<PAGE>
 
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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549
 
                               ----------------
 
                                   FORM 10-Q
 
(MARK ONE)
 
[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
   Act of 1934
 
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
 
                                      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)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                       77-0394711
        (STATE OR OTHER JURISDICTION                          (I.R.S. EMPLOYER
      OF INCORPORATION OR ORGANIZATION)                     IDENTIFICATION NO. )
</TABLE>
 
                            2315 NORTH FIRST STREET
                          SAN JOSE, CALIFORNIA 95131
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                                (408) 570-8000
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
  Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
 
  As of September 9, 1998, there were approximately 67,359,000 shares of the
Registrant's Common Stock outstanding.
 
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                                       1
<PAGE>
 
                               BEA SYSTEMS, INC.
 
                                     INDEX
 
<TABLE>
<CAPTION>
                                                                        PAGE NO.
                                                                        --------
 <C>      <S>                                                           <C>
 PART 1.  FINANCIAL INFORMATION
 ITEM 1.  Financial Statements:
          Condensed Consolidated Statements of Operations
           Three and Six months ended July 31, 1998 and 1997.........       3
          Condensed Consolidated Balance Sheets
           July 31, 1998 and January 31, 1998........................       4
          Condensed Consolidated Statements of Cash Flows
           Six months ended July 31, 1998 and 1997...................       5
          Notes to Condensed Consolidated Financial Statements.......       6
 ITEM 2.  Management's Discussion and Analysis of Financial Condition
           and Results of Operations.................................       8
 ITEM 3.  Quantitative and Qualitative Disclosure About Market Risks.      19
 PART II. OTHER INFORMATION
 ITEM 4.  Submission of Matters to a Vote of Security Holders........      20
 ITEM 5.  Other Information..........................................      20
 ITEM 6.  Exhibits and Reports on Form 8-K...........................      20
          Signatures.................................................      21
</TABLE>
 
                                       2
<PAGE>
 
                         PART I. FINANCIAL INFORMATION
 
ITEM I. FINANCIAL STATEMENTS
 
                               BEA SYSTEMS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)
                                  (Unaudited)
 
<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED   SIX MONTHS ENDED
                                            JULY 31,            JULY 31,
                                       -------------------- ------------------
                                         1998       1997      1998      1997
                                       ---------  --------- --------  --------
<S>                                    <C>        <C>       <C>       <C>
Revenues:
  License fees........................ $  44,209  $ 26,112  $ 83,950  $ 50,590
  Services............................    21,268     9,595    38,977    16,563
                                       ---------  --------  --------  --------
    Total revenues....................    65,477    35,707   122,927    67,153
Cost of revenues:
  Cost of license fees................       814       590     1,589     1,168
  Cost of services....................    12,823     6,067    23,936    10,565
  Amortization of certain acquired
   intangible assets..................     5,226     2,811     8,408     5,414
                                       ---------  --------  --------  --------
    Total cost of revenues............    18,863     9,468    33,933    17,147
                                       ---------  --------  --------  --------
Gross margin..........................    46,614    26,239    88,994    50,006
Operating expenses:
  Sales and marketing.................    29,801    16,798    55,100    32,778
  Research and development............     9,365     5,779    18,633    10,922
  General and administrative..........     5,438     4,051    10,779     7,715
  Acquisition-related charges.........    38,300        --    38,791    16,000
                                       ---------  --------  --------  --------
    Total operating expenses..........    82,904    26,628   123,303    67,415
                                       ---------  --------  --------  --------
Loss from operations..................   (36,290)     (389)  (34,309)  (17,409)
Interest and other, net...............      (356)   (1,829)     (142)   (4,306)
                                       ---------  --------  --------  --------
Loss before provision for income
 taxes................................   (36,646)   (2,218)  (34,451)  (21,715)
Provision for income taxes............     1,056       600     1,679     1,172
                                       ---------  --------  --------  --------
Net loss.............................. $ (37,702) $ (2,818) $(36,130) $(22,887)
                                       =========  ========  ========  ========
Net loss per share:
  Basic............................... $   (0.57) $  (0.05) $  (0.54) $  (0.60)
                                       =========  ========  ========  ========
  Diluted............................. $   (0.57) $  (0.05) $  (0.54) $  (0.60)
                                       =========  ========  ========  ========
Shares used in computing:
  Basic net loss per share............    66,690    56,596    66,348    38,740
                                       =========  ========  ========  ========
  Diluted net loss per share..........    66,690    56,596    66,348    38,740
                                       =========  ========  ========  ========
</TABLE>
 
                            See accompanying notes.
 
                                       3
<PAGE>
 
                               BEA SYSTEMS, INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
 
<TABLE>
<CAPTION>
                                                 JULY 31, 1998 JANUARY 31, 1998
                                                 ------------- ----------------
                                                  (UNAUDITED)
<S>                                              <C>           <C>
                     ASSETS
Current assets:
  Cash and cash equivalents.....................   $ 26,146        $ 90,651
  Short-term investments........................    213,370           8,708
  Accounts receivable, net......................     64,232          47,422
  Other current assets..........................      4,909           2,970
                                                   --------        --------
    Total current assets........................    308,657         149,751
Computer equipment, furniture and leasehold
 improvements, net..............................     11,524           7,845
Acquired intangible assets, net.................     75,504          12,315
Other assets....................................      9,279           2,905
                                                   --------        --------
    Total assets................................   $404,964        $172,816
                                                   ========        ========
      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Borrowings under lines of credit..............   $  2,173        $  1,879
  Accounts payable..............................      8,800           5,040
  Accrued liabilities...........................     38,748          25,431
  Accrued income taxes..........................      3,815           2,741
  Deferred revenues.............................     19,284          14,639
  Current portion of notes payable and capital
   lease obligations............................     29,737          42,301
                                                   --------        --------
    Total current liabilities...................    102,557          92,031
Notes payable and capital lease obligations.....        508             691
Convertible subordinated notes..................    250,000             --
Stockholders' equity:
  Common stock..................................         67              66
  Additional paid-in capital....................    218,641         210,253
  Accumulated deficit...........................   (165,250)       (128,508)
  Notes receivable from shareholders............       (544)           (544)
  Deferred compensation.........................       (479)           (601)
  Accumulated other comprehensive loss..........       (536)           (572)
                                                   --------        --------
    Total stockholders' equity..................     51,899          80,094
                                                   --------        --------
    Total liabilities and stockholders' equity..   $404,964        $172,816
                                                   ========        ========
</TABLE>
 
                            See accompanying notes.
 
                                       4
<PAGE>
 
                               BEA SYSTEMS, INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                  (Unaudited)
 
<TABLE>
<CAPTION>
                                                            SIX MONTHS ENDED
                                                                JULY 31,
                                                            ------------------
                                                              1998      1997
                                                            --------  --------
<S>                                                         <C>       <C>
Operating activities:
  Net loss................................................. $(36,130) $(22,887)
  Adjustments to reconcile net loss to net cash provided by
   (used in) operating activities:
    Depreciation...........................................    1,628     1,062
    Amortization of deferred compensation..................      122       122
    Amortization of acquired intangible assets and certain
     acquisition-related charges...........................   47,708    21,554
    Amortization of debt issuance costs....................      139       --
    Changes in operating assets and liabilities, net of
     business combinations.................................   (4,330)   (3,302)
    Other..................................................       (5)      255
                                                            --------  --------
Net cash provided by (used in) operating activities........    9,132    (3,196)
                                                            --------  --------
Investing activities:
  Purchase of computer equipment, furniture and leasehold
   improvements............................................   (5,098)     (433)
  Payments for business combinations, net of cash acquired.  (98,358)   (1,519)
  Net purchases of available-for-sale short-term
   investments............................................. (204,662)       --
                                                            --------  --------
Net cash used in investing activities...................... (308,118)   (1,952)
                                                            --------  --------
Financing activities:
  Net borrowings (payments) under lines of credit..........      263    (9,050)
  Net borrowings (payments) on notes payable and capital
   lease obligations.......................................  229,988   (20,544)
  Proceeds from issuance of common stock, net..............    4,163   139,170
                                                            --------  --------
Net cash provided by financing activities..................  234,414   109,576
                                                            --------  --------
Net increase (decrease) in cash and cash equivalents.......  (64,572)  104,428
Cumulative foreign currency translation adjustment.........       67      (263)
Cash and cash equivalents at beginning of period...........   90,651     3,856
                                                            --------  --------
Cash and cash equivalents at end of period................. $ 26,146  $108,021
                                                            ========  ========
</TABLE>
--------
  See Note 1 for supplemental information of non-cash investing activity
relating to the merger with Leader Group, Inc.
 
                            See accompanying notes.
 
                                       5
<PAGE>
 
                               BEA SYSTEMS, INC.
 
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1. BASIS OF PRESENTATION
 
  The condensed consolidated financial statements included herein are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows
for the interim periods. 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 or Plan of
Operations contained in the BEA Systems, Inc. ("BEA" or the "Company") Annual
Report on Form 10-KSB for the fiscal year ended January 31, 1998 and the
supplemental consolidated financial statements and notes thereto, contained in
the Company's current report on Form 8-K as filed with the Securities and
Exchange Commission on September 10, 1998, reflecting the merger with Leader
Group, Inc. ("Leader Group"). The results of operations for the three and six
months ended July 31, 1998 are not necessarily indicative of the results for
the entire fiscal year ending January 31, 1999.
 
  The consolidated balance sheet at January 31, 1998 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.
 
NOTE 2. EARNINGS PER SHARE
 
  The Company adopted Statement of Financial Accounting Standard No. 128 ("FAS
128"), "Earnings per Share," in the fourth quarter of the fiscal year ended
January 31, 1998. As a result, the Company has changed the method used to
compute net earnings per share and has restated net earnings per share for all
prior periods as required by FAS 128. The adoption of FAS 128 did not have a
material impact on the Company's consolidated results of operations. The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations (in thousands, except per share
data):
 
<TABLE>
<CAPTION>
                                       THREE MONTHS ENDED   SIX MONTHS ENDED
                                            JULY 31,            JULY 31,
                                       -------------------- ------------------
                                         1998       1997      1998      1997
                                       ---------  --------- --------  --------
   <S>                                 <C>        <C>       <C>       <C>
   Numerator:
     Net loss......................... $ (37,702) $ (2,818) $(36,130) $(22,887)
     Effect of Series B redeemable
      convertible preferred stock
      dividends.......................       --        --        --      (268)
                                       ---------  --------  --------  --------
     Net loss available to common
      stockholders for basic loss per
      share........................... $ (37,702) $ (2,818) $(36,130) $(23,155)
                                       =========  ========  ========  ========
   Denominator:
     Weighted average shares..........    66,690    56,596    66,348    38,740
                                       =========  ========  ========  ========
     Basic and diluted net loss per
      share........................... $   (0.57) $  (0.05) $  (0.54) $  (0.60)
                                       =========  ========  ========  ========
</TABLE>
 
  The computation of diluted net loss per share for the three months ended
July 31, 1998 excludes the impact of the conversion of the 4% Convertible
Subordinated Notes issued in June and July 1998 (See Note 3), which are
convertible into 9,467,450 shares of common stock, as such impact would be
antidilutive for the periods presented.
 
 
                                       6
<PAGE>
 
NOTE 3. CONVERTIBLE SUBORDINATED DEBT OFFERING
 
  On June 12, 1998, the Company completed the sale of $200 million of 4%
Convertible Subordinated Notes ("the Notes") due June 15, 2005 in an offering
to qualified institutional investors. The Company granted the initial
purchasers a 30-day option to purchase an additional $50 million of the Notes
to cover overallotments, which was exercised in full in a transaction
completed on July 7, 1998. The Notes are subordinated to all existing and
future senior indebtedness of the Company and are convertible into common
stock of the Company at a conversion rate of 37.8698 shares per $1,000
principal amount of Notes (equivalent to an approximate conversion price of
$26.41 per share). The Notes are redeemable at the option of the Company in
whole or in part at any time on or after June 5, 2001, in cash plus accrued
interest through the redemption date, if any, subject to certain events.
 
NOTE 4. COMPREHENSIVE INCOME
 
  Effective February 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," ("FAS 130").
FAS 130 establishes new rules for the reporting of comprehensive income and
its components and requires foreign currency translation adjustments and
unrealized gains or losses on the Company's available-for-sale investments,
which prior to adoption were reported in shareholders' equity, to be included
in other comprehensive income. Prior year financial statements have been
restated to conform to the requirements of FAS 130.
 
  The components of comprehensive income, net of tax, are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED   SIX MONTHS ENDED
                                             JULY 31,            JULY 31,
                                        -------------------- ------------------
                                          1998       1997      1998      1997
                                        ---------  --------- --------  --------
   <S>                                  <C>        <C>       <C>       <C>
   Net loss...........................  $ (37,702) $ (2,818) $(36,130) $(22,887)
   Foreign currency translation
    adjustment........................        (46)     (280)       25      (184)
   Change in unrealized gain (loss) on
    available-for-sale investments....        (16)      --        (37)      --
                                        ---------  --------  --------  --------
   Comprehensive loss.................  $ (37,764) $ (3,098) $(36,142) $(23,071)
                                        =========  ========  ========  ========
</TABLE>
 
NOTE 5. ACQUISITIONS
 
  On June 16, 1998, the Company completed an Asset Purchase Agreement with NCR
Corporation ("NCR") under which the Company purchased the TOP END enterprise
middleware technology and product family for approximately $92.4 million in
cash. The Company has accounted for the acquisition as a purchase of assets.
In connection with the purchase, the Company recorded a charge of $38.3
million relating to acquired in-process research and development in its second
quarter ended July 31, 1998. The remaining purchase price was primarily
allocated to intangible assets.
 
  In July 1998, the Company acquired Entersoft Systems Corporation, an
independent distributor of TOP END products. The purchase price of the
transaction was approximately $2.7 million in cash. The Company has accounted
for the acquisition using the purchase method, with the purchase price being
allocated primarily to intangible assets.
 
NOTE 6. SUBSEQUENT EVENT
 
  In August 1998, the Company paid the remaining $27.7 million outstanding
debt due to Novell, Inc. in connection with the acquisition of TUXEDO,
securing the perpetual rights to the BEA TUXEDO product.
 
                                       7
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
  The following discussion of the financial condition and results of
operations of BEA Systems, Inc. should be read in conjunction with
Management's Discussion and Analysis or Plan of Operations and the
Consolidated Financial Statements and the Notes thereto included in the
Company's Annual Report on Form 10-KSB for the year ended January 31, 1998,
and the supplemental consolidated financial statements and notes thereto,
contained in the Company's current report filed with the Securities and
Exchange Commission on September 10, 1998, reflecting the merger with Leader
Group, Inc. This discussion 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
regarding beliefs, plans, expectations or intentions regarding the future. All
forward-looking statements included in this document are made as of the date
hereof, based on information available to BEA as of the date thereof, and BEA
assumes no obligation to update any forward-looking statement. 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 heading "Factors That May Impact Future Operating Results."
 
  All financial information for dates and periods prior to the merger with
Leader Group, Inc. ("Leader Group") have been recast to reflect the combined
operations of the Company and Leader Group.
 
RESULTS OF OPERATIONS
 
THREE AND SIX MONTHS ENDED JULY 31, 1998 AND 1997
 
 Revenues
 
  The Company's revenues are derived from fees for software licenses and from
maintenance, customer support, education and consulting services. The
Company's consolidated revenues for the second quarter ended July 31, 1998
were $65.5 million, which represented an 83 percent increase from $35.7
million in the same quarter of the prior fiscal year. Consolidated revenues
also increased 83 percent to $122.9 million for the six months ended July 31,
1998, compared to $67.2 million for the six months ended July 31, 1997.
 
  License revenues for the quarter ended July 31, 1998 were $44.2 million, an
increase of 69 percent from $26.1 million in the same quarter of the prior
fiscal year. License revenues increased 66 percent to $84.0 million for the
six months ended July 31, 1998 as compared to $50.6 million for the six months
ended July 31, 1997. The increase was mainly due to continued customer
acceptance of and increase in market awareness for the Company's middleware
products, expansion of the Company's direct sales force and the development of
indirect sales channels, such as value-added resellers and distributors.
License revenues represented 68 percent and 73 percent of total revenues for
the second quarter ended July 31, 1998 and 1997, respectively, and 68 percent
and 75 percent of total revenues for the six months ended July 31, 1998 and
1997, respectively. The decrease in license revenues as a percentage of total
revenues was primarily due to the substantial increase in service revenues as
a result of the Company's increased focus on its service offerings.
 
  Service revenues for the quarter ended July 31, 1998 were $21.3 million, an
increase of 122 percent from $9.6 million in the same quarter of the prior
fiscal year. Service revenues represented 32 percent and 27 percent of total
revenues for the quarter ended July 31, 1998 and 1997, respectively. For the
six months ended July 31, 1998, service revenues were $39.0 million, an
increase of 135 percent from $16.6 million in the same period of the prior
fiscal year. Service revenues represented 32 percent and 25 percent of total
revenues for the six months ended July 31, 1998 and 1997, respectively. The
increase in services revenues was due in large part to an increase in the
number of service and support employees and consultants as well as an increase
in the number of service-related product offerings.
 
 
                                       8
<PAGE>
 
  International revenues accounted for 42 percent and 44 percent of revenues
for the three month period ended July 31, 1998 and 1997, respectively, and 46
percent for both six month periods. The Company experienced revenue growth in
the Americas and Europe, with the European region experiencing particularly
strong performance. Revenues from the Asia/Pacific region for the quarter and
six month periods ended July 31, 1998 comprised a lower percentage of total
revenues than posted in the prior fiscal periods as a result of economic,
banking and currency difficulties in that region which has resulted in the
delay of orders for the Company's products from Asian customers and is likely
to result in further delays and cancellations of such orders. The Company
anticipates that its financial results will continue to be adversely impacted
by weak Asian economic conditions.
 
  For the three and six month periods, the Company continued to derive the
majority of its license revenues from BEA TUXEDO and products that work in
conjunction with BEA TUXEDO. Additionally, service revenues relate principally
to the BEA TUXEDO product family. Management expects that license and service
revenues from BEA TUXEDO will continue to account for the majority of the
Company's revenues for the foreseeable future.
 
 Cost of Revenues
 
  Consolidated cost of revenues increased 99 percent for the quarter ended
July 31, 1998 to $18.9 million as compared to $9.5 million for the same
quarter in the prior fiscal year. As a percent of total revenue, total cost of
revenues increased from 27 percent in the quarter ended July 31, 1997 to 29
percent in the quarter ended July 31, 1998. Consolidated cost of revenues for
the six months ended July 31, 1998 was $33.9 million as compared to $17.1
million for the six months ended July 31, 1997, an increase of 98 percent. As
a percent of total revenues, total cost of revenues increased from 26 percent
for the six months ended July 31, 1997 to 28 percent for the six months ended
July 31, 1998. This percentage increase was primarily the result of an
increase in services as a percentage of total revenues which carry a
substantially higher cost of revenues than software license sales.
 
  Cost of licenses includes expenses related to the purchase of compact discs,
costs associated with transferring the Company's software to electronic media,
the printing of user manuals, packaging and distribution costs. Cost of
licenses totaled $814,000 and $590,000 for the quarter ended July 31, 1998 and
1997, respectively. Cost of licenses totaled $1.6 million and $1.2 million for
the six months ended July 31, 1998 and 1997, respectively. For both the three
and six month periods presented, cost of licenses represented approximately 2
percent of license revenues.
 
  Cost of services, which consists primarily of salaries and benefits for the
Company's consulting and product support personnel, was $12.8 million and $6.1
million for the quarter ended July 31, 1998 and 1997, respectively,
representing 60 percent and 63 percent of total service revenues for each
period. Cost of services were $23.9 million and $10.6 million for the six
months ended July 31, 1998 and 1997, respectively, representing 61 percent and
64 percent of total service revenues for each period. The increase in cost of
services in absolute dollars was due primarily to additional consulting,
education and support personnel in response to the increased demand for the
Company's service products. Additionally, customer support costs increased due
to the expansion of customer support centers in Europe and Asia and costs to
improve the Company's overall customer support infrastructure. In the future,
management expects the cost of services as a percentage of total service
revenues to range between 65 percent and 70 percent as the Company continues
to build its support and service organization, although there can be no
assurance that the Company will be able to maintain such percentages.
 
  Amortization of certain acquired intangible assets totaled $5.2 million and
$2.8 million for the quarter ended July 31, 1998 and 1997, respectively and
$8.4 million and $5.4 million for the six month periods. As a percentage of
total revenues, amortization expense was 8 percent for both three month
periods ended July 31, 1998, and July 31, 1997. For the six months ended July
31, 1998 and 1997, amortization expense was 7 percent and 8 percent,
respectively. The increase in amortization expense in absolute dollars is
primarily due to the Company's recent acquisition of the TOP END enterprise
middleware technology and product family ("TOP END") from NCR Corporation
("NCR"). In the future, amortization expense associated with intangible assets
acquired through July 31, 1998 is expected to total approximately $6.8 million
and $6.2 million for the remaining third
 
                                       9
<PAGE>
 
and fourth quarter of fiscal year 1999, and approximately $26.9 million for
the fiscal year ending January 31, 2000 and approximately $23.2 million in
aggregate through the fiscal year ending January 31, 2004.
 
 Operating Expenses
 
  Sales and marketing expenses include salaries, sales commissions, travel and
facility costs for the Company's sales and marketing personnel. These expenses
also include programs aimed at increasing revenues, such as advertising,
public relations, trade shows and expositions. Sales and marketing expenses
were $29.8 million and $16.8 million for the three months ended July 31, 1998
and 1997, respectively, representing 46 percent and 47 percent of total
revenues for each period. Sales and marketing expenses were $55.1 million and
$32.8 million for the six months ended July 31, 1998 and 1997, respectively,
representing 45 percent and 49 percent of total revenues for each period.
While decreasing as a percentage of total revenues, sales and marketing
expenses increased in absolute dollars due to the expansion of the Company's
direct sales force and an increase in marketing personnel and programs. The
Company expects to continue to invest in sales channel expansion and marketing
programs to promote the Company's products and competitive position.
Accordingly, the Company expects sales and marketing expenses to continue to
increase in future periods in absolute dollars while remaining relatively
constant as a percentage of total revenues, although there can be no assurance
that total revenues will increase to maintain such percentage.
 
  Research and development expenses consist primarily of salaries and benefits
for software engineers, contract development fees, costs of computer equipment
used in software development and facilities expenses. For the fiscal quarters
ended July 31, 1998 and 1997, research and development expenses were $9.4
million and $5.8 million, respectively, representing 14 percent and 16 percent
of total revenues for each period. For the six months ended July 31, 1998 and
1997, research and development expenses were $18.6 million and $10.9 million,
respectively, representing 15 percent and 16 percent of total revenues for
each period. While decreasing as a percentage of total revenues, research and
development spending increased in absolute dollars due to an increase in
software development personnel and related expenses. The Company expects to
continue to commit substantial resources to product development and
engineering in future periods. As a result, the Company expects research and
development expenses to continue to increase in absolute dollars in future
periods. Additionally, management intends to continue recruiting and hiring
experienced software development personnel and to consider the licensing and
acquisition of technologies complementary to the Company's business.
 
  General and administrative expenses include costs for the Company's human
resources, finance, information technology and general management functions,
as well as the amortization of goodwill associated with various acquisitions.
General and administrative expenses were $5.4 million and $4.1 million for the
second quarter ended July 31, 1998 and 1997, respectively, representing 8
percent and 11 percent of total revenues for each period. General and
administrative expenses were $10.8 million and $7.7 million for the six months
ended July 31, 1998 and 1997, respectively, representing 9 percent and 11
percent of total revenues for each period. While decreasing as a percentage of
total revenues, the increase in general and administrative expenses in
absolute dollars was attributed to the expansion of the Company's support
infrastructure, including information systems and associated expenses
necessary to manage the Company's growth. The decrease in general and
administrative expenses as a percentage of total revenue was due to the
substantial increase in the Company's total revenues and economies of scale
achieved in its administrative functions. Goodwill amortization totaled
$803,000 and $83,000 in the second quarter of fiscal years 1999 and 1998,
respectively. In the future, amortization of goodwill acquired prior to July
31, 1998 is expected to total $989,000 for each of the remaining quarters in
fiscal year 1999, approximately $4.0 million for the fiscal year ending
January 31, 2000 and approximately $4.9 million in aggregate for the years
there after through the fiscal year ending January 31, 2003. The Company
anticipates that general and administrative expenses will increase in absolute
dollars while decreasing slightly as a percentage of total revenues, although
there can be no assurances that total revenues will increase to achieve such
percentage.
 
  Acquisition-related charges for the quarter ended July 31, 1998 included a
$38.3 million write-off of acquired in-process research and development
expenses associated with the acquisition of TOP END from NCR.
 
                                      10
<PAGE>
 
In the first quarter of fiscal year 1998, the Company incurred $491,000 of
expenses relating to the merger with Leader Group. For the six months ended
July 31, 1997, the Company incurred a $16.0 million charge associated with the
write-off of acquired in-process research and development expenses relating to
certain technologies and products purchased from Digital Equipment
Corporation.
 
 Interest and Other
 
  Interest expense was approximately $2.5 million in the second quarter of
fiscal year 1999 and $1.8 million in the same quarter of the prior fiscal
year. Interest income was $2.3 million for the three months ended July 31,
1998 and was not material in the prior fiscal year. The increase in interest
expense was due to a higher average amount of outstanding borrowings in the
second quarter of fiscal year 1999 compared to the prior year, primarily due
to the issuance of $250 million of its 4% Convertible Subordinated Notes ("the
Notes"). Interest income increased due to a higher average cash, cash
equivalents and short-term investment balances, generated primarily from
proceeds of the convertible note offering.
 
 Provision for Income Taxes
 
  The Company recorded an income tax provision of $1.1 million and $600,000 in
the second quarter of fiscal years 1999 and 1998, respectively, as compared to
an income tax provision of $1.7 million and $1.2 million for the six months
ended July 31, 1998 and 1997, respectively. The Company's income tax provision
for the second quarter and six months ended July 31, 1998, was higher than the
comparable periods for the prior fiscal year, primarily due to taxable
earnings after giving consideration to federal and state net operating loss
and tax carryovers, foreign withholding tax and foreign income tax expense as
a result of local country profits.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  At July 31, 1998, cash, cash equivalents and short-term investments totaled
$239.5 million as compared to $99.4 million at January 31, 1998, an increase
of $140.1 million. The increase in cash, cash equivalents and short-term
investments was primarily due to proceeds from the Notes offset by cash used
in acquisitions, principally TOP END from NCR. Additionally, while the Company
generated approximately $9.1 million of cash from operations for the six
months ended July 31, 1998, cash was used to repay portions of the Company's
outstanding notes payable and capital lease obligations. Working capital
totaled $206.1 million at July 31, 1998, as compared to $57.7 million at
January 31, 1998.
 
  At July 31, 1998, the Company's outstanding short and long-term debt
obligations were $282.4 million up from $44.9 million at January 31, 1998. At
July 31, 1998, the Company's outstanding debt obligations consist principally
of the $250 million Notes and $27.7 million ($38.7 million at January 31,
1998) due to Novell, Inc. in connection with the acquisition of TUXEDO. In
August 1998, the Company paid the debt obligation due Novell in full.
 
  In addition to normal operating expenses, cash requirements are anticipated
for development of new software products and enhancement of existing products,
financing anticipated growth, payment of outstanding debt obligations and the
acquisition of products and technologies complementary to the Company's
business. The Company believes that its existing cash, cash equivalents,
short-term investments, borrowing from the Notes, and cash generated from
operations, if any, will be sufficient to satisfy its currently anticipated
cash requirements for fiscal year 1999. However, the Company intends to make
additional acquisitions and may need to raise additional capital through
future debt or equity financing to the extent necessary to fund any such
acquisitions. There can be no assurance that additional financing will be
available, if at all, or on terms favorable to the Company.
 
IMPACT OF THE YEAR 2000
 
  The Company has designed, developed and tested the most current version of
BEA TUXEDO and its other software products to be Year 2000 compliant. However,
some of the Company's customers may be using
 
                                      11
<PAGE>
 
software versions that are not Year 2000 compliant. The Company has been
encouraging such customers to upgrade to current product versions. It is
possible that the Company may experience additional costs associated with
assisting customers with these upgrades. In addition, the current products may
contain undetected errors or defects associated with Year 2000 functions that
may have a material adverse effect on the Company's business, results of
operations and financial condition. Year 2000 compliance issues are expected
to result in a significant amount of litigation against software vendors and
the extent to which the Company may be affected is uncertain.
 
  The Company has been informed by substantially all of its business
application software suppliers that their software is Year 2000 compliant. The
software from these suppliers is used in the Company's financial, sales,
customer support and administrative operations. Accordingly, the Company does
not anticipate that the advent of the millennium will not have a material
effect on its business, operating results and financial condition. However,
there can be no assurances that Year 2000 problems will not occur with respect
to the Company's computer systems. The Year 2000 problem may affect other
entities with which the Company transacts business and the Company cannot
predict the effect of the Year 2000 problem on such entities.
 
FACTORS THAT MAY IMPACT FUTURE OPERATING RESULTS
 
  BEA Systems, Inc. operates 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 the Company's business, financial condition or results of operations.
 
 Limited Operating History; Integration of Acquisitions; No Assurance of
Profitability
 
  The Company was incorporated in January 1995 and, accordingly, has a limited
operating history upon which an evaluation of the Company and its prospects
can be based. Revenues generated by the Company to date have been derived
primarily from sales of BEA TUXEDO, a product to which the Company acquired
worldwide rights in February 1996, and from fees for related services. Since
its inception, the Company has acquired a number of businesses, technologies
and products. Prior to the consummation of these acquisitions, the Company had
no revenues and limited business activities. Accordingly, the Company is
subject to the risks inherent both in the operation of a business with a
limited operative history and the integration of a number of separate and
independent business operations and there can be no assurance that the Company
will be able to address these risks successfully. At July 31, 1998, the
Company had an accumulated deficit of approximately $165.3 million. In
addition, in connection with certain acquisitions completed prior to July 31,
1998, the Company recorded approximately $234.2 million as intangible assets,
approximately $158.7 million of which has already been amortized and
approximately $75.5 million of which is expected to be amortized in future
periods through the Company's fiscal year ending January 31, 2004. The amount
of such intangible assets to be expensed to cost of revenues, to research and
development and to general and administrative expense in future periods, for
intangible assets acquired prior to July 31, 1998, is expected to be $26.0
million and $30.8 million in the fiscal years ending January 31, 1999 and
2000, respectively. To the extent the Company makes additional acquisitions of
businesses, products and technologies in the future, the Company may report
additional, potentially significant, expenses related thereto. To the extent
future events result in the impairment of any capitalized intangible assets,
amortization expenses may occur sooner than the Company expects. For the
foregoing reasons, there can be no assurance that the Company will be
profitable in any future period and recent operating results should not be
considered indicative of future financial performance.
 
 Potential Fluctuations in Quarterly Operating Results
 
  The Company expects that it will experience significant fluctuations in
future quarterly operating results as a result of many factors, including,
among others: the size and timing of customer orders, introduction or
enhancement of products by the Company or its competitors, market acceptance
of middleware products, the lengthy sales cycle for the Company's products,
technological changes in computer systems and environments, the structure and
timing of future acquisitions of businesses, products and technologies,
including the acquisition of the TOP END enterprise middleware technology
product family from NCR, the impact and duration of
 
                                      12
<PAGE>
 
deteriorating economic and political conditions in Asia and related declines
in Asian currency values, general economic conditions which can affect
customers' capital investment levels, the ability of the Company to develop,
introduce and market new products on a timely basis, changes in the Company's
or its competitors' pricing policies, customer order deferrals in anticipation
of future new products and product enhancements, the Company's success in
expanding its sales and marketing programs, mix of products and services sold,
mix of distribution channels, ability to meet the service requirements of its
customers, costs associated with acquisitions, including the acquisition of
the TOP END enterprise middleware technology product family from NCR, the
terms and timing of financing activities, loss of key personnel and
fluctuations in other foreign currency exchange rates and interpretations of
the recently introduced Statement of Position (SOP) 97-2, Software Revenue
Recognition (as amended by SOP 98-4). As a result of all of these factors, the
Company believes that quarterly revenues and operating results are difficult
to forecast and period-to-period comparisons of its results of operations are
not necessarily meaningful and should not be relied upon as indications of
future performance.
 
  A portion of the Company's revenues are derived from large orders as
customers deploy BEA products throughout their organizations. As the revenue
size of individual license transactions increases, the risk of fluctuation in
future quarterly results can also be expected to increase. Any inability of
the Company to generate large customer orders, or any delay or loss of such
orders in a particular quarter, will have a material adverse effect on the
Company's revenues and, more significantly on a percentage basis, its net
income or loss in that quarter. Moreover, the Company typically receives and
fulfills a majority of its orders within the quarter, with a substantial
portion occurring in the last month of a fiscal quarter. As a result, the
Company may not learn of revenue shortfalls until late in a fiscal quarter.
Additionally, the Company's operating expenses are based in part on its
expectations for future revenue and are relatively fixed in the short term.
Any revenue shortfall below expectations could have an immediate and
significant adverse effect on the results of operations.
 
  As is common in the software industry, the Company believes that its fourth
quarter orders are favorably impacted by a variety of factors including year-
end capital purchases by larger corporate customers and sales incentive
programs. This increase typically results in first quarter customer orders
being lower than orders received in the immediately preceding fourth quarter.
The Company anticipates that this seasonal impact is likely to increase as it
continues to focus on large corporate accounts.
 
  Similarly, shortfalls in BEA's revenues and earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of the Company's Common Stock. Moreover, the Company's stock
price is subject to the volatility generally associated with software and
technology stocks and may also be affected by broader market trends unrelated
to the Company's performance.
 
 Past and Future Acquisitions
 
  From its inception in January 1995, the Company has made a number of
strategic acquisitions. Integration of acquired companies, divisions and
products involves the assimilation of potentially conflicting operations and
products, which divert the attention of the Company's management team and may
have a material adverse effect on the Company's operating results in future
quarters. In addition, in connection with certain of its acquisitions, the
Company is required to make certain future payments. Any failure to make such
payments or otherwise perform continuing obligations relative to these
acquisitions would result in the loss of certain of its rights in the acquired
businesses or products and would have a material adverse effect on the
Company's business, operating results and financial condition. Most recently,
the Company acquired Leader Group and a business unit of Penta Systems, Inc.
in the quarter ended April 30, 1998, completed the TOP END acquisition
(discussed below) in June 1998 and acquired Entersoft in July. The Company
intends to make additional acquisitions in the future, although there can be
no assurance that suitable companies, divisions or products will be available
for acquisition. Such acquisitions entail numerous risks, including an
inability to successfully assimilate acquired operations and products, an
inability to retain key employees of the acquired operations, diversion of
management's attention, and difficulties and uncertainties in transitioning
the key business relationships from the acquired entity to the Company. In
addition, future acquisitions by the Company may result in the issuance of
 
                                      13
<PAGE>
 
dilutive securities, the assumption or incurrence of debt obligations, large
one-time expenses and the creation of intangible assets that result in
significant future amortization expense. These factors could have a material
adverse effect on the Company's business, operating results and financial
condition.
 
  The recently-completed TOP END acquisition is subject to a number of risks
that could adversely affect the Company's ability to achieve the anticipated
benefits of the TOP END acquisition. These risks may be exacerbated by the
fact that the TOP END operations and personnel are located in San Diego,
California, where the Company did not previously have any material operations.
The need to focus management's attention on establishing relationships with,
and procedures for communicating with, TOP END employees may reduce the
ability of the Company to successfully pursue other opportunities for a period
of time. Any departure of key TOP END employees or significant numbers of
other TOP END employees could have a material adverse effect on the Company.
The Company may face difficulties in retaining TOP END customers, and
customers' uncertainties as to the Company's plans and abilities to support
both the TOP END products and BEA TUXEDO after the acquisition could adversely
affect the Company's ability to retain these customers, which could have a
material adverse effect on the Company. The TOP END acquisition resulted in a
write-off related to acquired in-process research and development of $38.3
million in the Company's second quarter ended July 31, 1998 and will result in
substantial ongoing amortization expenses, which will have a negative impact
on the Company's future operating results.
 
 Product Concentration
 
  The Company currently derives the majority of its license and service
revenues from BEA TUXEDO and from related products and services. These
products and services are expected to continue to account for the majority of
the Company's revenues for the foreseeable future. As a result, factors
adversely affecting the pricing of or demand for BEA TUXEDO, such as
competition, product performance or technological change, could have a
material adverse effect on the Company's business and results of operations
and financial condition.
 
 Lengthy Sales Cycle
 
  The Company's products are typically used to integrate large, sophisticated
applications that are critical to a customer's business and the purchase of
the Company's products is often part of a customer's implementation of a
distributed computing environment. Customers evaluating the Company's software
products face complex decisions regarding alternative approaches to the
integration of enterprise applications, competitive product offerings, rapidly
changing software technologies and limited internal resources due to other
information systems requirements. For these and other reasons, the sales cycle
for the Company's products is lengthy and is subject to delays or cancellation
over which the Company has little or no control. To the extent the revenue
size of license transactions increases, customer evaluations and procurement
processes are expected to lengthen the overall sales cycle. The Company
believes its sales cycles can be affected by general economic conditions which
impact customers' capital investment decisions. Any significant increase in
the Company's sales cycle could have a material adverse effect on the
Company's business, results of operations and financial condition.
 
  Although the Company has a standard license agreement which meets the
revenue recognition criteria under current generally accepted accounting
principles, the Company must often negotiate and revise terms and conditions
of this standard agreement, particularly in larger sales transactions.
Negotiation of mutually acceptable language can extend the sales cycle and in
certain situations, may require the Company to defer recognition of revenue on
the sale. In addition, while the recently issued SOP 97-2, Software Revenue
Recognition, is not expected to have a material impact on the Company's
revenues and earnings, detailed implementation guidance of these standards has
not yet been issued. Once issued, such guidance could lead to unanticipated
changes in the Company's current revenue recognition practices and have an
adverse impact on revenues and earnings. In the event that implementation
guidance is different, the Company believes that it can adapt its current
business practice to comply with this guidance; however, there can be no
assurances that this will be the case.
 
                                      14
<PAGE>
 
 Competition
 
  The market for middleware software and related services is highly
competitive. The Company's competitors are diverse and offer a variety of
solutions directed at various segments of the middleware software marketplace.
These competitors include system and database vendors such as IBM and database
vendors such as Oracle, which offer their own middleware functionality for use
with their proprietary systems. Microsoft has released a product that includes
certain middleware functionality and has demonstrated and announced that it
intends to include this functionality in the future versions of its Windows NT
operating system. In addition, there are companies offering and developing
middleware and integration software products and related services that
directly compete with products offered by the Company. Further, the software
development tool vendors typically emphasize the broad versatility of their
toolsets and, in some cases, offer complementary middleware software that
supports these tools and performs messaging and other basic middleware
functions. Last, internal development groups within prospective customers'
organizations may develop software and hardware systems that may substitute
for those offered by the Company. A number of the Company's competitors and
potential competitors have longer operating histories, significantly greater
financial, technical, marketing and other resources, greater name recognition
and a larger installed base of customers than the Company.
 
  The Company's principal competitors currently include hardware vendors who
bundle their own middleware software products with their computer systems and
database vendors that advocate client/server networks driven by the database
server. IBM is the primary hardware vendor who offers a line of middleware and
database solutions for its customers. The bundling of middleware functionality
in IBM proprietary hardware and database systems requires the Company to
compete with IBM in its installed base, where IBM has certain inherent
advantages due to its significantly greater financial, technical, marketing
and other resources, greater name recognition and the integration of its
enterprise middleware functionality with its proprietary hardware and database
systems. The Company needs to differentiate its products based on
functionality, interoperability with non-IBM systems, performance and
reliability and establish its products as more effective solutions to
customers' needs. Oracle is the primary relational database vendor offering
products that are intended to serve as alternatives to the Company's
enterprise middleware solutions. There can be no assurance that the Company
will compete successfully with hardware, database, or other vendors, or that
the products offered by such vendors will not achieve greater market
acceptance than the Company's products.
 
  Microsoft has demonstrated certain middleware functionality and announced
that it intends to include this functionality in future versions of its
Windows NT operating system. Microsoft has also introduced a product that
includes certain middleware functionality. The bundling of middleware
functionality in Windows NT will require the Company to compete with Microsoft
in the Windows NT marketplace, where Microsoft will have certain inherent
advantages due to its significantly greater financial, technical, marketing
and other resources, greater name recognition, its substantial installed base
and the integration of its middleware functionality with Windows NT. If
Microsoft successfully incorporates middleware software products into Windows
NT or separately offers middleware applications, the Company will need to
differentiate its products based on functionality, interoperability with non-
Microsoft platforms, performance and reliability and establish its products as
more effective solutions to customers' needs. There can be no assurance that
the Company will be able to successfully differentiate its products from those
offered by Microsoft, or that Microsoft's entry into the middleware market
will not materially adversely affect the Company's 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 the Company's 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 the Company's ability to sell additional software
licenses and maintenance, consulting and support services on terms favorable
to the Company. Further, competitive pressures could require the Company to
reduce the price of its products and related services, which could materially
adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to compete
successfully against current and future competitors and the failure to do so
would have a material adverse effect upon the Company's business, operating
results and financial condition.
 
                                      15
<PAGE>
 
 International Operations
 
  International revenues accounted for 42 percent and 44 percent of
consolidated revenues in the quarter ended July 31, 1998 and the quarter ended
July 31, 1997, respectively. The Company sells its products and services
through a network of branches and subsidiaries located in 24 countries
worldwide. In addition, the Company also markets through distributors in
Europe and the Asia/Pacific region. Management believes that its success
depends upon continued expansion of its international operations. The
Company's international business is subject to a number of risks, including
unexpected changes in regulatory practices and tariffs, greater difficulties
in staffing and managing foreign operations, longer collection cycles,
seasonality, potential changes in tax laws, greater difficulty in protecting
intellectual property and the impact of fluctuating exchange rates between the
US dollar and foreign currencies in markets where the Company does business,
in particular the French franc, the German mark, the British pound, the
Japanese yen, the Australian dollar and the Korean won. The Company's
international revenues may also be impacted by general economic and political
conditions in these foreign markets. Since the late summer of 1997, a number
of Pacific Rim countries have experienced economic, banking and currency
difficulties that have led to economic downturns in those countries. Among
other things, the decline in value of Asian currencies, together with
difficulties obtaining credit, has resulted in a decline in the purchasing
power of the Company's Asian customers, which in turn has resulted in the
delay of orders for the Company's products from certain Asian customers and is
likely to result in further delays and, possibly the cancellation, of such
orders. As a result of such delays, the Company's revenues from Asia for the
quarter ended July 31, 1998 comprised a lower percentage of total revenues
than the Company has historically experienced. The Company anticipates that
its financial results will continue to be adversely impacted by the weak Asian
economic conditions. The extent of the future impact of these conditions is
difficult to predict. There can be no assurances that these factors and other
factors will not have a material adverse effect on the Company's future
international revenues and consequently on the Company's business and
consolidated financial condition and results of operations.
 
 Management of Growth
 
  The Company currently is continuing to experience a period of rapid and
substantial growth that has placed, and is expected to continue to place, a
strain on the Company's administrative and operational infrastructure. The
number of Company employees has increased from 120 employees in three offices
in the United States at January 31, 1996 to approximately 1,100 employees in
51 offices in 24 countries at July 31, 1998. The Company's ability to manage
its staff and growth effectively will require continued improvement in its
operational, financial and management controls, reporting systems and
procedures. In this regard, the Company is currently updating its management
information systems to integrate financial and other reporting among the
Company's multiple domestic and foreign offices. In addition, the Company
intends to continue to increase its staff worldwide and to continue to improve
financial reporting and controls for the Company's global operations. There
can be no assurance that the Company will be able to successfully implement
improvements to its management information and control systems in an efficient
or timely manner or that, during the course of this implementation,
deficiencies in existing systems and controls will be discovered. If
management of the Company is unable to manage growth effectively, the
Company's business, results of operations and financial condition will be
materially adversely affected.
 
 Dependence on Growth of Market for Middleware
 
  The middleware market, in which the Company conducts its business, is
emerging and is characterized by continuing technological developments,
evolving industry standards and changing customer requirements. BEA's success
is dependent in large part on the Company's middleware software products'
achieving market acceptance by large customers with substantial legacy
mainframe systems. The Company's future financial performance will depend in
large part on continued growth in the number of companies extending their
mainframe-based, mission-critical applications to an enterprise-wide
distributed computing environment through the use of middleware technology.
There can be no assurance that the market for middleware technology and
related services will continue to grow. If the middleware market fails to grow
or grows more slowly than the Company currently
 
                                      16
<PAGE>
 
anticipates, or if the Company experiences increased competition in this
market, the Company's business, results of operations and financial condition
will be adversely affected.
 
 Dependence on Key Personnel and Need to Hire Additional Personnel
 
  The Company believes its future success will depend upon its ability to
attract and retain highly skilled personnel including the Company's founders,
Messrs. William T. Coleman III, Edward W. Scott, Jr., Alfred S. Chuang and key
members of management. Competition for such personnel is intense and there can
be no assurance that the Company will be able to retain its key employees or
that it will be successful in attracting, assimilating and retaining them in
the future. As the Company seeks to expand its 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 the Company's
business, results of operations and financial condition.
 
 Expanding Distribution Channels and Reliance on Third Parties
 
  To date, the Company has sold its products principally through its direct
sales force, as well as through indirect sales channels, such as ISVs,
hardware OEMs, systems integrators, independent consultants and distributors.
The Company's ability to achieve significant revenue growth in the future will
depend in large part on its success in expanding its direct sales force and in
further establishing and maintaining relationships with distributors, ISVs and
OEMs. In particular, a significant element of the Company's strategy is to
embed its technology in products offered by the Company's ISV customers. The
Company intends to seek distribution arrangements with other ISVs to embed the
Company's technology in their products and expects that these arrangements
will account for a significant portion of the Company's revenues in future
periods. There can be no assurance that the Company will be able to
successfully expand its direct sales force or other distribution channels,
secure license agreements with additional ISVs on commercially reasonable
terms or at all, or otherwise further develop its relationships with
distributors and ISVs, or that any such expansion or additional license
agreements would result in an increase in revenues. Although the Company
believes that its investments in the expansion of its direct sales force and
in the establishment of other distribution channels through third parties
ultimately will improve the Company's operating results, to the extent that
such investments are made and revenues do not correspondingly increase, the
Company's business, results of operations and financial condition will be
materially and adversely affected.
 
  The Company relies on informal relationships with a number of consulting and
systems integration firms to enhance its sales, support, service and marketing
efforts, particularly with respect to implementation and support of its
products as well as lead generation and assistance in the sale process. The
Company will need to expand its relationships with third parties in order to
support license revenue growth. Many such firms have similar, and often more
established, relationships with the Company's principal competitors. There can
be no assurance that these and other third parties will provide the level and
quality of service required to meet the needs of the Company's customers, that
the Company will be able to maintain an effective, long term relationship with
such third parties, or that such third parties will continue to meet the needs
of the Company's customers.
 
 Rapid Technology Change; Dependence on New Products and Product Enhancements
 
  The market for the Company's products is highly fragmented, competitive with
alternative computing architectures and characterized by continuing
technological development, evolving industry standards and changing customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render the Company's existing products obsolete and unmarketable. As a result,
the Company's success depends upon its ability to enhance existing products,
respond to changing customer requirements and develop and introduce in a
timely manner new products that keep pace with technological developments and
emerging industry standards. There can be no assurance that the Company's
products will adequately address the changing needs of the marketplace or that
the Company will be successful in developing and marketing enhancements to its
existing products or products
 
                                      17
<PAGE>
 
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,
will materially and adversely affect the Company's business, results of
operations and financial condition.
 
 Risk of Software Defects
 
  The software products offered by the Company are internally complex and,
despite extensive testing and quality control, may contain errors or defects,
especially when first introduced. Such defects or errors could result in
corrective releases for the Company's software products, damage to the
Company's reputation, loss of revenue, product returns or order cancellations,
or lack of market acceptance of its products, any of which could have a
material and adverse effect on the Company's business, results of operations
and financial condition.
 
  The Company's license agreements with its customers typically contain
provisions designed to limit the Company's exposure to potential product
liability claims. It is possible, however, that the limitation of liability
provisions contained in the Company's 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 the Company has not experienced
any product liability claims to date, the sale and support of its products may
entail the risk of such claims, which could be substantial in light of the use
of such products in mission-critical applications. A successful product
liability claim brought against the Company could have a material adverse
effect on the Company's business, results of operations and financial
condition.
 
 Dependence on Proprietary Technology; Risk of Infringement
 
  The Company's success depends upon its proprietary technology. The Company
relies on a combination of patent, copyright, trademark and trade secret
rights, confidentiality procedures and licensing arrangements to establish and
protect its proprietary rights. No assurance can be given that competitors
will not successfully challenge the validity or scope of the Company's patents
or that such patents will provide a competitive advantage to the Company.
 
  As part of its confidentiality procedures, the Company generally enters into
non-disclosure agreements with its employees, distributors and corporate
partners and into license agreements with respect to its software,
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products or technology without authorization, or to develop similar
technology independently. In particular, the Company has, in the past,
provided certain hardware OEMs with access to its source code and any
unauthorized publication or proliferation of this source code could materially
adversely affect the Company's business, operating results and financial
condition. Policing unauthorized use of the Company's products is difficult,
and although the Company is unable to determine the extent to which piracy of
its software products exists, software piracy can be expected to be a
persistent problem. Effective protection of intellectual property rights is
unavailable or limited in certain foreign countries. There can be no assurance
that the Company's protection of its proprietary rights will be adequate or
that the Company's competitors will not independently develop similar
technology, duplicate the Company's products or design around any patents
issued to the Company or other intellectual property rights of the Company.
 
  The Company does not believe that any of its products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim such infringement by the Company with respect to
current or future products. Any such claims, with or without merit, could
result in costly litigation that could absorb significant management time,
which could have a material adverse effect on the Company's business,
operating results and financial condition. Such claims might require the
Company to enter into royalty or license agreements. Such royalty or license
agreements, if required, may not be available on terms acceptable to the
Company or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.
 
 
                                      18
<PAGE>
 
 Control by Management and Current Stockholders
 
  As of July 31, 1998, the Company's officers and directors and their
affiliates, in the aggregate, had voting control over approximately 62 percent
of the Company's voting common stock. In particular, Warburg, Pincus Ventures,
L.P. ("Warburg") had voting control over approximately 49 percent of the
Company's voting common stock and beneficially owned approximately 63 percent
of the Company's common stock (which includes the non-voting Class B common
stock owned by Warburg). As a result, these stockholders will be able to
control all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. The voting power
of Warburg and the Company's officers and directors under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company.
 
 Significant Leverage; Debt Service
 
  In connection with the sale of 4% Convertible Subordinated Notes, the
Company incurred $250 million indebtedness. As a result of this indebtedness,
the Company's principal and interest payment obligations has increased
substantially. The degree to which the Company will be leveraged could
materially and adversely affect the Company's ability to obtain financing for
working capital, acquisitions or other purposes and could make it more
vulnerable to industry downturns and competitive pressures. The Company's
ability to meet its debt service obligations will be dependent upon the
Company's future performance, which will be subject to financial, business and
other factors affecting the operations of the Company, many of which are
beyond its control.
 
  The Company will require substantial amounts of cash to fund scheduled
payments of interests on the Notes, payment of the principal amount of the
Notes, payment of principal and interest on the Company's other indebtedness,
future capital expenditures and any increased working capital requirements. If
the Company is unable to meet its cash requirements out of cash flow from
operations, there can be no assurance that it will be able to obtain
alternative financing. In the absence of such financing, the Company's 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 may be adversely
affected. If the Company does not generate sufficient increases in cash flow
from operations to repay the Notes at maturity, it could attempt to refinance
the Notes; however, no assurance can be given that such a refinancing would be
available on terms acceptable to the Company, if at all. Any failure by the
Company to satisfy its obligations with respect to the Notes at maturity (with
respect to payments of principal) or prior thereto (with respect to payments
of interest or required repurchases) would constitute a default under the
Indenture entered into in connection with the issuance of the Notes and could
cause a default under agreements governing other indebtedness, if any, of the
Company.
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
 
FOREIGN CURRENCY FORWARD CONTRACTS
 
  The Company has a program to minimize the effect of foreign exchange
transaction gains and losses from recorded foreign currency-denominated assets
and liabilities. This program involves the use of forward foreign exchange
contracts in certain European and Asian countries, principally U.K., France,
Germany, Finland, Sweden, Switzerland, Japan and Australia. A forward foreign
exchange contract obligates the Company to exchange predetermined amounts of
specified foreign currencies at specified exchange rates on specified dates or
to make an equivalent U.S. dollar payment equal to the value of such exchange.
Each month the Company marks to market the foreign exchange contracts based on
the change in the foreign exchange rates with any resulting gain or losses
recorded in the interest and other expense.
 
  The Company does not currently hedge anticipated foreign currency-
denominated revenues and expenses not yet incurred.
 
                                      19
<PAGE>
 
                          PART II. OTHER INFORMATION
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  At the Company's Annual Meeting of Stockholders held on June 25, 1998, the
following individuals were elected to the Board of Directors:
 
<TABLE>
<CAPTION>
                                                                         VOTES
                                                             VOTES FOR  WITHHELD
                                                             ---------- --------
     <S>                                                     <C>        <C>
     Cary J. Davis.......................................... 35,267,829  38,842
     Dean O. Morton......................................... 35,266,579  40,092
</TABLE>
 
  The following proposals were approved at the Company's Annual Meeting:
 
<TABLE>
<CAPTION>
                                                  AFFIRMATIVE NEGATIVE   VOTES
                                                     VOTES      VOTES   WITHHELD
                                                  ----------- --------- --------
     <S>                                          <C>         <C>       <C>
     1. Amendment of the Company's 1997 Employee
        Stock Purchase Plan.....................  32,237,776    585,044  15,663
     2. Amendment of the Company's 1997 Stock
        Incentive Plan..........................  27,545,429  5,277,861  15,193
     3. Ratify the appointment of Ernst & Young,
        LLP as independent auditors for the
        fiscal year ending January 31, 1998.....  35,280,994     18,521   7,156
</TABLE>
 
ITEM 5. OTHER INFORMATION.
 
  Any stockholder proposal submitted outside the processes of Rule 14a-8,
under the Securities Exchange Act for presentation to Registrant's 1999 Annual
Meeting of Stockholders will be considered untimely for the purposes of Rules
14a-4 and 14a-5 if notice thereof is received by the Registrant after April
14, 1999.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
 
(a) EXHIBITS
 
  The following exhibits are filed by attachment to this Form 10-Q:
 
<TABLE>
<CAPTION>
     EXHIBIT DESCRIPTION
     ------- -----------
     <C>     <S>
     27.1    Financial Data Schedule
</TABLE>
 
(b) REPORTS ON FORM 8-K
 
    The Company filed Current Reports on Form 8-K dated June 30, 1998,
  relating to the purchase of the TOP END enterprise middleware technology
  and product family from NCR Corporation, and September 10, 1998, to provide
  supplemental consolidated financial statements relating to the merger with
  Leader Group, Inc.
 
                                      20
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirement of the Security Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
                                          BEA SYSTEMS, INC.
                                          (Registrant)
 
                                          /s/ STEVE L. BROWN
                                          -------------------------------------
                                                     STEVE L. BROWN
                                           EXECUTIVE VICE PRESIDENT AND CHIEF
                                                    FINANCIAL OFFICER
                                             (PRINCIPAL FINANCIAL AND CHIEF
                                                   ACCOUNTING OFFICER)
 
Dated: September 14, 1998
 
                                      21