |                              |         |   |      |   |         |  
|Comprehensive income                                                   |  | $                            | 24,059  |   |      | $ | 24,317  |  
|                                                                       |  |                              |         |   |      |   |         |  
|Net income per share:                                                  |  |                              |         |   |      |   |         |  
|Basic                                                                  |  | $                            | 0.06    |   |      | $ | 0.06    |  
|                                                                       |  |                              |         |   |      |   |         |  
|Diluted                                                                |  | $                            | 0.06    |   |      | $ | 0.06    |  
|                                                                       |  |                              |         |   |      |   |         |  
|Number of shares used in per share calculations:                       |  |                              |         |   |      |   |         |  
|Basic                                                                  |  |                              | 409,660 |   |      |   | 402,710 |  
|                                                                       |  |                              |         |   |      |   |         |  
|Diluted                                                                |  |                              | 425,840 |   |      |   | 419,130 |  
|                                                                       |  |                              |         |   |      |   |         |  



See accompanying
notes to condensed consolidated financial statements.



3



---

##### Table of Contents

BEA SYSTEMS, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS



(in thousands)

(Unaudited)



|                                              |  |                |           |   |                  |   |           |  
|--------------------------------------------- |  | -------------- | --------- | - | ---------------- | - | --------- | -
|                                              |  | April 30, 2004 |           |   | January 31, 2004 |  
|Assets                                        |  |                |           |   |                  |   |           |  
|Current assets:                               |  |                |           |   |                  |   |           |  
|Cash and cash equivalents                     |  | $              | 707,940   |   |                  | $ | 683,729   |  
|Restricted cash                               |  |                | 1,633     |   |                  |   | 1,583     |  
|Short-term investments                        |  |                | 851,248   |   |                  |   | 783,288   |  
|Accounts receivable, net                      |  |                | 205,815   |   |                  |   | 268,526   |  
|Other current assets                          |  |                | 39,773    |   |                  |   | 32,480    |  
|                                              |  |                |           |   |                  |   |           |  
|Total current assets                          |  |                | 1,806,409 |   |                  |   | 1,769,606 |  
|Property and equipment, net                   |  |                | 354,692   |   |                  |   | 358,497   |  
|Goodwill, net                                 |  |                | 56,100    |   |                  |   | 56,100    |  
|Acquired intangible assets, net               |  |                | 12,768    |   |                  |   | 15,997    |  
|Long-term restricted cash                     |  |                | 5,380     |   |                  |   | 3,880     |  
|Other long-term assets                        |  |                | 15,695    |   |                  |   | 16,109    |  
|                                              |  |                |           |   |                  |   |           |  
|Total assets                                  |  | $              | 2,251,044 |   |                  | $ | 2,220,189 |  
|                                              |  |                |           |   |                  |   |           |  
|Liabilities and Stockholders Equity          |  |                |           |   |                  |   |           |  
|Current liabilities:                          |  |                |           |   |                  |   |           |  
|Accounts payable                              |  | $              | 10,575    |   |                  | $ | 18,534    |  
|Accrued facilities consolidation charges      |  |                | 15,237    |   |                  |   | 9,847     |  
|Accrued payroll and related liabilities       |  |                | 49,946    |   |                  |   | 61,155    |  
|Accrued income taxes                          |  |                | 47,248    |   |                  |   | 43,725    |  
|Accrued liabilities                           |  |                | 80,028    |   |                  |   | 74,968    |  
|Deferred revenues                             |  |                | 267,966   |   |                  |   | 273,879   |  
|Accrued liabilities related to land lease     |  |                | 19,656    |   |                  |   | 19,656    |  
|Deferred tax liabilities                      |  |                |          |   |                  |   | 600       |  
|Current portion of notes payable              |  |                | 494       |   |                  |   | 493       |  
|                                              |  |                |           |   |                  |   |           |  
|Total current liabilities                     |  |                | 491,150   |   |                  |   | 502,857   |  
|Deferred tax liabilities                      |  |                | 23        |   |                  |   | 1,522     |  
|Notes payable and other long-term obligations |  |                | 4,125     |   |                  |   | 4,033     |  
|Long-term debt related to land lease          |  |                | 191,639   |   |                  |   | 191,639   |  
|Convertible subordinated notes                |  |                | 550,000   |   |                  |   | 550,000   |  
|Commitments and contingencies                 |  |                |           |   |                  |   |           |  
|Stockholders equity:                         |  |                |           |   |                  |   |           |  
|Common stock                                  |  |                | 411       |   |                  |   | 408       |  
|Additional paid-in capital                    |  |                | 1,131,039 |   |                  |   | 1,112,703 |  
|Treasury stock, at cost                       |  |                | (123,303  | ) |                  |   | (123,303  | )
|Retained earnings (deficit)                   |  |                | 6,333     |   |                  |   | (19,001   | )
|Deferred compensation                         |  |                | (8,891    | ) |                  |   | (10,462   | )
|Accumulated other comprehensive income        |  |                | 8,518     |   |                  |   | 9,793     |  
|                                              |  |                |           |   |                  |   |           |  
|Total stockholders equity                    |  |                | 1,014,107 |   |                  |   | 970,138   |  
|                                              |  |                |           |   |                  |   |           |  
|Total liabilities and stockholders equity    |  | $              | 2,251,044 |   |                  | $ | 2,220,189 |  
|                                              |  |                |           |   |                  |   |           |  



See accompanying
notes to condensed consolidated financial statements.



4



---

##### Table of Contents

BEA SYSTEMS, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



(in thousands)

(Unaudited)



|                                                                                  |  |                              |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Three months ended April 30, |         
|                                                                                  |  | 2004                         |          |   | 2003 |  
|Operating activities:                                                             |  |                              |          |   |      |   |          |  
|Net income                                                                        |  | $                            | 25,334   |   |      | $ | 24,455   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |          |   |      |   |          |  
|Depreciation                                                                      |  |                              | 6,739    |   |      |   | 7,297    |  
|Amortization of deferred compensation                                             |  |                              | 1,571    |   |      |   | 2,266    |  
|Amortization of acquired intangible assets                                        |  |                              | 3,228    |   |      |   | 5,017    |  
|Tax benefit from exercise of stock options                                        |  |                              | 6,300    |   |      |   | 9,824    |  
|Facilities consolidation                                                          |  |                              | 6,859    |   |      |   |         |  
|Changes in operating assets and liabilities                                       |  |                              | 28,742   |   |      |   | (13,922  | )
|Other                                                                             |  |                              | 3,352    |   |      |   | 5,560    |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                              | 82,125   |   |      |   | 40,497   |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Investing activities:                                                             |  |                              |          |   |      |   |          |  
|Purchases of property and equipment                                               |  |                              | (2,690   | ) |      |   | (3,961   | )
|Payments for acquisitions, net of cash acquired                                   |  |                              | (200     | ) |      |   | (4,129   | )
|Purchases of available-for-sale short-term investments                            |  |                              | (348,884 | ) |      |   | (145,582 | )
|Proceeds from maturities of available-for-sale short-term investments             |  |                              | 49,793   |   |      |   | 30,800   |  
|Proceeds from sales of available-for-sale short-term investments                  |  |                              | 226,002  |   |      |   | 119,318  |  
|Other                                                                             |  |                              | (47      | ) |      |   | 353      |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                              | (76,026  | ) |      |   | (3,201   | )
|                                                                                  |  |                              |          |   |      |   |          |  
|Financing activities:                                                             |  |                              |          |   |      |   |          |  
|Increase in restricted cash for collateral on land lease transaction              |  |                              |         |   |      |   | (21,226  | )
|Net proceeds received for employee stock purchases                                |  |                              | 19,389   |   |      |   | 9,836    |  
|Purchases of treasury stock                                                       |  |                              |         |   |      |   | (51,999  | )
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash provided by (used in) financing activities                               |  |                              | 19,389   |   |      |   | (63,389  | )
|                                                                                  |  |                              |          |   |      |   |          |  
|Net increase (decrease) in cash and cash equivalents                              |  |                              | 25,488   |   |      |   | (26,093  | )
|Effect of exchange rate changes on cash and cash equivalents                      |  |                              | (1,277   | ) |      |   | 447      |  
|Cash and cash equivalents at beginning of period                                  |  |                              | 683,729  |   |      |   | 578,717  |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Cash and cash equivalents at end of period                                        |  | $                            | 707,940  |   |      | $ | 553,071  |  
|                                                                                  |  |                              |          |   |      |   |          |  



See accompanying
notes to condensed consolidated financial statements.



5



---

##### Table of Contents



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 presented. These condensed consolidated financial statements should be
read in conjunction with the Consolidated Financial Statements and Notes thereto, together with Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the BEA Systems, Inc. (BEA or the
Company) Annual Report on Form 10-K for the fiscal year ended January 31, 2004. The results of operations for the three months ended April 30, 2004 are not necessarily indicative of the results to be anticipated for the entire fiscal
year ending January 31, 2005 (fiscal 2005).



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



Principles of consolidation



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



Use of estimates



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



Revenue recognition



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



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



6



---

##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



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



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



Accounts receivable



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



Stock-based compensation



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



7



---

##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



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



|                         |  |                                                  |   |  |                                                           |   |  |             |  |               
|------------------------ |  | ------------------------------------------------ | - |  | --------------------------------------------------------- | - |  | ----------- |  | --------------
|                         |  | Employeestock optionsThree monthsended April 30, |   |  | Employee stock purchase plan Three months ended April 30,
|                         |  | 2004                                             |   |  | 2003                                                      |   |  | 2004        |  | 2003          
|Expected life (in years) |  | 4.0                                              |   |  | 4.0                                                       |   |  | 0.5 to 2.0  |  | 0.5 to 2.0    
|Risk-free interest rate  |  | 4.08                                             | % |  | 2.87                                                      | % |  | 1.22%-2.18% |  | 1.34% to 1.78%
|Expected volatility      |  | 63                                               | % |  | 65                                                        | % |  | 54%         |  | 80%           



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



8



---

##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                                                                       |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                       |  | Three months endedApril 30, |        
|                                                                                                       |  | 2004                        |         |   | 2003 |  
|Net income as reported                                                                                 |  | $                           | 25,334  |   |      | $ | 24,455  |  
|Add back:                                                                                              |  |                             |         |   |      |   |         |  
|Stock-based employee compensation expense included in reported net income                              |  |                             | 1,680   |   |      |   | 1,917   |  
|Less:                                                                                                  |  |                             |         |   |      |   |         |  
|Total stock-based employee compensation expense determined under the fair value method for all awards, |  |                             | (36,015 | ) |      |   | (45,012 | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Pro forma net loss                                                                                     |  | $                           | (9,001  | ) |      | $ | (18,640 | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Basic and diluted net income per share as reported                                                     |  | $                           | 0.06    |   |      | $ | 0.06    |  
|                                                                                                       |  |                             |         |   |      |   |         |  
|Pro forma basic net loss per share                                                                     |  | $                           | (0.02   | ) |      | $ | (0.05   | )
|                                                                                                       |  |                             |         |   |      |   |         |  
|Pro forma diluted net loss per share                                                                   |  | $                           | (0.02   | ) |      | $ | (0.04   | )
|                                                                                                       |  |                             |         |   |      |   |         |  



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



Projects funded by third parties



The Company occasionally enters into product development agreements with
third parties that provide funding to BEA, which is intended by BEA and the third party to offset certain operating costs incurred by BEA. Such amounts are recorded as a reduction in BEAs operating expenses. During the first quarter of fiscal
2005 and 2004, approximately $2.7 million and $3.2 million, respectively, of third party funding was recorded as a reduction in operating expenses.



|Note 2. | Related Party Transactions
|------- | --------------------------



Loans to executives and officers



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



9



---

##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In September 1999, the Company issued an unsecured line of credit to Alfred Chuang, our Chief
Executive Officer of the Company, in the amount of $5.0 million. No borrowings were outstanding under this line of credit at April 30, 2004 or January 31, 2004.



Common Board Members or Executive Officers



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



|Note 3. | Net income per share
|------- | --------------------



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



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



|                                                                                |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                |  | Three months endedApril 30, |        
|                                                                                |  | 2004                        |         |   | 2003 |  
|Numerator:                                                                      |  |                             |         |   |      |   |         |  
|Numerator for basic net income per share:                                       |  |                             |         |   |      |   |         |  
|Net income available to common shareholders                                     |  | $                           | 25,334  |   |      | $ | 24,455  |  
|                                                                                |  |                             |         |   |      |   |         |  
|Denominator:                                                                    |  |                             |         |   |      |   |         |  
|Denominator for basic net income per share:                                     |  |                             |         |   |      |   |         |  
|Weighted average shares outstanding                                             |  |                             | 409,840 |   |      |   | 403,015 |  
|Weighted average shares subject to repurchase and shares held in escrow         |  |                             | (180    | ) |      |   | (305    | )
|                                                                                |  |                             |         |   |      |   |         |  
|Denominator for basic net income per share, weighted average shares outstanding |  |                             | 409,660 |   |      |   | 402,710 |  
|Weighted average dilutive potential common shares:                              |  |                             |         |   |      |   |         |  
|Options and shares subject to repurchase and shares held in escrow              |  |                             | 16,180  |   |      |   | 16,420  |  
|                                                                                |  |                             |         |   |      |   |         |  
|Denominator for diluted net income per share                                    |  |                             | 425,840 |   |      |   | 419,130 |  
|                                                                                |  |                             |         |   |      |   |         |  
|Basic and diluted net income per share                                          |  | $                           | 0.06    |   |      | $ | 0.06    |  
|                                                                                |  |                             |         |   |      |   |         |  



The computation of
diluted net income per share for the three months ended April 30, 2004 and 2003 excludes the impact of options to purchase 16.0 million and 35.3 million shares of common stock, respectively, and the conversion of the $550 million 4% Convertible
Subordinated Notes due December 15, 2006 (the 2006 Notes) which are convertible into 15.9 million shares of common stock at both April 30, 2004 and 2003, as such impact would be anti-dilutive for these periods.



10



---

##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|Note 4. | Property and Equipment
|------- | ----------------------



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



|                                             |  |                |          |   |                  |   |          |  
|-------------------------------------------- |  | -------------- | -------- | - | ---------------- | - | -------- | -
|                                             |  | April 30, 2004 |          |   | January 31, 2004 |  
|Land                                         |  | $              | 306,539  |   |                  | $ | 306,388  |  
|Computer hardware and software               |  |                | 80,083   |   |                  |   | 77,698   |  
|Furniture and equipment                      |  |                | 33,681   |   |                  |   | 33,342   |  
|Leasehold improvements                       |  |                | 42,483   |   |                  |   | 42,677   |  
|Furniture and equipment under capital leases |  |                | 1,538    |   |                  |   | 1,538    |  
|                                             |  |                |          |   |                  |   |          |  
|                                             |  |                | 464,324  |   |                  |   | 461,643  |  
|Accumulated depreciation and amortization    |  |                | (109,632 | ) |                  |   | (103,146 | )
|                                             |  |                |          |   |                  |   |          |  
|                                             |  | $              | 354,692  |   |                  | $ | 358,497  |  
|                                             |  |                |          |   |                  |   |          |  



|Note 5. | Acquired Intangible Assets
|------- | --------------------------



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



|                       |  |                     |         |                         |   |          |                   |  |   |       
|---------------------- |  | ------------------- | ------- | ----------------------- | - | -------- | ----------------- |  | - | ------
|                       |  | April 30, 2004     
|                       |  | Grosscarryingamount |         | Accumulatedamortization |   |          | Netcarryingamount
|Purchased technology   |  | $                   | 120,936 |                         | $ | (108,943 | )                 |  | $ | 11,993
|Non-compete agreements |  |                     | 26,745  |                         |   | (25,970  | )                 |  |   | 775   
|                       |  |                     |         |                         |   |          |                   |  |   |       
|Total                  |  | $                   | 147,681 |                         | $ | (134,913 | )                 |  | $ | 12,768
|                       |  |                     |         |                         |   |          |                   |  |   |       
|                       | 
|                       |  | January 31, 2004   
|                       |  | Grosscarryingamount |         | Accumulatedamortization |   |          | Netcarryingamount
|Purchased technology   |  | $                   | 120,936 |                         | $ | (105,914 | )                 |  | $ | 15,022
|Non-compete agreements |  |                     | 26,745  |                         |   | (25,770  | )                 |  |   | 975   
|                       |  |                     |         |                         |   |          |                   |  |   |       
|Total                  |  | $                   | 147,681 |                         | $ | (131,684 | )                 |  | $ | 15,997
|                       |  |                     |         |                         |   |          |                   |  |   |       



The total expected
future amortization related to acquired intangible assets as of April 30, 2004 is provided in the table below (in thousands):



|                                                    |  |                    |       
|--------------------------------------------------- |  | ------------------ | ------
|                                                    |  | Futureamortization
|Nine months ending January 31, 2005                 |  | $                  | 9,247 
|Fiscal year ending January 31, 2006 (fiscal 2006) |  |                    | 3,521 
|                                                    |  |                    |       
|Total                                               |  | $                  | 12,768
|                                                    |  |                    |       



|Note 6. | Facilities Consolidation Charges
|------- | --------------------------------



During the first fiscal quarter of 2005, the Company approved a plan to consolidate certain facilities in regions including the United States and Canada.
A facilities consolidation charge of $7.7 million was recorded using managements best estimates and was based upon the present value of the remaining future lease



11



---

##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



commitments for vacant facilities, net of the present value of the estimated future sublease income. The facilities consolidation charge also included the
write-off of approximately $0.8 million of unamortized leasehold improvements. During the fiscal year ended January 31, 2002 (Fiscal 2002), the Company approved a plan to consolidate certain facilities in the United States, Canada, and
Germany. The Company recorded a facilities consolidation charge of $20.0 million based on the remaining future lease commitments for vacant facilities, net of estimated future sublease income. The estimated costs of abandoning these leased
facilities, including estimated costs to sublease, were based on market information and trend analyses, including information obtained from third party real estate industry sources.



As a result of these consolidation activities, at April 30, 2004, $15.2 million of lease termination costs remained accrued,
net of anticipated sublease income. These accrued costs are expected to be fully expended by fiscal 2012. If actual circumstances prove to be materially different than the amounts management has estimated, the Companys total charges for these
vacant facilities could be significantly higher. Adjustments to the facilities consolidation charge will be made in future periods, if necessary, based upon then current actual events and circumstances. The following table summarizes the charge in
fiscal 2002 and fiscal 2005, and the activity related to the facilities consolidation liability during the fiscal year ended January 31, 2003 (Fiscal 2003), the fiscal year ended January 31, 2004 (Fiscal 2004), and the three
months ended April 30, 2004 (in thousands):



|                                                                                                                                                 |  |                         |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------- | ------ | -
|                                                                                                                                                 |  | Facilitiesconsolidation |       
|Charges accrued during fiscal 2002 included in operating expenses                                                                                |  | $                       | 20,000 |  
|Write-off of leasehold improvements                                                                                                              |  |                         | (2,152 | )
|Cash payments during fiscal 2002                                                                                                                 |  |                         | (1,447 | )
|                                                                                                                                                 |  |                         |        |  
|Accrued at January 31, 2002                                                                                                                      |  |                         | 16,401 |  
|Cash payments during fiscal 2003                                                                                                                 |  |                         | (3,784 | )
|                                                                                                                                                 |  |                         |        |  
|Accrued at January 31, 2003                                                                                                                      |  |                         | 12,617 |  
|Cash payments during fiscal 2004                                                                                                                 |  |                         | (2,770 | )
|                                                                                                                                                 |  |                         |        |  
|Accrued at January 31, 2004                                                                                                                      |  |                         | 9,847  |  
|Cash payments during the three months ended April 30, 2004                                                                                       |  |                         | (1,469 | )
|Charges accrued during the three months ended April 30, 2004 included in operating expenses (net of write-off of leasehold improvements of
$806) |  |                         | 6,859  |  
|                                                                                                                                                 |  |                         |        |  
|Accrued at April 30, 2004                                                                                                                        |  | $                       | 15,237 |  
|                                                                                                                                                 |  |                         |        |  



|Note 7. | Accumulated Other Comprehensive Income
|------- | --------------------------------------



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



|                                                                            |  |               |        |   |                 |   |      
|--------------------------------------------------------------------------- |  | ------------- | ------ | - | --------------- | - | -----
|                                                                            |  | April 30,2004 |        |   | January 31,2004
|Foreign currency translation adjustments                                    |  | $             | 9,821  |   |                 | $ | 9,519
|Unrealized gain (loss) on available-for-sale investments, net of income tax |  |               | (1,303 | ) |                 |   | 274  
|                                                                            |  |               |        |   |                 |   |      
|Total accumulated other comprehensive income                                |  | $             | 8,518  |   |                 | $ | 9,793
|                                                                            |  |               |        |   |                 |   |      



|Note 8. | Common Stock and Treasury Stock
|------- | -------------------------------



During the three months ended April 30, 2004, the Company issued 2.2 million shares of common stock and received $12.0 million in proceeds resulting from
the exercise of employee stock options.



12



---

##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Company recorded a tax benefit from stock options of $6.3 million and $9.8 million in the three
months ended April 30, 2004 and 2003, respectively.



In
September 2001 and March 2003, the Board of Directors approved an aggregate repurchase of up to $200.0 million of our common stock under the Share Repurchase Program. In fiscal 2003, 6.9 million shares were repurchased at a total cost of
approximately $42.1 million. In fiscal 2004, an additional 8.0 million shares were purchased at a total cost of approximately $81.2 million, leaving approximately $76.7 million of the approval limit available for share repurchases under the Share
Repurchase Program. No repurchases were done in the first quarter of fiscal 2005 under the Share Repurchase Program. Subsequent to the quarter ended April 30, 2004, the Board of Directors approved an additional repurchase of up to $200.0 million of
our common stock under the Share Repurchase Program.



|Note 9. | Commitments and Contingencies
|------- | -----------------------------



Litigation and other claims



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



Warranties and indemnification



The Company generally provides a warranty for its software products and services to its customers and accounts for its
warranties under Statement of Financial Accounting Standards No. 5, Accounting for Contingencies(FAS 5). The Companys products are generally warranted to perform substantially as described in the associated product
documentation for a period of 90 days. The Companys services are generally warranted to be performed consistent with industry standards for a period of 90 days from delivery. In the event there is a failure under such warranties, the Company
generally is obligated to correct the product or service to conform to the warranty provision or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company has not
provided for a warranty accrual as of April 30, 2004 or January 31, 2004. To date, the Companys warranty expense has not been significant.



The Company generally agrees to indemnify its customers against legal claims that the Companys software products infringe certain third-party
intellectual property rights and accounts for its indemnification obligations under FAS 5. In the event of such a claim, the Company is generally obligated to defend its customer against the claim and to either settle the claim at the Companys
expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company agrees to modify or replace the infringing product, or, if those options are not reasonably
possible, to refund the cost of the software, as pro-rated over a three-year period. To date, the Company has not been required to make any payment resulting from infringement claims asserted against its customers. As such, the Company has not
recorded a liability for infringement costs as of April 30, 2004 or January 31, 2004.



13



---

##### Table of Contents

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



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



Overview



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



14



---

##### Table of Contents

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



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



Investment in Distribution.    In the first
quarter of fiscal 2005, we implemented changes in our Americas distribution organization. These changes included signing relationships with a value-added distributor and several value-added resellers (VARs), creating a new general
accounts region within our Americas sales organization primarily to coordinate our efforts with the VARs, reassigning personnel to staff this newly created general accounts region, transitioning customer relationships for these reassigned personnel,
transitioning customer accounts to be focused on by the general accounts region and the VARs, moving the location of our telesales organization, and hiring a significant number of new employees in the Americas sales organization. We believe these
changes disrupted the sales process in our first quarter of our fiscal 2005 more than we anticipated, and contributed significantly to reducing our revenue in North America in this quarter. Although we currently believe the structural changes have
been substantially completed, the adverse impact of these changes will continue into our second quarter of our fiscal 2005 and for some time thereafter. For example, it will take time to transition customer relationships, to train the new personnel
and to train the VARs. In addition, after the close of our first quarter of our fiscal 2005, the Vice President in charge of our Americas sales organization resigned from the company. In the interim, our Executive Vice President of worldwide sales
is directly managing the Americas sales organization. Based in part on adverse the impact on our revenue resulting from the disruptions we experienced in our first quarter of our fiscal 2005, we believe that there is a significant risk that the
ongoing adverse impact of these changes to our Americas sales and distribution organizations, together with the absence of a dedicated executive leading our Americas sales organization, could negatively impact our revenue in the Americas in our
second quarter of our fiscal 2005 and beyond.



Investment in
Platform Product.    In the Fall of 2001, we announced a new focus on a platform approach. Primarily known as an application server provider, our platform strategy converged application server, integration, portal, security,
development and deployment tools, and operations, administration and management into a single product offering. Our approach was to unify these technologies into a single code base, with a single installation, single development and deployment tools
and single management console. Delivering a platform product required significant research and development investment in areas that were relatively new to us, such as security, integration and tools, and also required significant investment in
research and development in order to



15



---

##### Table of Contents

unify various technologies into a single code base. Selling and marketing a platform product also requires significant investment in marketing to educate
customers and prospects, and significant investment to educate our sales force. One goal of the platform approach is to sell more broadly inside customer organizations, and also to sell at higher levels in the customer organizations. This approach
may have the effect of lengthening sales cycles and increasing deal sizes, both of which make it harder to predict the timing and size of large deals. We recently released our WebLogic Platform 8.1 product in July 2003, and are actively working on the transitions inside the sales
force, product market and customer base.



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



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



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



Critical Accounting Policies



We believe there have been no significant changes in our critical accounting policies during the quarter ended April 30, 2004 as compared to our previous
disclosures in Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2004.



16



---

##### Table of Contents

Results of Operations



The following table sets forth certain line items in BEAs consolidated statements of operations as a percentage of total revenues for the fiscal
quarters ended April 30, 2004 and 2003.



|                                           |  |                            |   |  |       |  
|------------------------------------------ |  | -------------------------- | - |  | ----- | -
|                                           |  | Three monthsendedApril 30, |  
|                                           |  | 2004                       |   |  | 2003  |  
|Revenues:                                  |  |                            |   |  |       |  
|License fees                               |  | 45.7                       | % |  | 51.6  | %
|Services                                   |  | 54.3                       |   |  | 48.4  |  
|                                           |  |                            |   |  |       |  
|Total revenues                             |  | 100.0                      |   |  | 100.0 |  
|Cost of revenues:                          |  |                            |   |  |       |  
|Cost of license fees (1)                   |  | 5.4                        |   |  | 4.8   |  
|Cost of services (1)                       |  | 34.4                       |   |  | 40.7  |  
|Amortization of acquired intangible assets |  | 1.2                        |   |  | 2.1   |  
|                                           |  |                            |   |  |       |  
|Total cost of revenues                     |  | 22.3                       |   |  | 24.3  |  
|                                           |  |                            |   |  |       |  
|Gross margin                               |  | 77.7                       |   |  | 75.7  |  
|Operating expenses:                        |  |                            |   |  |       |  
|Sales and marketing                        |  | 38.4                       |   |  | 38.8  |  
|Research and development                   |  | 13.3                       |   |  | 14.7  |  
|General and administrative                 |  | 8.2                        |   |  | 7.8   |  
|Facilities consolidation                   |  | 2.9                        |   |  |      |  
|                                           |  |                            |   |  |       |  
|Total operating expenses                   |  | 62.8                       |   |  | 61.3  |  
|                                           |  |                            |   |  |       |  
|Income from operations                     |  | 14.9                       |   |  | 14.4  |  
|Interest and other, net                    |  | (1.1                       | ) |  | 0.3   |  
|                                           |  |                            |   |  |       |  
|Income before provision for income taxes   |  | 13.8                       |   |  | 14.7  |  
|Provision for income taxes                 |  | 4.1                        |   |  | 4.4   |  
|                                           |  |                            |   |  |       |  
|Net income                                 |  | 9.7                        | % |  | 10.3  | %
|                                           |  |                            |   |  |       |  

---

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



Revenues (in thousands):



|               |  |                             |         |                   |   |         |  |      |  
|-------------- |  | --------------------------- | ------- | ----------------- | - | ------- |  | ---- | -
|               |  | Three months endedApril 30, |         | Percentage change |  
|               |  | 2004                        |         | 2003              |  
|Total revenues |  | $                           | 262,635 |                   | $ | 237,294 |  | 10.7 | %



Our revenues are
derived from fees for software licenses, and services, which include customer support, education and consulting. The revenue growth of 10.7 percent for the quarter ended April 30, 2004 (the first quarter of fiscal 2005) from the same
quarter in the prior fiscal year (the first quarter of fiscal 2004) reflects growth in our customer support, consulting and education revenues, offset partially by a decrease in license revenues. Services revenue increased by 23.9
percent which was primarily due to the $20.0 million increase (22.8 percent increase) in support revenues compared to the same quarter in the prior year. Geographically, the increase in total revenues was due in large part to the 25.8 percent
increase in international revenues offset by a 2.2 percent decline in Americas revenues year over year. In the quarter ended April 30, 2004, total revenues when translated at a constant exchange rate from the same quarter in the prior year would
have been approximately $245.5 million. Many factors that impact our revenue levels are beyond our control and there can be no assurance that our revenues will grow in the future.



17



---

##### Table of Contents

License Fees (in thousands):



|             |  |                             |         |                  |   |         |  |      |   
|------------ |  | --------------------------- | ------- | ---------------- | - | ------- |  | ---- | --
|             |  | Three months endedApril 30, |         | Percentagechange |  
|             |  | 2004                        |         | 2003             |  
|License fees |  | $                           | 120,152 |                  | $ | 122,339 |  | (1.8 | )%



Management believes
the decrease in license revenues for the first quarter of fiscal 2005 from the same quarter in the prior fiscal year was due in part to organizational changes in the Americas sales force, greater than anticipated seasonality, the timing of large
transactions, and the rate of market acceptance of the WebLogic Platform 8.1. License fees for the period ended April 30, 2004 included 17 product transactions of high dollar value (transactions with a product value greater than $1.0 million)
compared to 12 transactions in the same quarter of the prior year. Management believes that the trend toward an increase in the number of license fee transactions greater than $1.0 million increases the risk that reported results may differ from
expected results.



Service Revenues



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



|                                  |  |                             |         |                  |   |         |  |      |  
|--------------------------------- |  | --------------------------- | ------- | ---------------- | - | ------- |  | ---- | -
|                                  |  | Three months endedApril 30, |         | Percentagechange |  
|                                  |  | 2004                        |         | 2003             |  
|Consulting and education revenues |  | $                           | 34,527  |                  | $ | 27,053  |  | 27.6 | %
|Customer support revenues         |  |                             | 107,956 |                  |   | 87,902  |  | 22.8 |  
|                                  |  |                             |         |                  |   |         |  |      |  
|Total service revenues            |  | $                           | 142,483 |                  | $ | 114,955 |  | 23.9 | %
|                                  |  |                             |         |                  |   |         |  |      |  



Consulting and
education revenues consist of professional services related to the deployment and use of our software products, and are typically recognized on a time and materials basis. Customer support revenues consist of fees for annual maintenance contracts,
which are recognized ratably over the term of the agreement (generally one year). Customer support is typically priced as a percentage of license fees. The significant increase in customer support revenues in the first quarter of fiscal 2005
compared to the same quarter in the prior fiscal year was driven by maintenance renewals on our existing installed base of software licenses as well as maintenance contracts sold together with new sales of software licenses. Consulting and education
revenues increased in the first quarter of fiscal 2005 compared to the same quarter in the prior fiscal year due, in part, to an increase in demand for consulting and education services related to our new WebLogic Platform products, which were
released in July 2003.



Revenues by Geographic Region



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



|                                               |  |                                 |         |                            |       |   |                                 |   |                            |  |       |  
|---------------------------------------------- |  | ------------------------------- | ------- | -------------------------- | ----- | - | ------------------------------- | - | -------------------------- |  | ----- | -
|                                               |  | Three monthsended April 30,2004 |         | Percentageof totalrevenues |       |   | Three monthsended April 30,2003 |   | Percentageof totalrevenues | 
|Americas                                       |  | $                               | 125,377 |                            | 47.7  | % |                                 | $ | 128,152                    |  | 54.0  | %
|Europe, Middle East and Africa region (EMEA) |  |                                 | 98,916  |                            | 37.7  |   |                                 |   | 70,251                     |  | 29.6  |  
|Asia/Pacific region (APAC)                   |  |                                 | 38,342  |                            | 14.6  |   |                                 |   | 38,891                     |  | 16.4  |  
|                                               |  |                                 |         |                            |       |   |                                 |   |                            |  |       |  
|Total revenues                                 |  | $                               | 262,635 |                            | 100.0 | % |                                 | $ | 237,294                    |  | 100.0 | %
|                                               |  |                                 |         |                            |       |   |                                 |   |                            |  |       |  



For each of the twelve
fiscal quarters ended April 30, 2004, EMEA and APAC revenues as a percentage of total revenues have ranged between 28 percent to 38 percent for EMEA and 13 percent to 17 percent for APAC.



18



---

##### Table of Contents

These ranges may fluctuate in the future depending upon regional economic conditions, including but not limited to, foreign currency exchange rates, and if a
large sale is made in a particular region. Management believes the decline in the Americas revenues quarter over quarter was due to a combination of factors which include organizational changes in the Americas sales force, greater than anticipated
seasonality, and the timing of large deals. Americas revenues translated at a constant exchange rate would have been $124.1 million. The increase in EMEA revenues was due to strong performance across the entire region including a significant
increase in million dollar transactions compared to a year ago. EMEA revenues translated at constant exchange rate would have been approximately $85.9 million. APAC revenues declined slightly from the same quarter in the prior year. APAC revenues
would have been approximately $35.5 million when translated at a constant exchange rate year over year.



Cost of Revenues



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



|                                           |  |                             |        |                  |   |        |  |       |  
|------------------------------------------ |  | --------------------------- | ------ | ---------------- | - | ------ |  | ----- | -
|                                           |  | Three months endedApril 30, |        | Percentagechange |  
|                                           |  | 2004                        |        | 2003             |  
|Cost of license fees                       |  | $                           | 6,471  |                  | $ | 5,897  |  | 9.7   | %
|Cost of services                           |  |                             | 48,981 |                  |   | 46,817 |  | 4.6   |  
|Amortization of acquired intangible assets |  |                             | 3,228  |                  |   | 5,017  |  | (35.7 | )
|                                           |  |                             |        |                  |   |        |  |       |  
|Total cost of revenues                     |  | $                           | 58,680 |                  | $ | 57,731 |  | 1.6   | %
|                                           |  |                             |        |                  |   |        |  |       |  



Cost of License
Fees.    Cost of license fees, as referenced in the table above, includes fees paid to third- party contractors in connection with our customer license compliance program, royalties and license fees paid to third parties,
costs associated with transferring our software to electronic media, the printing of user manuals, packaging and distribution costs, and localization costs. Cost of license fees was 5.4 percent and 4.8 percent of license revenues for the first
quarter of fiscal 2005 and 2004, respectively. The increase in cost of license fees in absolute dollars and as a percentage of license revenues from the first quarter of fiscal 2004 to the first quarter of fiscal 2005 is primarily due to increases
in royalties paid to third parties



Cost of
Services.    Cost of services, consists primarily of salaries and benefits for consulting, education and product support personnel; cost of third party delivered education and consulting revenues; and infrastructure costs in
information technology and real estate facilities for the operation of the services organization. The increase in cost of services in the first fiscal quarter of 2005 compared to the same quarter in fiscal 2004 is primarily related to costs
associated with the increase in consulting and education revenues and an exchange rate impact of approximately 6 percent. These increases in costs of services were offset by the classification of $1.2 million of rent expense as Other Income, Net in
the first quarter of fiscal 2005 in connection with the adoption of Financial Accounting Standards Board Interpretation No. 46 (FIN 46R) in August 2003. Cost of services represented 34.4 percent, and 40.7 percent of total services
revenues in the first quarter of fiscal 2005 and 2004, respectively. Cost of services as a percentage of service revenues decreased over this period due to a higher mix of higher-margin customer support revenues versus lower-margin consulting and
education revenues.



Amortization of Acquired Intangible
Assets included in Cost of Revenues.    The amortization of acquired intangible assets consists of amortization of purchased technology, non-compete agreements, customer base, patents and trademarks and distribution rights.
The decrease in amortization from the first quarter of fiscal 2004 to the first quarter of fiscal 2005 was primarily due to a portion of our acquired intangible assets becoming fully amortized in the early part of the first quarter of fiscal 2005.
In the future, amortization expense associated with intangible assets recorded prior to April 30, 2004 is currently expected to total approximately $9.2 million and $3.5 million for the remainder of fiscal 2005 and for fiscal 2006, respectively. We
periodically review the



19



---

##### Table of Contents

estimated remaining useful lives of our intangible assets. A reduction in our estimate of remaining useful lives, if any, could result in increased
amortization expense in future periods.



Operating
Expenses



Sales and Marketing (in thousands):



|                             |  |                             |         |                  |   |        |  |     |  
|---------------------------- |  | --------------------------- | ------- | ---------------- | - | ------ |  | --- | -
|                             |  | Three months endedApril 30, |         | Percentagechange |  
|                             |  | 2004                        |         | 2003             |  
|Sales and marketing expenses |  | $                           | 100,611 |                  | $ | 91,909 |  | 9.5 | %



Sales and marketing
expenses include salaries, benefits, sales commissions, travel, information technology and facility costs for our sales and marketing personnel. These expenses also include programs aimed at increasing revenues, such as advertising, public
relations, trade shows and user conferences. The increase in sales and marketing in the first fiscal quarter of 2005 compared to the same quarter in fiscal 2004 is primarily related to the investment in additional personnel in the sales organization
coupled with a negative foreign exchange impact of approximately 5 percent and offset by the classification of rent expense of $0.5 million as Interest and Other, Net in the first quarter of fiscal 2005 in connection with the adoption of FIN 46R in
August 2003.



Research and Development (in thousands):



|                                  |  |                             |        |                  |   |        |  |     |  
|--------------------------------- |  | --------------------------- | ------ | ---------------- | - | ------ |  | --- | -
|                                  |  | Three months endedApril 30, |        | Percentagechange |  
|                                  |  | 2004                        |        | 2003             |  
|Research and development expenses |  | $                           | 34,942 |                  | $ | 34,830 |  | 0.3 | %



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. Research and development
expenses remained flat in absolute dollars from the first quarter of fiscal 2004 to the first quarter in fiscal 2005 and included the $0.6 million classification of rent expense as Interest and Other, Net in the first quarter of fiscal 2005 in
connection with the adoption of FIN 46R in August 2003. We believe that a significant level of research and development is required to remain competitive and we expect to continue to commit substantial resources to product development and
engineering in future periods.



General and Administrative
(in thousands):



|                                    |  |                             |        |                  |   |        |  |      |  
|----------------------------------- |  | --------------------------- | ------ | ---------------- | - | ------ |  | ---- | -
|                                    |  | Three months endedApril 30, |        | Percentagechange |  
|                                    |  | 2004                        |        | 2003             |  
|General and administrative expenses |  | $                           | 21,615 |                  | $ | 18,610 |  | 16.1 | %



General and
administrative expenses include costs for our human resources, finance, legal, information technology, facilities and general management functions, as well as bad debt expense. The increase in expenses over the same quarter in fiscal 2004 was due
primarily accounting expenses related to the compliance with the regulations of the Sarbanes-Oxley Act, legal expenses on intellectual property matters offset by the $1.2 million reduction in the allowance for doubtful accounts in fiscal 2004, and
the classification of rent expense in the first quarter of fiscal 2005 of $0.3 million as Interest and Other, Net in connection with the adoption of FIN 46R in August 2003.



20



---

##### Table of Contents

Other Charges



Facilities Consolidation.



During the first fiscal quarter of 2005, we approved a plan to consolidate certain facilities in regions including the United States and Canada. A
facilities consolidation charge of $7.7 million was recorded using managements best estimates and was based upon the remaining future lease commitments for vacant facilities, net of estimated future sublease income. The facilities
consolidation also included the write-off of approximately $0.8 million of unamortized leasehold improvements. The estimated costs of abandoning these leased facilities, including estimated costs to sublease were based on market information and
trend analyses, including information obtained from third party real estate industry sources.



Interest and Other, Net



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



|                                       |  |                             |        |   |                  |   |        |   |  |        |   
|-------------------------------------- |  | --------------------------- | ------ | - | ---------------- | - | ------ | - |  | ------ | --
|                                       |  | Three months endedApril 30, |        |   | Percentagechange |  
|                                       |  | 2004                        |        |   | 2003             |   |       
|Interest expense                       |  | $                           | (7,285 | ) |                  | $ | (5,543 | ) |  | 31.4   | % 
|Net loss on sale of equity investments |  |                             |       |   |                  |   | (198   | ) |  | n/a    |   
|Foreign exchange gain (loss)           |  |                             | (322   | ) |                  |   | 683    |   |  | (147.2 | ) 
|Interest income and other, net         |  |                             | 4,676  |   |                  |   | 5,780  |   |  | (19.1  | ) 
|                                       |  |                             |        |   |                  |   |        |   |  |        |   
|Total interest and other, net          |  | $                           | (2,931 | ) |                  | $ | 722    |   |  | (506.0 | %)
|                                       |  |                             |        |   |                  |   |        |   |  |        |   



On August 1, 2003 and
in accordance with the adoption of FIN 46R, we recorded the carrying value of leased San Jose land and the related debt that had previously been accounted for as an operating lease. Prior to August 1, 2003, the carrying costs associated with the San
Jose land of approximately $2.6 million for the quarter ended April 30, 2004 were accounted for as rent expense, which was recorded as operating expenses and cost of services. Subsequent to August 1, 2003, these carrying costs have been recorded as
interest expense. This change is the primary reason for the increase in interest expense



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



We have a program to reduce the effect of foreign exchange gains and losses from recorded foreign currency-denominated
monetary assets and liabilities. This program involves the use of forward foreign exchange contracts in certain European, Asian and Latin and North American currencies. A forward foreign exchange contract obligates us to exchange predetermined
amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. Under this program, foreign currency gains and losses due to exchange rate
fluctuations are partially offset by gains and losses on the forward contracts. We do not use foreign currency contracts for speculative or trading purposes. All outstanding forward contracts are marked-to-market on a monthly basis with gains and
losses included in Interest income and other, net. Net gains/(losses) resulting from foreign currency transactions and hedging foreign currency transactions were approximately ($322,000) and $683,000 for the first quarter of fiscal 2005 and 2004,
respectively.



21



---

##### Table of Contents

Interest Income and other, net declined quarter over quarter due to the decline in short term interest
rates combined with the reduction in cash due to repayment of the long-term debt related to the land lease in October 2003.



Provision for Income Taxes



We have provided for income tax expense of $10.9 million and $10.5 million for the first quarters of fiscal 2005 and 2004, respectively. Our effective
income tax rate was 30 percent for both the first quarter of fiscal 2005 and for the first quarter of fiscal 2004. Our effective tax rate for the first quarter of fiscal 2005 and for the first quarter of fiscal 2004 differed from the U.S. federal
statutory rate of 35 percent primarily due to the benefit of low taxed foreign earnings.



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



Liquidity and Capital Resources



As of April 30, 2004, cash, cash equivalents (excluding all restricted cash) and short-term investments totaled $1,559.2 million versus $1,467.0 million
at January 31, 2004.



Cash flow from operations increased by
$41.6 million from $40.5 million in the first quarter of fiscal 2004 to $82.1 million in the first quarter of fiscal 2005. The increase is primarily due to net changes in certain operating assets and liabilities, which generated cash of
approximately $41.9 million in the first quarter of fiscal 2005 compared to consuming cash of $4.1 million in the first quarter of fiscal 2004, a net increase of $46.0 million.



Cash used in investing activities increased by $72.8 million from $3.2 million in the first quarter of fiscal 2004 to $76.0
million in the first quarter of fiscal 2005. This increase was primarily due to an increase of $77.6 million in net purchases of available-for-sale short-term investments.



Cash provided by financing activities in the first quarter of fiscal 2005 of $19.4 million was primarily related to the
proceeds from the issuance of common stock under employee stock compensation plans. Cash used in financing activities in the first quarter of fiscal 2004 of $63.4 million was primarily related to the repurchases of our common stock totaling $52.0
million and the increase of $21.2 million in restricted cash for collateral provided in connection with a new European banking arrangement, offset by proceeds of $9.8 million from the issuance of common stock under employee stock compensation plans.



At April 30, 2004, our outstanding short and long-term debt
obligations consisted of $550.0 million of convertible notes, long-term debt related to our San Jose land lease of $211.3 million (of which $19.7 million is recorded as accrued liabilities related to the land lease and $191.6 million is recorded as
long-term debt related to the land lease on our balance sheet), and $4.1 million of other obligations. The long-term debt related to the San Jose land lease was recorded on our balance sheet when we adopted the provision of the Financial Accounting
Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) on August 1, 2003. The adoption of FIN 46 on August 1, 2003 had no impact on our liquidity because the change in
the accounting method for the synthetic lease arrangement did not change the underlying cash flows.



22



---

##### Table of Contents

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



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



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



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



The total debt related to the San Jose land lease of $211.3 million matures in February 2006. Interest on this debt is calculated based on the London
Interbank Offering Rate (LIBOR) and the effective interest rate will fluctuate based on changes in LIBOR as well as changes in our financial position as specified in the San Jose land lease agreement. The effective annual interest rate
was approximately 2.89 percent as of April 30, 2004. Interest payments are made in cash at intervals ranging from thirty days to six months, as elected by us.



In connection with the long-term debt related to the San Jose land lease, we must maintain certain covenants, including liquidity, leverage and
profitability ratios. As of April 30, 2004, we are in compliance with all such financial covenants.



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



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



|                                                             |  |                  |         |                        |   |                    |  |                    |         |                          |   |        |  |   |       
|------------------------------------------------------------ |  | ---------------- | ------- | ---------------------- | - | ------------------ |  | ------------------ | ------- | ------------------------ | - | ------ |  | - | ------
|Minimum Contractual Obligations                              |  | Totalpaymentsdue |         | Remainderof fiscal2005 |   | Fiscal2006 and2007 |  | Fiscal2008 and2009 |         | Fiscal2010 andthereafter
|Convertible notes (principal only)                           |  | $                | 550,000 |                        | $ |                   |  | $                  | 550,000 |                          | $ |       |  | $ |      
|Interest related to convertible notes                        |  |                  | 63,250  |                        |   | 22,000             |  |                    | 41,250  |                          |   |       |  |   |      
|Other obligations                                            |  |                  | 4,641   |                        |   | 494                |  |                    | 2,016   |                          |   | 1,344  |  |   | 787   
|Long-term debt and accrued liabilities related to land lease |  |                  | 211,295 |                        |   |                   |  |                    | 211,295 |                          |   |       |  |   |      
|Operating                                                    |  |                  | 169,864 |                        |   | 34,005             |  |                    | 72,295  |                          |   | 34,556 |  |   | 29,008
|                                                             |  |                  |         |                        |   |                    |  |                    |         |                          |   |        |  |   |       
|Total contractual obligations                                |  | $                | 999,050 |                        | $ | 56,499             |  | $                  | 876,856 |                          | $ | 35,900 |  | $ | 29,795
|                                                             |  |                  |         |                        |   |                    |  |                    |         |                          |   |        |  |   |       



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



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



In September 2001 and March 2003, the Board of Directors approved an aggregate repurchase of up to $200.0 million of our common stock under the Share Repurchase Program. An insignificant number of shares



23



---

##### Table of Contents

were repurchased in fiscal 2002. In fiscal 2003, 6.9 million shares were repurchased at a total cost of approximately $42.1 million. In fiscal 2004, an
additional 8.0 million shares were purchased at a total cost of approximately $81.2 million leaving approximately $76.7 million of the approval limit available for share repurchases under the Share Repurchase Program. No repurchases were done in the
first quarter of fiscal 2005 under the Share Repurchase Program. Subsequent to the quarter ended April 30, 2004, the Board of Directors approved an additional repurchase of up to $200.0 million of our common stock under the Share Repurchase Program.



Our principal source of liquidity is our cash, cash
equivalents and short-term investments, as well as the cash flow that we generate from our operations. Our liquidity could be negatively impacted by any phenomenon that results in a reduction in demand for our products or services. We believe that
our existing cash, cash equivalents, short-term investments and cash generated from operations, if any, will be sufficient to satisfy our currently anticipated cash requirements through April 30, 2005. However, we may make acquisitions or license
products and technologies complementary to our business or we may decide to purchase the land held under lease, and may need to raise additional capital through future debt or equity financing to the extent necessary to fund any such acquisitions,
licenses, or purchase. There can be no assurance that additional financing will be available, at all, or on terms favorable to us.



Related Party Transactions



Loans to Executives and Officers



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



In September 1999, we issued an unsecured line of credit to Alfred S. Chuang, our Chief Executive Officer, in the amount of $5.0 million. No borrowings have been made and none were outstanding under this line of
credit at April 30, 2004 or January 31, 2004.



Common Board
Members or Executive Officers



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



Risk Factors that May Impact Future Operating Results



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



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



Although we have experienced annual revenue growth in recent years, our revenues have historically fluctuated. For example, in the quarters ended October
31, 2001, April 30, 2002, April 30, 2003 and April 30, 2004, our revenues declined as compared to the previous fiscal quarter, and in the quarters ended October 31, 2001, January 31, 2002, April 30, 2002 and July 31, 2002 our revenues declined as
compared to the same



24



---

##### Table of Contents

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



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



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



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



| |  | any continuing negative impact to our revenue, particularly in our second quarter of 2005, caused by the changes we made to our Americas sales and distribution organizations in our
first quarter of 2005;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



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



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



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



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



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



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



25



---

##### Table of Contents

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



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



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



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



| |  | loss of key personnel.
| | - | ----------------------



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



An increasingly material portion of our revenues has been
derived from large orders, as major customers deployed our products. For example, in the quarters ended April 30, 2004, January 31, 2004 and July 31, 2003, there were 17, 26 and 19 product transactions each with a value of greater than $1 million,
respectively, including one product transaction with a value of greater than $10 million during the quarter ended July 31, 2003. Increases in the dollar size of some individual license transactions increases the risk of fluctuation in future
quarterly results because the unexpected loss of a small number of larger orders can create a significant revenue shortfall. For example, we believe this reliance on larger transactions adversely impacted our quarter ended April 30, 2004, where our
reported license revenue was several million dollars lower than the level expected by securities analysts. If we cannot generate a sufficient number of large customer orders, turn a sufficient number of development orders into orders for large
deployments or if customers delay or cancel such orders in a particular quarter, it may have a material adverse effect on our revenues and, more significantly on a percentage basis, our net income or loss in that quarter. Moreover, we typically
receive and fulfill most of our orders within the quarter, and a substantial portion of our orders, particularly our larger transactions, are typically received in the last month of each fiscal quarter, with a concentration of such orders in the
final week of the quarter. As a result, even though we may have positive business indicators about customer demand during a quarter, we may not learn of revenue shortfalls until very late in the fiscal quarter. Not only could this significantly
adversely affect our revenues, such shortfalls would substantially adversely affect our earnings because they may occur after it is too late to adjust expenses for that quarter. This is particularly relevant at this time because we have previously
implemented significant cost cutting measures, thereby making incremental additional cost cutting more difficult to achieve. The risk of delayed or cancelled orders is also particularly relevant with respect to our increased dependence on large
customer orders, which are more likely to be cancelled, delayed or reduced and also have a greater financial impact on our operating results. Moreover, ongoing adverse economic conditions worldwide, particularly those related to the technology
industry and the economic and political uncertainties arising out of the ongoing U.S. military activity in Iraq, recent and possible future terrorist activities, other potential military and security actions in the Middle East, and instability in
markets such as the Korean peninsula and other parts of Asia, have increased the likelihood that customers will unexpectedly delay, cancel or reduce orders, resulting in revenue shortfalls. Any revenue shortfall below our expectations could have an
immediate and significant adverse effect on our results of operations.



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



In the first quarter of fiscal 2005, we implemented changes in our Americas
distribution organization. These changes included signing relationships with a value-added distributor and several value-added resellers (VARs), creating a new general accounts region within our Americas sales organization primarily to
coordinate our efforts with the VARs, reassigning personnel to staff this newly created general accounts region, transitioning customer relationships for these reassigned personnel, transitioning customer accounts to be focused on by the general
accounts region and the VARs, moving the location of our telesales organization, and hiring a significant number of new employees in the Americas sales organization. We believe these changes disrupted the sales process in our first quarter of our
fiscal 2005 more than we anticipated, and contributed significantly to



26



---

##### Table of Contents

reducing our revenue in North America in this quarter. Although we currently believe the structural changes have been substantially completed, the adverse
impact of these changes will continue into our second quarter of our fiscal 2005 and for some time thereafter. For example, it will take time to transition customer relationships, to train the new personnel and to train the VARs. In addition, after
the close of our first quarter of our fiscal 2005, the Vice President in charge of our Americas sales organization resigned from the company. In the interim, our Executive Vice President of worldwide sales is directly managing the Americas sales
organization. Based in part on adverse impact on our revenue resulting from the disruptions we experienced in our first quarter of our fiscal 2005, we believe that there is a significant risk that the ongoing adverse impact of these changes to our
Americas sales and distribution organizations, together with the absence of a dedicated executive leading our Americas sales organization, could negatively impact our revenue in the Americas in our second quarter of our fiscal 2005 and beyond.



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



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



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



In addition to its current products which include some application server functionality, Microsoft has announced that it intends to include and enhance
certain application server and integration functionalities in its .NET technologies. Microsofts .NET technologies is a proprietary programming environment that competes with the Java-based environment of our products. A widespread acceptance
of Microsofts .NET technologies,



27



---

##### Table of Contents

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



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



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



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



We currently derive the majority of our license and service revenues from BEA WebLogic Server, BEA Tuxedo and from related products and services. We
expect these products and services to continue to account for the majority of our revenues in the immediate future. As a result, factors adversely affecting the pricing of or demand for BEA WebLogic Server, BEA Tuxedo or related services, such as a
continued or worsened general economic slowdown, future terrorist activities or military actions, any decline in overall market demand, competition, product performance or technological change, could have a material adverse effect on our business
and consolidated results of operations and financial condition. As we have increased our focus on using strategic partners to provide services related to the deployment and use of our software solutions, we previously experienced a slowdown in the
growth of our services revenue, particularly revenue derived from our consulting



28



---

##### Table of Contents

services, and it is possible this trend could resume. Conversely if this trend were to reverse, as it did in the quarters ended October 31, 2003, October 31,
2002 and January 31, 2003, when we experienced an increase from the previous fiscal quarters in our consulting revenues, it may adversely affect our overall operating margins since our consulting revenue margins are lower than our license revenue
margins as well as our other services revenue margins.



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



Revenues from markets outside of the Americas accounted 52.3% and 46.0% of our total revenues in the first quarter of fiscal 2005, and fiscal 2004,
respectively. We sell our products and services through a network of branches and subsidiaries located in 34 countries worldwide. In addition, we also market our products through distributors. We believe that our success depends upon continued
expansion of our international operations. Our international business is subject to a number of risks, including greater difficulties in maintaining and enforcing U.S. accounting and public reporting standards, greater difficulties in staffing and
managing foreign operations, unexpected changes in regulatory practices and tariffs, longer collection cycles, seasonality, potential changes in export licensing and tax laws, and greater difficulty in protecting intellectual property rights. Also,
the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies in markets where we do business can significantly impact our revenues. For example, a strengthening of the U.S. dollar could have an adverse impact on our
international revenue, particularly in the EMEA region if the relative value of the Euro were to decline. Also, we are periodically subject to tax audits by government agencies in foreign jurisdictions. To date, the outcomes of these audits have not
had a material impact on us. It is possible, however, that future audits could result in significant assessments against us or our employees for transfer taxes, payroll taxes, income taxes, or other taxes as well as related employee and other claims
which could adversely effect our operating results. General economic and political conditions in these foreign markets, including the military action in the Middle East and geopolitical instabilities on the Korean peninsula and other parts of Asia
may also impact our international revenues, as such conditions may cause decreases in demand or impact our ability to collect payment from our customers. There can be no assurances that these factors and other factors will not have a material
adverse effect on our future international revenues and consequently on our business and consolidated financial condition and results of operations.



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



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



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



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



29



---

##### Table of Contents

reductions in information technology spending, order deferrals, and reductions or cancellations of customer orders for our products and services.



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



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



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



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



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



In addition, there has been an ongoing public debate whether employee stock
option and employee stock purchase plan shares should be measured at their fair value and treated as a compensation expense and, if so, how to properly value such charges. If we were to elect or were required to record an expense for our stock-based
compensation plans using the fair value method, we could have significant compensation charges. For example, for the quarters ended April 30, 2004, and 2003, had we accounted for stock-based compensation plans under Financial Accounting Standards
Board (FASB) Statement No. 123, as amended by FASB Statement No. 148, diluted earnings per share would have been reduced by $0.08 and $0.11 per share, respectively. Although we are currently not required to record any compensation
expense using the fair value method in connection with option grants that have an exercise price at or above fair market value and for shares issued under our employee stock



30



---

##### Table of Contents

purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as a compensation expense using the fair
value method. See Note 1 of the Notes to Condensed Consolidated Financial Statements. On March 31, 2004, FASB issued a proposed statement which, if adopted, would eliminate the ability to account for compensation transactions using Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and generally would require instead that such transaction be accounted for using the fair value based method.



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



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



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



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



31



---

##### Table of Contents

The price of our common stock may fluctuate significantly.



The market price for our common stock may be affected by a number of
factors, including developments in the Internet, changes in the software or technology industry, general market and economic conditions, further terrorist activities, military actions in Iraq and the Middle East in general, geopolitical instability
on the Korean peninsula and other parts of Asia, and other factors, including factors unrelated to our operating performance or our competitors operating performance. In addition, BEA and many other companies in the Internet, technology and
emerging growth sectors have experienced wide fluctuations in their stock prices, including recent rapid rises and declines that often have not been directly related to the operating performance of such companies, such as the declines in the stock
prices of many such companies that started in March 2000. Such factors and fluctuations, as well as general economic, political and market conditions, such as recessions, may materially adversely affect the market price of our common stock.



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 standards and limited internal resources due to other
information systems requirements. For these and other reasons, the sales cycle for our products is lengthy and is subject to delays or cancellation over which we have little or no control. We have recently experienced an increase in the number of
million and multi-million dollar license transactions. For example, in the quarters ended April 30, 2004, January 31, 2004 and July 31, 2003, we had 17, 26 and 19 product transactions each with a value at greater than $1 million, respectively,
including one product transaction with a value of over $10 million in the quarter ended July 31, 2003. 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 in our key markets has also contributed to increasing the length of our sales cycle, and there is a risk that this could continue or worsen. Finally, the recent introduction of the WebLogic
Platform 8.1 has contributed to a longer sales cycle due to the fact that it offers a more comprehensive solution that may require more detailed customer evaluations. Delays or failures to complete large orders and sales in a particular quarter
could significantly reduce revenue that quarter, as well as subsequent quarters over which revenue for the sale would likely be recognized.



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



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



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



The
market for our products and services is highly fragmented, competitive with alternative computing architectures, and characterized by continuing technological developments, evolving and competing industry standards, and changing customer
requirements. The introduction of products embodying new technologies, the emergence of new industry standards, or changes in customer requirements could result in a decline in the markets for our existing products or render them obsolete and
unmarketable. As a result, our success depends upon our ability to timely and effectively enhance existing products (such as our WebLogic Server products and Web Services features), respond to changing customer requirements, and develop and
introduce in a timely manner new products (such as our WebLogic Platform 8.1, WebLogic Integration 8.1, WebLogic Workshop 8.1, WebLogic Liquid Data 8.1 and WebLogic Portal 8.1 products) that keep pace with technological and market



32



---

##### Table of Contents

developments and emerging industry standards. In addition, the widespread continued adoption of Java technologies and standards is critical to driving sales
of our products because they operate in a Java-based environment. The widespread acceptance of Microsofts .NET technologies, which competes with Java-based environments and technologies, could curtail the use of Java. A decline in the ability
or willingness of Sun Microsystems, Inc., the creator and licensor of a substantial portion of the basic technologies and standards comprising Java, to devote resources to promote and facilitate the adoption and further development of Java
technologies and standards, as well as to make these Java technologies and standards available on sufficiently favorable terms, could also curtail the use of Java by the software industry, including us. If the rate of adoption of Java technologies
and standards were to slow or decline, and we were unable to successfully adapt our products to other technologies and standards, it would adversely affect the sales of our products and services. It is possible that our products will not adequately
address the changing needs of the marketplace and that we will not be successful in developing and marketing enhancements to our existing products or products incorporating new technology on a timely basis. Failure to develop and introduce new
products, or enhancements to existing products, in a timely manner in response to changing market conditions or customer requirements, or lack of customer acceptance of our products, will materially and adversely affect our business, results of
operations and financial condition. In addition, our success is increasingly dependent on our strategic partners ability to successfully develop and integrate their software with the BEA products with which it interoperates or is bundled,
integrated or marketed. If their software performs poorly, contains errors or defects or is otherwise unreliable, or does not provide the features and benefits expected or required, it could lower the demand for our solutions and our products and
services, result in negative publicity or loss of our reputation, and adversely affect our revenues and other operating results.



We could report a net loss again.



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



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



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



33



---

##### Table of Contents

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



From our inception in January
1995, we have made a substantial number of strategic acquisitions. In connection with acquisitions completed prior to April 30, 2004, we recorded approximately $389.3 million as intangible assets and goodwill of which approximately $320.4 million
has been amortized or written off as of April 30,2004. In the third quarter of fiscal 2002, we recorded asset impairment charges totaling $80.1 million against certain acquired intangible assets and goodwill. If future events cause
additional impairment of any intangible assets acquired in our past or future acquisitions, we may have to record additional charges relating to such assets sooner than we expect which would cause our profits to decline. In addition, integration of
acquired companies, divisions and products involves the assimilation of potentially conflicting operations and products, which diverts the attention of our management team and may have a material adverse effect on our operating results in future
quarters. It is possible that we may not achieve any of the intended financial or strategic benefits of these transactions. While we intend to make additional acquisitions in the future, there may not be suitable companies, divisions or products
available for acquisition. Our acquisitions entail numerous risks, including the risk that we will not successfully assimilate the acquired operations and products, retain key employees of the acquired operations, or execute successfully the product
development strategy driving the acquisition. There are also risks relating to the diversion of our managements attention, and difficulties and uncertainties in our ability to maintain the key business relationships that we or the acquired
entities have established. In addition, we may have product liability or intellectual property liability associated with the sale of the acquired companys products. Acquisitions also expose us to the risk of claims by terminated employees,
from shareholders of the acquired companies or other third parties related to the transaction. Finally, if we undertake future acquisitions, we may issue dilutive securities, assume or incur additional debt obligations, incur large one-time
expenses, utilize substantial portions of our cash, and acquire intangible assets that would result in significant future amortization expense. Any of these events could have a material adverse effect on our business, operating results and financial
condition.



On June 29, 2001, the FASB eliminated pooling of
interests accounting for acquisitions. The effect of this change could be to increase the portion of the purchase price for any future acquisitions that must be charged to our cost of revenues and operating expenses in the periods following any such
acquisitions. As a consequence, our results of operations in periods following any such acquisition could be materially adversely affected. Although these changes will not directly affect the purchase price for any of these acquisitions, they will
have the effect of increasing the reported expenses associated with any of these acquisitions. To that extent, these changes may make it more difficult for us to acquire other companies, product lines or technologies. Also on June 29, 2001, the FASB
pronounced under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(FAS 142) that purchased goodwill should not be amortized, but rather, should be periodically reviewed for impairment. Such
impairment could be caused by internal factors as well as external factors beyond our control. The FASB has further determined that at the time goodwill is considered impaired, an amount equal to the impairment loss should be charged as an operating
expense in the statement of operations. The timing of such an impairment (if any) of goodwill acquired in past and future transactions is uncertain and difficult to predict. Our results of operations in periods following any such impairment could be
materially adversely affected. We are required to determine whether goodwill and any assets acquired in past acquisitions have been impaired in accordance with FAS 142 and, if so, charge such impairment as an expense. In the quarter ended October
31, 2001, we took an asset impairment charge of $80.1 million related to past acquisitions. We have remaining net goodwill and net acquired intangible assets of approximately $68.9 million at April 30, 2004, so if we are required to take such
additional impairment charges, the amounts could have a material adverse effect on our results of operations.



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



Our success depends upon our proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect



34



---

##### Table of Contents

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



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



We
have experienced substantial growth since our inception in 1995 that has placed a strain on our administrative and operational infrastructure. Overall, we have increased the number of our employees from 120 employees in three offices in the United
States at January 31, 1996 to approximately 3,173 employees in 71 offices in 34 countries at April 30, 2004. Our ability to manage our staff and growth effectively requires us to continue to improve our operational, financial, disclosure and
management controls, reporting systems and procedures, and information technology infrastructure, particularly in light of the enactment of the Sarbanes-Oxley Act of 2002 and related regulations. In this regard, we are continuing to update our
management information systems to integrate financial and other reporting among our multiple domestic and foreign offices. In addition, we may continue to increase our staff worldwide and continue to improve the financial reporting and controls for
our global operations. We are also continuing to develop and roll out information technology initiatives. It is possible that we will not be able to successfully implement improvements to our management information, control systems, reporting
systems and information technology infrastructure in an efficient or timely manner and that, during the course of this implementation, we could discover deficiencies in existing systems and controls, as well as past errors resulting therefrom. If we
are unable to manage growth effectively, our business, results of operations and financial condition will be materially adversely affected.



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



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



We currently intend to construct additional corporate offices and research and development facilities on the San Jose land. Accordingly, the land is
treated as a held and used asset. If we were to decide not to proceed with the construction of these facilities, if we significantly delayed or scaled back the construction project or if we decide to sell the San Jose land, the land may then meet
the criteria to be treated as a held for sale asset and, if the lands fair market value at that time was less than the carrying value of $306.5 million, we would have to write-down the carrying value of the San Jose land, which
could result in substantial charges to our consolidated statement of operations of up to the carrying value of $306.5 million. We will assess the San Jose land for



35



---

##### Table of Contents

impairment under Statement of Financial Accounting Standards No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets(FAS
144), at least annually or whenever events or circumstances indicate that the value of the San Jose land may be permanently impaired. In accordance with FAS 144, if we determine that one or more impairment indicators are present, indicating
the carrying amount may not be recoverable, the carrying amount of the asset would be compared to net future undiscounted cash flows that the asset, or the relevant asset grouping, is expected to generate. If the carrying amount of the asset is
greater than the net future undiscounted cash flows that the asset is expected to generate, the fair value would be compared to the carrying value of the asset. If the fair value is less than the carrying value, an impairment loss would be
recognized. The impairment loss would be the excess of the carrying amount of the asset over its fair value. To date, no impairment losses on the land have been recorded under FAS 144, however there can be no assurance that we will not be required
to record a substantial impairment charge related to the San Jose land of up to $306.5 million if events or circumstances change and we determine that the value of the San Jose land is impaired under FAS 144.



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



At April 30, 2004, we had approximately $550 million of convertible notes outstanding and debt related to the San Jose land lease of $211.3
million. As a result of this indebtedness, we have substantial principal and interest payment obligations. The degree to which we are leveraged could significantly harm our ability to obtain financing for working capital, acquisitions or other
purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other
factors affecting our operations, many of which are beyond our control.



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



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



We believe our future success will depend upon our ability to attract and retain highly skilled personnel, including our Chairman, Chief Executive Officer
and President, Alfred S. Chuang, 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.



36



---

##### Table of Contents

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



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



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



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



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



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
|------- | ----------------------------------------------------------



Foreign Exchange



Our revenues originating outside the Americas were 52.3 percent and 46.0 percent of total revenues in the first quarter of fiscal 2005 and 2004,
respectively. International revenues from each individual country outside of the United States were less than 10 percent of the total revenues in the first quarter of fiscal 2005 and 2004 respectively with the exception of United Kingdom with $36.7
or 14.0 percent and $24.7 million or 10.4 percent, respectively. International sales were made mostly from our foreign sales subsidiaries in the local countries and are typically denominated in the local currency of each country. These subsidiaries
also incur most of their expenses in the local currency. Accordingly, foreign subsidiaries use the local currency as their functional currency.



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



Our exposure to foreign exchange rate
fluctuations arises in part from intercompany accounts between our parent company in the United States and our foreign subsidiaries. These intercompany accounts are typically denominated in the functional currency of the foreign subsidiary in order
to centralize foreign exchange risk. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated



37



---

##### Table of Contents

into U.S. dollars for consolidation purposes. As exchange rates vary, these results, when translated, may vary from expectations and may adversely impact
overall financial results.



We have a program to reduce the
effect of foreign exchange gains and losses from recorded foreign currency-denominated monetary assets and liabilities. This program involves the use of forward foreign exchange contracts in certain European, Asian and Latin and North American
currencies. A forward foreign exchange contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such
exchange. Under this program, foreign currency gains and losses due to exchange rate fluctuations are partially offset by gains and losses on the forward contracts. We do not use foreign currency contracts for speculative or trading purposes. All
outstanding forward contracts are marked-to-market on a monthly basis with gains and losses included in interest and other, net. Net gains/(losses) resulting from foreign currency transactions and hedging foreign currency transactions were
approximately ($322,000) and $683,000 for the first quarter of fiscal 2005 and 2004, respectively.



Our outstanding forward contracts as of April 30, 2004 are presented in the table below. This table presents the net notional amount in U.S. dollars using
spot exchange rates in April 2004 and the weighted average contractual foreign currency exchange rates. Notional weighted average exchange rates are quoted using market conventions where the currency is expressed in units per U.S. dollar. All of
these forward contracts mature within 111 days or less as of April 30, 2004. Net sales of foreign currency are stated as a positive net notional amount and net purchases of foreign currency are stated as a negative net notional amount.



|                                       |  |                    |   |  |                                      
|-------------------------------------- |  | ------------------ | - |  | -------------------------------------
|                                       |  | Net notionalamount |   |  | Notional weightedaverage exchangerate
|                                       |  | (in thousands)     |   |  |                                      
|Functional CurrencyU.S. Dollar        |  |                    |   |  |                                      
|Brazilian reals                        |  | (1,400             | ) |  | 3.000                                
|British pounds                         |  | 6,000              |   |  | 0.537                                
|Canadian dollars                       |  | 3,300              |   |  | 1.319                                
|Danish kroners                         |  | 1,500              |   |  | 6.147                                
|Euros                                  |  | (6,300             | ) |  | 0.793                                
|Israeli shekels                        |  | 5,000              |   |  | 4.485                                
|Japanese yen                           |  | (9,900             | ) |  | 105.720                              
|Korean won                             |  | (13,500            | ) |  | 1165.730                             
|New Zealand dollars                    |  | (5,500             | ) |  | 1.428                                
|Singapore dollars                      |  | (3,900             | ) |  | 1.676                                
|Swedish krona                          |  | 2,800              |   |  | 7.339                                
|Swiss francs                           |  | 4,700              |   |  | 1.234                                
|                                       |  |                    |   |  |                                      
|Total                                  |  | (17,200            | ) |  |                                      
|                                       |  |                    |   |  |                                      
|Functional CurrencyEURO               |  |                    |   |  |                                      
|British pounds                         |  | 10,900             |   |  | 0.554                                
|Israeli shekels                        |  | (5,800             | ) |  | 4.740                                
|Swedish krona                          |  | (500               | ) |  | 7.619                                
|Swiss francs                           |  | (1,500             | ) |  | 1.289                                
|                                       |  |                    |   |  |                                      
|Total                                  |  | 3,100              |   |  |                                      
|                                       |  |                    |   |  |                                      
|Functional Currency Australian Dollar |  |                    |   |  |                                      
|New Zealand dollars                    |  | 2,100              |   |  | 1.500                                
|Singapore dollars                      |  | 5,600              |   |  | 1.761                                
|                                       |  |                    |   |  |                                      
|Total                                  |  | 7,700              |   |  |                                      
|                                       |  |                    |   |  |                                      
|Grand total                            |  | (6,400             | ) |  |                                      
|                                       |  |                    |   |  |                                      



38



---

##### Table of Contents

Interest Rates



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



We account for our investment instruments in accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities(FAS 115). All of the cash equivalents, short-term investments and short and long-term restricted cash are treated as available-for sale under FAS 115. Investments in both fixed rate and
floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than
expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have seen a decline in
market value due to changes in interest rates. However, we reduce our interest rate risk by investing our cash in instruments with remaining time to maturity of less than two years. As of April 30, 2004, the average holding period until maturity of
our cash equivalents, short and long-term restricted cash, short and long-term investments was approximately 241 days. The table below presents the principal amount and related weighted average interest rates for our investment portfolio. Short-term
investments are all in fixed rate instruments.



Table of
investment securities (in thousands) at April 30, 2004:



|                                                |  |            |           |                     |      |  
|----------------------------------------------- |  | ---------- | --------- | ------------------- | ---- | -
|                                                |  | Fair value |           | Averageinterestrate |     
|Cash equivalents                                |  | $          | 510,724   |                     | .93  | %
|Short-term investments (0-1 year)               |  |            | 16,239    |                     | 1.13 | %
|Short-term investments (1-2 years)              |  |            | 835,009   |                     | 1.67 | %
|Short-term restricted cash (0-1 year)           |  |            | 1,633     |                     | 1.16 | %
|Long-term restricted cash (0-1 year)            |  |            | 5,380     |                     | 1.16 | %
|                                                |  |            |           |                     |      |  
|Total cash equivalent and investment securities |  |            | 1,368,985 |                     |      |  
|                                                |  |            |           |                     |      |  



We are exposed to
changes in short-term interest rates through the long-term debt related to the land lease of $211.3 million, which bears a variable short-term interest rate based on the London Interbank Offering Rate (LIBOR). The effective annual
interest rate on this debt was approximately 2.89 percent as of April 30, 2004. The annual interest expense on this debt will fluctuate from time to time depending on changes in LIBOR and changes in our financial position as specified in the lease
agreement. A 1.0 percent (100 basis point) increase in LIBOR will generate an increase in annual interest expense of approximately $2.1 million. We are also exposed to changes in short-term interest rates through our invested balances of cash
equivalents, restricted cash and short-term investments, the yields on which will fluctuate with changes in short-term interest rates. A 1.0 percent (100 basis point) decrease in short-term interest rates would result in an annual reduction of
interest income of approximately $9.9 million. The annual interest rate on our $550 million convertible notes is fixed at 4.0 percent through the maturity date in December 2006.



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



Evaluation of our Disclosure Controls and Internal Controls.



As of the end of the period covered by this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures
and our internal controls and procedures for financial reporting. This controls evaluation was done under the supervision and with the participation of management,



39



---

##### Table of Contents

including our Chief Executive Officer and Chief Financial Officer. Rules adopted by the Securities and Exchange Commission (SEC) require that in
this section of the Quarterly Report on Form 10-Q, we present the conclusions of the CEO and the CFO about the effectiveness of our disclosure controls and internal controls based on and as of the date of the controls evaluation.



CEO and CFO Certifications.



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



Disclosure Controls and Internal Controls.



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



Limitations on the Effectiveness of Controls.



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



Scope of the Controls
Evaluation.



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



40



---

##### Table of Contents

Conclusions.



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



41



---

##### Table of Contents



PART II. OTHER INFORMATION



|ITEM 2. | CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
|------- | --------------------------------------------------------------------------------



Stock Repurchases:



In September 2001 and March 2003, BEA approved an aggregate repurchase of up to $200 million of the company common stock under the Share Repurchase
Program. BEA did not repurchase shares of the its common stock during the quarter ended April 30, 2004. As of April 30, 2004, the remaining repurchase authorization under this program totaled $76.7 million. Subsequent to the quarter ended April 30,
2004, BEA approved an additional repurchase of up to $200 million of the company common stock under the Share Repurchase Program.



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



(a) Exhibits:



|              |  |                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibitnumber |  | Description                                                                                                                                                          
|              | 
|3.1           |  | Form of Registrants Amended and Restated Certificate of Incorporation (1)                                                                                           
|              | 
|3.2           |  | Registrants Amended and Restated Bylaws (2)                                                                                                                         
|              | 
|10.1          |  | Fiscal 2005 Executive Staff Bonus Plan*                                                                                                                              
|              | 
|31.1          |  | Certification of Alfred S. Chuang, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|              | 
|31.2          |  | Certification of William M. Klein, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.1          |  | Certification of Alfred S. Chuang, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification of William M. Klein, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* | Denotes a management contract or compensatory plan or arrangement.
|- | ------------------------------------------------------------------

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



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



(b) Reports on Form 8-K:



On February 19, 2004, the Registrant furnished a Current Report on Form 8-K
relating to the announcement of its preliminary results for its fourth quarter ended January 31, 2004.



On April 12, 2004, the Registrant filed a Current Report on Form 8-K relating to the resignation of Robert L. Joss, Board of directors of the Registrant.



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



42



---

##### Table of Contents



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)                                                                                                 
|Dated:  June 9, 2004 |  |  |  |                                                                                                                                
|                     |  | 
|                     |  |  |  | /s/    WILLIAM M. KLEIN                                                                                                        
|                     |  |  |  |                                                                                                                                
|                     |  |  |  | William M. Klein Executive Vice President
and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)



43