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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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



For the Fiscal Year Ended December 31, 2002



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



For the transition period from
 to



Commission File Number 000-25683



MARIMBA, INC.

(Exact name of registrant as specified in its charter)



|Delaware                 |  | 77-0422318                       
|------------------------ |  | ---------------------------------
|(State of incorporation) |  | (IRS Employer Identification No.)



440
Clyde Avenue, Mountain View, California 94043

(Address of principal executive offices, including ZIP code)



(650) 930-5282

(Registrants telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, $.0001 par value

(Title of class)



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 if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  x



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



The aggregate market value of the registrants common stock, $.0001 par value, held by non-affiliates of the registrant on June 28,
2002 was approximately $18 million. As of February 28, 2003, there were 25,319,009 shares of registrants common stock, $.0001 par value, outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of registrants definitive proxy statement (the Proxy Statement) to be mailed to stockholders in connection with
its 2003 annual meeting of stockholders scheduled to be held on June 5, 2003 are incorporated by reference into Part III of this report. Except as expressly incorporated by reference, the registrants Proxy Statement shall not be deemed to be
part of this report.



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MARIMBA,
INC.



TABLE OF CONTENTS



|               |  | PART I                                                                                         |  |   
|-------------- |  | ---------------------------------------------------------------------------------------------- |  | --
|              
|Item 1.        |  | Business                                                                                       |  | 3 
|              
|Item 2.        |  | Properties                                                                                     |  | 10
|              
|Item 3.        |  | Legal Proceedings                                                                              |  | 10
|              
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                            |  | 10
|              
|               |  | PART II                                                                                        |  |   
|              
|Item 5.        |  | Market for Registrants Common Equity and Related Stockholder Matters                          |  | 11
|              
|Item 6.        |  | Selected Financial Data                                                                        |  | 12
|              
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operation           |  | 14
|              
|Item 7a.       |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 33
|              
|Item 8.        |  | Financial Statements and Supplementary Data                                                    |  | 34
|              
|Item 9.        |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure           |  | 60
|              
|               |  | PART III                                                                                       |  |   
|              
|Item 10.       |  | Directors and Executive Officers of the Registrant                                             |  | 61
|              
|Item 11.       |  | Executive Compensation                                                                         |  | 61
|              
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 61
|              
|Item 13.       |  | Certain Relationships and Related Transactions                                                 |  | 61
|              
|Item 14.       |  | Controls and Procedures                                                                        |  | 61
|              
|               |  | PART IV                                                                                        |  |   
|              
|Item 15.       |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 62
|              
|Signatures     |  | 63                                                                                            
|              
|Certifications |  | 65                                                                                            



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PART I



The information in this report contains forward-looking statements which are subject to safe harbors
created under the U.S. federal securities laws. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking
statements, including statements that refer to projections of our future financial performance, anticipated revenue growth, profitability, capital needs, competition and market share growth, the development of new products and technologies and
market acceptance of such products or technologies, business and sales strategies, developments in our target markets, matters relating to distribution channels and partnerships, proprietary rights, litigation, and other trends in our businesses. In
addition, the words believes, anticipates, plans, expects, intends and similar expressions are intended to identify forward-looking statements. Marimbas actual results and the timing
of certain events may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed below in Item 7 under the heading Other Factors
Affecting Operating Results, Liquidity and Capital Resources. You should not regard the inclusion of forward-looking information as a representation by us or any other person that the future events, plans or expectations contemplated by us
will be achieved. All forward-looking statements in this report are based on information available to Marimba as of the date of this report, and Marimba undertakes no obligation to release publicly any updates or revisions to any such
forward-looking statements, except as otherwise required by law.



ITEM 1.    BUSINESS



Marimba, Inc. was incorporated in Delaware in February 1996. We develop, market and support software change management and software configuration management solutions. Our products help customers reduce their total cost of
information technology (IT) ownership and improve quality of IT service by streamlining the distribution and management of software applications and content. Our customer base spans multiple industries, including financial services,
healthcare, insurance, manufacturing and telecommunications. We market our products worldwide through a combination of a direct sales force and resellers.



See Management Discussion and Analysis of Financial Condition and Results of Operation and our Financial Statements and
Supplementary Data, appearing in Items 7 and 8 of this report, respectively, for additional financial information regarding our business.



Marimba Products



Marimbas products allow companies to perform policy-based distributions, updates, and repairs of software applications on desktops,
laptops, servers and devices. Additional functionality includes the ability to collect and track system, hardware and software configuration data. Our products help IT organizations provide their end-user community with higher service levels while
reducing the cost of managing their IT assets. Our bandwidth management, scalability, personalization and built-in security functionality allow corporations to use the Internet to reduce the complexity and cost of distributing, managing and updating
their software applications and data on endpoints that are both inside and outside a customers corporate firewall. Marimbas product families include the following:



Desktop/Mobile Management Product Family



Marimbas Desktop/Mobile Management product family is an enterprise-level change management solution
that allows corporations to manage the lifecycle of software on desktops, laptops and handheld devices across the Internet and other networks. This solution gives IT departments the ability to automate the deployment of software applications,
operating system patches and security updates through defined policies. Once software is deployed, the on-going maintenance and repair of that software is automated to promote standardization. Our Desktop/Mobile Management solution also provides an
inventory and audit capability, which enables IT



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departments to automate the collection of hardware and software configuration information from desktops, laptops, and handheld devices. This
information can be stored in a central location for used in software license compliance, security compliance, asset management, desktop refresh planning and helpdesk diagnostic purposes.



Server Management Product Family



Marimbas Server Management product family provides IT departments with a solution to automate
administrative tasks such as provisioning and deployment of applications and operating system patches, replication of code and content, and the ability to perform remote commands. These functions have been optimized for a variety of server
environments, from file and print servers in remote locations, to clusters of servers in data centers. Our Server Management solution allows administrators to manage large numbers of servers with heterogeneous Windows, Linux, and other UNIX server
platforms from a single console. Our solution also provides an inventory and audit capability tailored to the server environments, which enables IT departments to automate the collection of hardware and software configuration information from remote
servers. This information can be stored in a central location for used in resource planning, server consolidation planning, patch management, and helpdesk diagnostic purposes.



Embedded Management Product Family



Marimbas Embedded Management products allow device manufacturers and independent software vendors to
transparently deliver software updates, software patches, new features and new services over the Internet and other networks by embedding Marimba management capabilities into their devices or software applications.



Architecture



The Marimba infrastructure is designed to distribute software
and data efficiently over networks based upon TCP/IP (Transmission Control Protocol/Internet Protocol) and HTTP (Hyper-text Transfer Protocol), the basic communication protocol of the Internet. Marimba packages an application as a channel and
publishes the application to a transmitter, which then distributes the channel and subsequent updates across a network to tuners on client desktop computers, laptops, servers and devices.



Channel.    A channel is the application and/or related data that is distributed
using Marimbas products. For example, a channel could consist of a stock-trading application written in Java or a shrink-wrapped application. Each channel has an associated list of properties that describes its features, including application
type, author, copyright notice, update schedule and entry point. Marimbas application packager prepares the channel for distribution and inserts a channel adapter that installs and launches the application in a platform and
application-specific manner. The application packager is designed to accommodate a range of application types, including shrink-wrapped applications, Java applets, Visual Basic, C and C++ applications, and applications packaged using the Windows
Installer format (MSI). Using OSD (Open Software Description), a format for describing the way software programs relate to one another, the application packager creates a description of the installation process which is based on XML (eXtensible
Markup Language), a format commonly used on the Internet to describe data and documents. Using this technology, both shrink-wrapped and custom applications can be installed, updated and repaired without requiring changes to the original application
and without relying on the original application installer. After the application is packaged as a channel, it is published to the transmitter for distribution over the network.



Transmitter.    The transmitter is the server-side component of the Marimba
infrastructure. It distributes channels and subsequent updates to the tuner, the Marimba client. The tuner and transmitter communicate using the Marimba protocol, which is designed to substantially minimize bandwidth requirements for updates over
HTTP (Hyper-Text Transfer Protocol), the protocol used to distribute web pages. The Marimba protocol uses compression technology that compresses data and applications, and differential updating which identifies changes in code and updates only the
changed portion. All updates are transactional, interruptible and atomic,



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which means that channels on the tuner are always in a functional state even if the most recent update failed or was interrupted. In
addition, interrupted downloads can be restarted automatically at the point of interruption. Marimbas technology provides functionality to identify and verify each channel resource and installed applications. Additional transmitter features
include synchronization, replication, personalization, client feedback, bandwidth management and policy administration. Transmitter mirrors provide synchronization of server content. Mirroring provides the ability to replicate transmitter content so
that an external load balancer can be used to distribute service requests to multiple transmitters. Marimba products implement user authentication and access control using passwords or client-side certificates and by leveraging directory services,
including LDAP (Lightweight Directory Access Protocol), or Microsofts Active Directory.



Tuner.    The tuner is the client-side component of the Marimba infrastructure. The tuner subscribes to channels located on the transmitter and downloads and installs updates
of each channel. Once received from a transmitter, channels are stored locally on the tuner, making the downloaded channel resources instantly accessible regardless of whether the user is connected to the network. The tuner is typically configured
to run in the background and can manage multiple channels simultaneously without end-user interaction, updating them as necessary to present the user with the most recent version. In addition, the tuners user interface can be customized to
include the brand, logo and other look and feel elements desired by the customer. The tuner provides a set of features for modem support, bandwidth management, security controls, certificate management, update scheduling and support for corporate
network security mechanisms.



Using the Marimba
protocol, tuners can be redirected automatically to additional transmitters, serving as repeaters, in order to reduce the load on the main transmitter, to provide fault tolerance, and to make more efficient use of available bandwidth. By adding
repeaters, it is possible to provide faster download times and to service thousands of simultaneous downloads. Repeaters can be added and removed dynamically without disrupting the overall service, allowing for a high level of scalability, improved
service quality and availability. In addition, the use of a caching proxy server, which stores frequently accessed files on a local disk, can improve the efficiency of downloads through corporate network security barriers in an intranet or network
into the enterprise.



In addition to the basic
Marimba components, a variety of features are available for reporting deployment status, asset tracking, license compliance, policy-based distribution, staging updates, application signing, resource planning, certificate management, license
installation, transmitter administration, tuner administration and deploying tuner updates. All of these features are distributed as Marimba channels, and together with the basic infrastructure components, provide the necessary functionality to
distribute, manage and maintain mission critical software applications and services. Where appropriate, we provide programming interfaces and software development kits for customized extensions, allowing customers to tailor the Marimba solution to
their specific needs or to embed Marimba technology into existing applications.



Technology



We believe
that our investment in engineering has resulted in technology that provides us with a strategic advantage. Marimba products have been built from the ground up to provide a robust Internet-based solution. Marimba provides a lightweight,
cross-platform and easy-to-deploy solution that helps solve complex software application deployment and management problems which we believe are not addressed adequately by existing client-server distribution and management tools.



Marimba products make extensive use of a broad range of
technologies, including Java, JSP, TCP/IP, HTTP, LDAP, XML, SSL (Secure Socket Layer, a protocol for secure transmissions over the Internet), and various digital security technologies. Most of our products are implemented using Sun
Microsystems Java programming language. As a result, we believe that our products are portable, easily reconfigured and efficient. The use of Java has proven to be an advantage in developing portable components without significantly increasing
the engineering overhead as additional platform support is required. We believe that our use of and



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expertise in Java provides us a competitive advantage. See Other Factors Affecting Operating Results, Liquidity and Capital
ResourcesWe Rely on Third-Party Software and Applications.



The Marimba Protocol



The Marimba protocol is designed to distribute applications and data to multiple intermittently connected endpoints. The protocol is layered on HTTP so that it can be used from within most secure
corporate intranets and networks by tunneling through an HTTP proxy server. When the user is online, the tuner initiates update requests either when requested by the user or automatically using a predefined update schedule. When an update request is
received, the transmitter quickly determines which files in the channel have changed, and if a change has occurred, Marimbas technology determines exactly which bytes within those files have changed. The tuner then downloads the resulting
changes, and compression algorithms are used to further reduce the total download overhead. The efficiency of the Marimba protocol makes it possible to distribute frequent updates to large software applications and application files with relatively
low bandwidth utilization. The protocol also provides features for user authentication, personalization of content, the distribution of events and data from the tuner to the transmitter and the automatic redirection of requests to repeaters.



Cross Platform Framework



Our OSD-based software installation technology provides a
cross-platform framework for installing, updating and verifying applications in an operating system specific manner. Applications are delivered with an OSD file that defines the platforms on which the software runs, as well as the libraries and
resources it requires. In addition, the OSD file contains platform specific extensions that define the exact installation requirements. For example, on the Microsoft Windows platform, the OSD file describes exactly which files need to be installed,
which libraries that contain application code need to be updated, which registry entries need to be set and which system scripts need to be updated. Once an application is installed, the OSD file can be used to upgrade, verify and uninstall the
application. OSD files are generated automatically using an installation capture technology, which eliminates the use of the original application installer. Information technology managers can customize the OSD script to control the level of user
involvement in the resulting installation.



Security Features



We
have invested significant resources in developing Marimbas security implementation. Marimbas security features currently include end user authentication, digital certificates and signing technology to verify application authenticity, and
SSL communications to help protect the integrity and confidentiality of data transmitted via Marimbas products. Our security implementation represents a combination of software written by us and security code licensed to us by various vendors,
including encryption modules licensed from RSA Data Security and an SSL implementation from Netscape. To further enhance the breadth of our security offerings, we also licensed a Java-based security implementation. In addition, we have an
arrangement with VeriSign for the provision of digital certificates specifically for Marimba products. See Other Factors Affecting Operating Results, Liquidity and Capital ResourcesWe Rely on Third-Party Software and
Applications.



Customers



Our customer base spans multiple industry segments including
financial services, government, insurance, retail, manufacturing and telecommunications. When selling to potential customers, our Desktop/Mobile Management products are usually targeted at the IT organization, our Server Management products our
usually targeted at either the IT organization or the data center operations function, and our Embedded Management products our usually targeted at the product managers for the device or software which will embed our technology. For the years ended
December 31, 2002, 2001 and 2000, no single customer represented more than 10% of total revenues.



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Sales and Marketing



We market our products worldwide through a
direct sales force and indirectly through resellers. Our worldwide direct sales, professional services, and marketing organizations consisted of 87 individuals as of December 31, 2002, 28 of whom were located at our Mountain View, California
headquarters, 43 in regional offices located in California, Georgia, Illinois, New York and Texas, 14 in the United Kingdom and 2 in France.



Our direct sales force currently targets primarily large and medium sized accounts within North America, the UK and France. Smaller
accounts in these regions, and all accounts in other regions of Europe and Asia, are primarily targeted through independent resellers. For the years ended December 31, 2002, 2001 and 2000, sales to customers outside of the United States were
approximately 16%, 8% and 5% of total revenue. For information on risks related to foreign sales, see Other Factors Affecting Operating Results, Liquidity and Capital ResourcesOur Operating Results and Financial Condition May be
Materially Harmed if We Are Not Successful At Expanding Internationally.



Our customers typically engage our professional services organizations to assist with the implementation and deployment of our products, and we have built an experienced consulting services
organization to facilitate this. We believe that growth in our product sales depends upon our ability to provide our customers with these services and to educate third-party resellers and consultants on how to provide similar services. As a result,
over the long term, we believe that increases in product revenues would require us to increase the number of our service personnel to meet these needs.



Our marketing efforts are designed to help customers understand both the business and technical benefits of the products. We conduct a
variety of marketing programs to educate our target market, create awareness and generate leads for our products. To achieve these goals, we have engaged in marketing activities including telemarketing, direct mailings, print and online advertising
campaigns and trade shows. These programs are targeted at key information technology and financial executives as well as general managers of business units. In addition, we conduct public relations programs that include establishing and maintaining
relationships with key trade press, business press and industry analysts.



Alliances and Partnerships



We have a limited number of distribution relationships for our products with systems integrators and other resellers. Our resellers generally purchase our products at discounts from end-user list prices, and sales under these
agreements are generally denominated in U.S. dollars. This indirect sales channel has recently contributed a greater portion of our revenues, and our reliance on these relationships may increase. We believe that the support of these resellers for
our products may become increasingly important in influencing new customers decisions to license our products. See Other Factors Affecting Operating Results, Liquidity and Capital ResourcesFailure to Further Develop and Sustain
Our Indirect Sales Channel and Third-Party Distribution Relationships Could Limit or Prevent Future Growth.



We also have several marketing and technology partnerships with leading software providers, including providers of products that are
complementary to ours. These partnerships include joint sales and marketing relationships that provide us access to potential sales to large enterprises that we might not otherwise have access to, as well as product integration and other
relationships. See Other Factors Affecting Operating Results, Liquidity and Capital ResourcesWe Rely on Third-Party Marketing and Technology Relationships For Future Sales Growth.



Customer Support and Training



Our customer support and training organization consisted of
23 employees as of December 31, 2002. Our support and maintenance programs are generally priced as a percentage of software license fees and provide



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customers with telephone and email support, as well as software updates to the products. We primarily offer the following annual support and
maintenance programs for our products:



Bronze
Service.    This service provides customers with technical assistance on installation and basic product questions via e-mail and/or telephone, as well as access to our customer support engineers. With this service, customers
also receive the latest product updates as they become generally available.



Silver Service.    This program includes all the features of the Bronze Service offering with the addition of coverage 24 hours a day, every day of the week.



Gold Service.    Designed for
mission-critical applications, the Gold Service program provides customers with all the features of the Silver Service plus proactive support from designated technical account managers and certain other benefits.



Research and Development



As of December 31, 2002, our engineering organization was
comprised of 43 employees. Our product development organization is divided into development groups organized along our product lines. These development groups are supported by quality assurance and documentation groups. The quality assurance group
works with the development group to identify software defects through the entire development cycle. The documentation group is responsible for end user, administrator and developer documentation for our products.



We believe that our software development team and core
technologies represent a significant competitive advantage. A technically skilled, quality oriented and productive development organization will be a key component to the success of new product offerings. We must continue to attract and retain
highly qualified employees to further our research and development efforts. Our business and operating results could be seriously harmed if we are not able to hire and retain a strong development team.



Research and development expenses were $7.9 million in 2002,
$10.5 million in 2001 and $11.1 million in 2000. To date, substantially all software development costs have been expensed as incurred. We believe that significant investments in research and development are required to remain competitive. As we
expand, we intend to increase the absolute amount of our research and development expenditures. For more information on our research and development expenses, see Managements Discussion and Analysis of Financial Condition and Results of
Operations.



Competition



The market for our products is intensely competitive and
rapidly evolving. We expect competition to continue to increase both from existing competitors and new market entrants. We believe that our ability to compete depends on many factors both within and beyond our control, including:



| |  |  | the ease of use, performance, features, price and reliability of our solutions as compared to those of our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | the timing and market acceptance of new solutions and enhancements to existing solutions developed by us and our competitors;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the quality of our customer service; and
| | - |  | ----------------------------------------



| |  |  | the effectiveness of our sales and marketing efforts.
| | - |  | -----------------------------------------------------



We encounter competition from a number of different sources, including sellers of enterprise-wide management systems, which include
electronic software distribution, including Tivoli and Computer Associates; companies such as Novadigm and ON Technology, which market products that support the distribution of



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software applications; and other software management suites, such as LanDesk, Altiris, and Microsofts SMS. We also face competition
from our customers information technology groups and other internal development efforts.



Many of our competitors have longer operating histories and significantly greater financial, technical, marketing and other resources than we do. Many of these companies have broader relationships with
existing and potential customers and resellers which could be leveraged to more effectively compete against us. These companies may also have more established customer support and professional services organizations than we do. In addition, our
competitors may adopt aggressive pricing policies. As a result, we may not be able to maintain a competitive position against current or future competitors.



As new participants enter the market, we will face increased competition. Potential competitors may bundle their products or incorporate
additional components into existing products in a manner that discourages users from purchasing our products. Furthermore, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share.
Our competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements than we can.



Proprietary Rights and Licensing



Our success and ability to compete are dependent on our ability to develop and maintain the proprietary aspects of our technology. We rely
on a combination of patent, trademark, trade secret, and copyright law and contractual restrictions to protect the proprietary aspects of our technology. We presently have been granted five U.S. patents and have seven U.S. patent applications
pending, which might not result in the issuance of any additional valid patents. We also have several trademark registrations in the United States and some foreign countries.



We seek to protect our source code for our software, documentation and other written materials under trade
secret and copyright laws. We license our software under license agreements, which impose restrictions on the licensees ability to utilize the software. Finally, we seek to avoid disclosure of our intellectual property by requiring employees
and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we regard as proprietary. In addition, we sell our products internationally. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the
United States.



Litigation may be necessary in
the future to enforce our intellectual property rights, to protect our trade secrets, and to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of resources and could
seriously harm our business and operating results. There can be no assurance that the outcome of any such litigation would be favorable to us.



Our success and ability to compete are also dependent on our ability to operate without infringing upon the proprietary rights of others,
and we have been involved in two such patent infringement suits in the past. We could incur substantial costs to defend any future intellectual property litigation, and in the event of a future successful claim of infringement against us and our
failure or inability to license the infringed technology, our business and operating results could be significantly harmed. See Other Factors Affecting Operating Results, Liquidity and Capital ResourcesWe May Be Found to Infringe
Proprietary Rights of Others.



Employees



At December 31, 2002, we had a total of 175
employees, 159 of whom were based in the United States and 16 of whom were based in Europe. Of the total, 43 were in research and development, 87 were engaged in sales and marketing, 23 were engaged in customer support and training, and 22 were in
administration and finance.



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None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good.



ITEM 2.    PROPERTIES



Our principal administrative, sales, marketing, and research and development facility occupies approximately 47,500 square feet in Mountain View, California under a lease which expires in April 2005. We also lease regional
U.S. offices located in California, Georgia, Illinois, New York, and Texas, as well as European offices in the United Kingdom and France. We believe that our existing facilities are adequate for our current needs and that suitable additional or
alternative space will be available in the future on commercially reasonable terms as needed.



ITEM 3.    LEGAL PROCEEDINGS



Beginning in April 2001, a number of substantially identical class action complaints alleging violations of the federal securities laws were filed in the United States District Court for the Southern
District of New York naming Marimba, Inc., certain of its officers and directors, and certain underwriters of the companys initial public offering (Morgan Stanley & Co., Inc., Credit Suisse First Boston Corp. and Bear Stearns & Co.,
Inc.) as defendants. The complaints have since been consolidated into a single action, and a consolidated amended complaint was filed in April 2002. The complaint alleges, among other things, that the underwriters of our initial public offering
violated the securities laws by failing to disclose certain alleged compensation and tie-in arrangements (such as undisclosed commissions or stock stabilization practices) in the registration statement filed in connection with the offering. Marimba
and certain of its officers and directors were named in the complaint pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The complaint seeks unspecified damages, attorney
and expert fees, and other unspecified litigation costs. Similar complaints have been filed against over 300 other issuers that have had initial public offerings since 1998 and all such actions have been included in a single coordinated proceeding.
In July 2002, the defendants in the consolidated actions filed motions to dismiss all of the cases in the litigation (including the case involving Marimba). On February 19, 2003, the court ruled on the motions and granted Marimbas motion to
dismiss the claims against it under Section 10(b) and Rule 10b-5. The motions to dismiss the claims under Section 11 were denied as to virtually all of the defendants in the consolidated cases, including Marimba. In addition, the Marimba individual
defendants in the litigation each signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002. Marimba intends to defend this litigation vigorously. However, due to the early stage of this litigation and the
inherent uncertainties of litigation in general, we cannot accurately predict the ultimate outcome of the litigation or the range of any potential damages or costs to Marimba relating to this litigation. Any unfavorable outcome of this litigation
could have a material adverse impact on our business, financial condition and results of operations.



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



There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2002.



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PART II



ITEM 5.    MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED

STOCKHOLDER MATTERS



Price Range of Common Stock



Our common stock is traded publicly on The Nasdaq National Market under the symbol MRBA. The following table sets forth for
the periods indicated the highest and lowest sales prices of the common stock during each quarter of the last two fiscal years:



|               |  | High |      | Low
|-------------- |  | ---- | ---- | ---
|Fiscal 2002:   |  |      |      |    
|Fourth Quarter |  | $    | 1.77 |    
|Third Quarter  |  | $    | 1.85 |    
|Second Quarter |  | $    | 3.15 |    
|First Quarter  |  | $    | 3.42 |    
|              
|Fiscal 2001:   |  |      |      |    
|Fourth Quarter |  | $    | 3.50 |    
|Third Quarter  |  | $    | 3.67 |    
|Second Quarter |  | $    | 3.95 |    
|First Quarter  |  | $    | 8.31 |    



On
February 28, 2003, the closing price of our common stock on The Nasdaq National Market was $1.49 per share. As of February 28, 2003, there were approximately 264 holders of record (not including beneficial holders of our common stock held in street
name) of our common stock.



Dividend Policy



We have not declared nor paid any cash dividends on our
capital stock since inception and we do not expect to do so in the foreseeable future. Any future determination with respect to the payment of dividends will be at the discretion of our Board of Directors and will depend upon, among other things,
our operating results, financial condition and capital requirements, the terms of then-existing indebtedness, general business conditions and such other factors as the Board of Directors deems relevant.



11



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ITEM 6.    SELECTED FINANCIAL DATA



The following is a summary of our selected consolidated financial data as of and for the five years ended December 31, 2002. This data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of Operation and our Consolidated Financial Statements and the Notes thereto appearing elsewhere in this report. Historical results may not be indicative of future results.



|                                                                                                          |  | Year Ended December 31,               |        
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | -------
|                                                                                                          |  | 2002                                  |        
|                                                                                                          |  | (in thousands, except per share data) |        
|Consolidated Statements of Operations Data:                                                               |  |                                       |        
|Revenues:                                                                                                 |  |                                       |        
|License                                                                                                   |  | $                                     | 18,223 
|Service                                                                                                   |  |                                       | 17,004 
|                                                                                                          |  |                                       |        
|Total revenues                                                                                            |  |                                       | 35,227 
|Cost of revenues:                                                                                         |  |                                       |        
|License                                                                                                   |  |                                       | 2,737  
|Service                                                                                                   |  |                                       | 5,829  
|                                                                                                          |  |                                       |        
|Total cost of revenues                                                                                    |  |                                       | 8,566  
|                                                                                                          |  |                                       |        
|Gross profit                                                                                              |  |                                       | 26,661 
|Operating expenses                                                                                        |  |                                       | 38,990 
|Net loss                                                                                                  |  | $                                     | (10,854
|Basic and diluted net loss per share                                                                      |  | $                                     | (0.44  
|                                                                                                          |  |                                       |        
|Weighted-average shares of common stock outstanding used in computing basic and diluted
net lossper share |  |                                       | 24,427 
|                                                                                                          |  |                                       |        
|                                                                                                         
|                                                                                                          |  |                                       |        
|                                                                                                          |  | December 31,                          |        
|                                                                                                          |  | 2002                                  |        
|                                                                                                          |  | (in thousands)                        |        
|Consolidated Balance Sheet Data:                                                                          |  |                                       |        
|Cash, cash equivalents, short-term and long-term investments                                              |  | $                                     | 50,264 
|Working capital (current assets, less currentliabilities)                                                 |  |                                       | 31,526 
|Total assets                                                                                              |  |                                       | 62,369 
|Long-term liabilities                                                                                     |  |                                       | 953    
|Redeemable convertible preferred stock                                                                    |  |                                       |       
|Accumulated deficit                                                                                       |  |                                       | (49,978
|Total stockholders equity (net capital deficiency)                                                       |  |                                       | 48,728 



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Supplementary Data



Quarterly Consolidated Financial Information (unaudited)



(In thousands, except per share data)



The following table presents our operating results for each of the eight quarters in the two-year period ended December 31, 2002. The information for each of these quarters is unaudited but has been
prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this report. In the opinion of management, all necessary adjustments (consisting of normal recurring adjustments) have been included to present fairly
the unaudited quarterly results when read in conjunction with the audited consolidated financial statements of our company and the notes thereto appearing in this report. These operating results may not be indicative of the results for any future
periods.



|2002                                                 |  | Q1 |        |   | Q2 |   |        | Q3 |  |   | Q4     |  
|---------------------------------------------------- |  | -- | ------ | - | -- | - | ------ | -- |  | - | ------ | -
|Revenues                                             |  | $  | 8,061  |   |    | $ | 9,038  |    |  | $ | 8,572  |  
|Gross profit                                         |  |    | 6,479  |   |    |   | 5,532  |    |  |   | 6,736  |  
|Net income (loss)                                    |  |    | (3,949 | ) |    |   | (5,282 | )  |  |   | (1,824 | )
|Net income (loss) per basic and diluted common share |  | $  | (0.16  | ) |    | $ | (0.22  | )  |  | $ | (0.07  | )
|                                                    
|2001                                                 |  | Q1 |        |   | Q2 |   |        | Q3 |  |   | Q4     |  
|Revenues                                             |  | $  | 11,004 |   |    | $ | 12,185 |    |  | $ | 10,006 |  
|Gross profit                                         |  |    | 9,016  |   |    |   | 10,586 |    |  |   | 8,538  |  
|Net loss                                             |  |    | (4,686 | ) |    |   | (3,693 | )  |  |   | (1,625 | )
|Net loss per basic and diluted common share          |  | $  | (0.20  | ) |    | $ | (0.15  | )  |  | $ | (0.07  | )



Timing Differences
Due to Estimates



The timing of expenses in
our fiscal 2002 results was significantly impacted by management estimates, particularly in the fourth quarter. Specifically, included in expense during the first and second quarter of 2002 was an accrual of executive and employee bonuses for fiscal
2002. Subsequent to year-end, we determined that certain of the accrued bonuses would not be paid, and as a result we reversed this accrual in the fourth quarter results, which had the effect of reducing our expenses in the fourth quarter by
approximately $605,000. Additionally, at December 31, 2002, we analyzed our past returns history, and combined with changed business practices we determined that a returns reserve was no longer appropriate. As a result of this analysis, the entire
reserve was reversed in the fourth quarter of 2002, resulting in a net increase to license revenue of $620,000 in the fourth quarter, and of $527,000 during the entire fiscal year of 2002. Taken together, the reversal of the bonus accrual and the
reversal of the returns reserve had a positive impact of $1.2 million on our results in the fourth quarter, taking us from a net loss position to a net profit for the quarter.



Statement Regarding Use of Non-GAAP Financial Measures



In addition to providing financial results calculated and presented in accordance with generally accepted
accounting principles, or GAAP, we sometimes present historical or forward-looking information regarding our financial performance, financial position or cash flows that excludes one or more of the following three items: (i) amortization of deferred
compensation, (ii) settlement of disputes or litigation, and (iii) restructuring costs associated with workforce reductions. We believe that presentation of financial information excluding these items is useful to investors, because it facilitates
their comparison of our current results of operations with those previously reported under this format, and more generally because we believe that including these charges could distort trends in our results of operations. In addition, in preparing
operating plans and forecasts, management relies in part on trends in our historical results of operations exclusive of these items. However, our presentation of non-GAAP results should not be viewed as a substitute for our financial results
determined in accordance with GAAP.



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ITEM 7.    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS



The following discussion and analysis should be read in conjunction with Selected Financial Data and our Consolidated
Financial Statements and Notes thereto included elsewhere in this report. As referenced in the first paragraph of Part I, this report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially
from the results discussed in such forward-looking statements. For a more complete understanding of our financial condition and results of operations, and some of the risks and trends that could affect future results, see Other Factors
Affecting Operating Results, Liquidity and Capital Resources in this Item 7.



Overview



Marimba, Inc. was incorporated in Delaware in February 1996. We develop, market and support software change management and software configuration management solutions. Our products help customers reduce their total cost of
information technology (IT) ownership and improve quality of IT service by streamlining the distribution and management of software applications and content. Our customer base spans multiple industries, including financial services,
healthcare, insurance, manufacturing and telecommunications. We market our products worldwide through a combination of a direct sales force and resellers.



Revenues to date have been derived primarily from the license of our products and to a lesser extent from support and maintenance,
consulting and training services, although recently support revenue has comprised a larger percentage of our revenues. Customers who license our products generally purchase maintenance contracts, typically covering a 12-month period. Additionally,
customers may purchase consulting services, which are customarily billed at a fixed daily rate plus out-of-pocket expenses. We also offer training services that are billed on a per student or per class session basis.



Since inception, we have made substantial investments in
sales, marketing and research and development to expand and enhance our product lines and increase the market awareness of Marimba and our products. We have incurred significant losses since inception and had an accumulated deficit of approximately
$50.0 million at December 31, 2002. We believe that our future success depends in part on our ability to increase our customer base and on growth in our market overall. Accordingly, over the long term, we intend to continue to invest heavily in
sales, marketing and research and development.



In view of the rapidly changing nature of our business and our limited operating history, we believe that period-to-period comparisons of revenues and operating results are not meaningful and should not be relied upon as indications
of future performance, growth or financial results. Additionally, historical trends may not be indicative of future growth or financial results.



Critical Accounting Policies and Estimates



Discussion and analysis of Marimbas financial condition and results of operation are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. The SEC has defined a companys critical accounting policies as the ones that are most important to the portrayal of the companys financial
condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We consider the accounting policies
described below to be our critical accounting policies. See Note 1 of the financial statements for more information about these critical accounting policies, as well as descriptions of other significant accounting policies. Actual results may differ
materially from these estimates under different assumptions or conditions.



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Revenue
Recognition.    We derive our revenues primarily from two sources: license revenues, which consist of software license fees; and service revenues, which are comprised of fees for maintenance and support, consulting and
training. Revenue recognition rules are complex, and require our management to exercise judgment and make a number of estimates. For example, most of our contracts contain multiple element arrangements, which require us to make assumptions and
judgments in order to allocate the total price among the various elements we must deliver, to determine whether vendor-specific evidence of fair value exists for each element and to determine whether and when each element has been delivered. We also
evaluate whether a risk of concession exists with regards to specific contracts or customers, and also whether there is any material risk of customer non-payment or product returns. If we were to change any of these assumptions or judgments, it
could cause a material increase or decrease in the amount of revenue that we report in a particular period. Revenue that we cannot recognize in a particular period is reflected on our balance sheet as deferred revenue and recognized over time as the
applicable revenue recognition criteria are satisfied. These estimates are made based upon all of the information available to us at the time. Material differences may result in the amount and timing of our revenue for any given period if different
judgments are made or different estimates are utilized.



Allowance for Doubtful Accounts.    The allowance for doubtful accounts is established through a charge to our general and administrative expenses. This allowance is for estimated losses resulting from the
inability of our customers to make required payments. It is a significant estimate and is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable
balances, both individually and in aggregate, and current economic conditions that may affect a customers ability to pay or suggest that a particular market sector is more prone to liquidity issues. The use of different estimates or
assumptions could produce different allowance balances. If the financial condition of our customers were to deteriorate subsequent to the date of our arrangements with them, this could result in an impairment of their ability to make payments and
additional allowances would be required.



Returns.    Prior to December 31, 2002, we maintained a returns reserve, established through a debit to license revenue. The reserve was for estimated losses resulting from the possibility of product
returns by customers. At December 31, 2002, we analyzed our past returns history, and combined with changed business practices we determined that a reserve was no longer appropriate. As a result of this analysis, the entire reserve was reversed in
the fourth quarter of 2002, resulting in a net increase to license revenue of $620,000 during the fourth quarter and $527,000 during fiscal year 2002. If in the future we experience customer returns, this may materially negatively impact our
business.



Compensation
Accruals.    Marimba records an accrual of compensation expenses which reflects compensation earned but not paid prior to the end of each period. The primary components of this accrual are commissions related to sales,
variable compensation programs for non-executives, and executive bonuses. These compensation programs may contain elements that are based upon both quarterly and annual performance, and we are required to estimate these payouts based upon the
knowledge we have at the time we report our results. The use of different judgments and estimates could have the affect of increasing or decreasing reported compensation costs in any given period. In particular, estimates of annual results made when
recording charges early in any fiscal year could, if proven incorrect, result in significant adjustments in later parts of the year as events unfold and our estimates are refined. For example, during fiscal 2002 we accrued executive and employee
bonuses during the first and second quarter. Subsequent to year-end, we determined that certain accrued bonuses would not be paid, and as a result we reversed these accruals in the fourth quarter results, which had the effect of reducing our
expenses in the fourth quarter by approximately $605,000.



July 2002 Legal Settlement. On July 25, 2002, the court approved a settlement between Marimba and Beck Systems, as described in the notes to the financial statements. Under the terms of the agreement for the settlement,
Marimba obtained a license to Beck Systems patents. The amount charged to cost of license revenues during the quarter ended June 30, 2002 was based on the apportionment of the total amount which related to payment for the alleged past
infringement. The remaining amount, which was recorded as acquired



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technology during the third quarter of 2002 and is being amortized to cost of license revenues over a five-year period, represents the
proportion of the total settlement relating to the future benefit to Marimba of the ongoing license to Beck Systems patents. The amounts allocated to the expense and the asset were based, respectively, on our license revenues since inception
versus our projection of the revenue relating to the technology that we expect to generate over the next 5 years. Managements assumptions about future revenues and the period over which our product will embed the patented technology required
significant judgment. Our revenues have fluctuated in the past and are expected to continue to do so. In addition, it is not clear how long our products will include the patented technology. If we had made a different estimate of future revenues or
the period over which our product will embed the patented technology, the apportionment of the settlement amount between the charge relating to the alleged past infringement and the acquired technology asset would have been different.



Acquired Technology.    We review
our acquired technology for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. We do not perform a periodic assessment of assets for impairment in the absence of such
information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant
adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.



Contingencies and Litigation.    We are sometimes subject to proceedings, lawsuits and other claims. We assess
the likelihood of any adverse judgments or outcomes to these matters as well as ranges of probable losses. A determination of the amount of loss contingency required, if any, for these matters is made after careful analysis of each individual
matter. Established loss contingencies may change and new loss contingencies may be established as the facts and circumstances of each matter changes.



Results of Operation



The following table presents selected financial data for the periods indicated as a percentage of total revenues:



|                              |  | Year Ended December 31, |   
|----------------------------- |  | ----------------------- | --
|                              |  | 2002                    |   
|Statement of Operations Data: |  |                         |   
|                             
|Revenues:                     |  |                         |   
|License                       |  | 51.7                    | % 
|Service                       |  | 48.3                    |   
|                              |  |                         |   
|Total revenues                |  | 100.0                   |   
|                             
|Cost of revenues:             |  |                         |   
|License                       |  | 7.8                     |   
|Service                       |  | 16.5                    |   
|                              |  |                         |   
|Total cost of revenues        |  | 24.3                    |   
|                              |  |                         |   
|Gross margin                  |  | 75.7                    |   
|Operating expenses            |  | 110.7                   |   
|Net loss                      |  | (30.8                   | )%
|                              |  |                         |   



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Revenues



The following table presents selected revenue data for the
periods indicated:



|                              |  | Year Ended December 31, |       
|----------------------------- |  | ----------------------- | ------
|                              |  | 2002                    |       
|                              |  | (in thousands)          |       
|Revenues:                     |  |                         |       
|License                       |  | $                       | 18,223
|Service                       |  |                         | 17,004
|                              |  |                         |       
|Total revenues                |  | $                       | 35,227
|                             
|Percentage of total revenues: |  |                         |       
|License                       |  |                         | 52    
|Service                       |  |                         | 48    



Total
revenues in 2002 were $35.2 million, compared to revenues of $44.0 million in both 2001 and 2000. The decrease in total revenues was due to a decrease in license revenues, partially offset by an increase in service revenues. The decrease in license
revenues and increase in service revenues are discussed below.



License Revenues.    License revenues decreased $9.6 million, or 34%, to $18.2 million in 2002 from $27.8 million in 2001. License revenues decreased $3.5 million, or 11%, to $27.8 million in 2001 from
$31.3 million in 2000. License revenues in fiscal 2002 included $527,000 from the reversal of our sales return allowance reserve, based on our evaluation of our past history of returns. Overall, the decrease in license revenues since 2000 was due
primarily to a generally weak IT spending environment that led to lower deal sizes and longer sales cycles.



The following table presents the license revenues derived from each of our product lines as a percentage of total license revenues (note
that prior to 2001, sales of Embedded Management products were included with the Desktop/Mobile Management product line):



|                                      |  | Year Ended December 31, |  
|------------------------------------- |  | ----------------------- | -
|                                      |  | 2002                    |  
|Percentage of total license revenues: |  |                         |  
|Desktop/Mobile Management             |  | 76                      | %
|Server Management                     |  | 19                      |  
|Embedded Management                   |  | 5                       |  



Service Revenues.    Service revenues include support and maintenance, consulting and training. Service revenues increased $775,000, or 5%, to $17.0 million in 2002 from $16.2 million in 2001. Service
revenues in 2001 increased $3.5 million, or 28%, to $16.2 million from $12.7 million in 2000. The increase in service revenues since 2000 was due primarily to the increase in support and maintenance revenues. Support and maintenance revenues are
driven by new license sales and by renewals of existing annual maintenance contracts. The downturn in sales of licenses during 2002 may negatively impact service revenues in the future. The following table presents the components of service revenues
as a percentage of service revenues for the periods indicated:



|                                      |  | Year Ended December 31, |  
|------------------------------------- |  | ----------------------- | -
|                                      |  | 2002                    |  
|Percentage of total service revenues: |  |                         |  
|Consulting                            |  | 17                      | %
|Support and maintenance               |  | 78                      |  
|Training                              |  | 5                       |  





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##### Table of Contents

As a percentage of total revenues, service revenues were 48%, 37% and 29% of total
revenues in 2002, 2001 and 2000, respectively. The increase in service revenues as a percentage of total revenues was due primarily to lower license revenues since 2000.



International.    Revenues outside the United States represented approximately
16%, 8% and 5% of total revenues in 2002, 2001 and 2000, respectively. International revenues increased by $2.0 million, or 55%, to approximately $5.5 million in 2002 when compared to 2001. In 2001, international revenues increased by $1.4 million,
or 67%, to approximately $3.4 million from $2.1 million in 2000. The increase in revenues outside the United States was due primarily to our sales and marketing efforts in Europe and more specifically to our expansion in the United Kingdom and
France. The following table presents our revenues by regions as a percentage of total revenues:



|              |  | Year Ended December 31, |  
|------------- |  | ----------------------- | -
|              |  | 2002                    |  
|Revenue:      |  |                         |  
|United States |  | 85                      | %
|Europe        |  | 12                      |  
|Other regions |  | 3                       |  



Costs of Revenues



Cost of License
Revenues.    Cost of license revenues consists primarily of the cost of third-party software technology that was either integrated into our products or resold by us. Cost of license revenues was $2.7 million, $595,000 and
$681,000 in 2002, 2001 and 2000, respectively. The increase in cost of license revenues in 2002 was due primarily to a $1.9 million charge recorded in the second quarter of 2002 in relation to the legal settlement of a patent dispute, which involved
a patent license, and to a lesser extent an increase in sales of third party products. We expect to record additional charges to cost of license revenues of approximately $85,000 per quarter over the next five years in connection with this patent
settlement. The following table presents our gross margin on license revenues:



|                                                                     |  | Year Ended December 31, |       
|-------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                     |  | 2002                    |       
|                                                                     |  | (in thousands)          |       
|License revenues                                                     |  | $                       | 18,223
|Cost of license revenues                                             |  |                         | 2,737 
|                                                                     |  |                         |       
|Gross margin on license revenues                                     |  | $                       | 15,486
|Gross margin on license revenues as a percentage of license revenues |  |                         | 85    



Cost
of Service Revenues.    Cost of service revenues includes:



| |  |  | salaries and related expenses of our customer service and training organizations;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | salaries and related expenses of our consultants for billable consulting engagements;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | cost of third parties contracted to provide consulting services to our customers; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | an allocation of our facilities, depreciation and certain other overhead expenses.
| | - |  | ----------------------------------------------------------------------------------



Cost of service revenues was $5.8 million, $5.9 million and $4.3 million in 2002, 2001 and 2000, representing
34%, 37% and 33% of service revenue, respectively. The increase in 2001 over 2000 was due primarily to growth in our customer service and training organizations, higher fees paid to a third party that provides after hours telephone support for our
customers and an increase in the costs of providing our consulting



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services, commensurate with the increase in consulting revenues. The following table presents our gross margin on service revenues:



|                                                                     |  | Year Ended December 31, |       
|-------------------------------------------------------------------- |  | ----------------------- | ------
|                                                                     |  | 2002                    |       
|                                                                     |  | (in thousands)          |       
|Service revenues                                                     |  | $                       | 17,004
|Cost of service revenues                                             |  |                         | 5,829 
|                                                                     |  |                         |       
|Gross margin on service revenues                                     |  | $                       | 11,175
|Gross margin on service revenues as a percentage of service revenues |  |                         | 66    



Gross Margin



Gross margin was 76%, 85% and 89% in 2002,
2001 and 2000, respectively. During 2002, the gross margin was negatively impacted by a $1.9 million charge in cost of license revenues related to a legal settlement involving a patent license, and by the decrease in license revenues as a percentage
of total revenues.



Operating Expenses



Research and
Development.    Research and development expenses, which are expensed as incurred, consist primarily of:



| |  |  | salaries and related costs of our engineering organization;
| | - |  | -----------------------------------------------------------



| |  |  | fees paid to third-party consultants, if any; and
| | - |  | -------------------------------------------------



| |  |  | an allocation of our facilities, depreciation and certain other overhead expenses.
| | - |  | ----------------------------------------------------------------------------------



We believe that our success is dependent in large part on the continued enhancement of our current products
and the ability to develop new, technologically advanced products that meet the sophisticated requirements of our customers. Research and development expenses were $7.9 million, $10.5 million and $11.1 million in 2002, 2001 and 2000, respectively.
The decrease in absolute dollars was due primarily to workforce reductions announced in July 2002 and April 2001, as well as our decisions during the second quarter of 2001 to discontinue the development of a hosting service and separately close our
Houston development facility. Over time, we plan to increase our expenses in research and development activities as we continue to enhance our products.



Sales and Marketing.    Sales and marketing expenses consist primarily of:



| |  |  | salaries and related costs of our sales and marketing organizations;
| | - |  | --------------------------------------------------------------------



| |  |  | sales commissions;
| | - |  | ------------------



| |  |  | costs of our marketing programs, including public relations, advertising, trade shows, collateral sales materials, and seminars;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | rent and facilities costs associated with our regional and international sales offices; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | an allocation of our facilities, depreciation and certain other overhead expenses.
| | - |  | ----------------------------------------------------------------------------------



Sales and marketing expenses were $24.1 million, $32.0 million and $27.8 million in 2002, 2001 and 2000,
respectively. From 2001 to 2002, sales and marketing expenses decreased in absolute dollars due primarily to fewer promotional activities, reductions of headcount in sales management, and lower commissions as a result of lower sales. From 2000 to
2001, sales and marketing expenses increased due primarily to growth in the sales organization during the first half of 2001, expansion of Marimbas sales operation in the United Kingdom and telemarketing expenses. Over time, we expect to
increase our investment in sales and marketing in our efforts to grow revenues and expand our brand awareness.



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General and
Administrative.    General and administrative expenses consist primarily of:



| |  |  | costs of our finance, human resources and legal services organizations;
| | - |  | -----------------------------------------------------------------------



| |  |  | insurance premiums and third-party legal and other professional services fees; and
| | - |  | ----------------------------------------------------------------------------------



| |  |  | an allocation of our facilities, depreciation and certain other overhead expenses.
| | - |  | ----------------------------------------------------------------------------------



General and administrative expenses were $5.7 million, $7.9 million and $12.6 million in 2002, 2001 and 2000,
respectively. General and administrative expenses decreased in absolute dollars from 2001 to 2002 due primarily to reductions of headcount and general cost cutting measures. General and administrative expenses were higher in 2000 compared with 2001
due primarily to the settlement of patent disputes and an increase in the bad debt provision of approximately $2.1 million in 2000.



Restructuring.    In April 2001, we eliminated approximately 20% of our workforce, or 60 employees and
independent contractors across all company departments. We recorded a charge of $789,000 in the second quarter of 2001 related to the restructuring plan. Of this amount, $666,000 of the restructuring accrual was reduced by cash payments made during
the year ended December 31, 2001 and the remaining balance of $123,000 was reversed out in 2002 once we determined that all outstanding obligations had been settled.



In July 2002, we eliminated approximately 12% of our workforce, or 24 employees, across all company
departments. We recorded a restructuring charge of $200,000 in connection with this plan, which consisted of charges of $323,000 for severance and benefits related to the workforce reduction, offset by a $123,000 adjustment from the charge for our
April 2001 restructuring plan.



Deferred
Compensation.    We record deferred compensation representing the difference between the exercise prices of options granted to acquire shares of common stock and the deemed fair value for financial reporting purposes of our
common stock on the grant dates. We also record deferred compensation to represent the intrinsic value of certain restricted stock awards. Deferred compensation is amortized over the vesting periods of the options and stock using the graded vesting
method.



In 2000, we recorded deferred
compensation of approximately $1.0 million (net of reduction of $1.6 million due to forfeited stock options and repurchased shares), which represented the intrinsic value of certain stock awards. In 2001, we recorded deferred compensation of
approximately $21,000 (net of reduction of $2.4 million due to forfeited stock options and repurchased shares), which represented the intrinsic value of certain stock awards. In 2002, we recorded a reversal in deferred compensation of approximately
$204,000 (net of reduction of $513,000 due to forfeited stock options and repurchased shares), which represented the intrinsic value of certain stock awards. Deferred compensation is being amortized over the vesting periods of the stock options and
stock using the graded vesting method.



We
amortized deferred compensation expense, net of gains resulting from the forfeiture of stock options and repurchase of shares due to employee departures, of $1.1 million, $361,000 and $809,000 for fiscal years 2002, 2001 and 2000, respectively. This
compensation expense relates to stock options and stock awarded to individuals in all operating expense categories.



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Interest Income and Other
Expenses, Net



Interest income, net,
consists primarily of interest earned on our cash, cash equivalents and investments offset by other miscellaneous expenses. Interest income, net was $1.6 million, $2.8 million and $4.5 million in 2002, 2001 and 2000, respectively. The decrease in
interest income, net, from 2000 to 2001 to 2002 was due primarily to lower invested cash balances and lower interest rates.



|                                                   |  | Year Ended December 31, |       
|-------------------------------------------------- |  | ----------------------- | ------
|                                                   |  | 2002                    |       
|                                                   |  | (in thousands):         |       
|Average cash, short-term and long-term investments |  | $                       | 55,450
|Interest income                                    |  | $                       | 1,536 
|Average return                                     |  |                         | 2.8   



Provision for Income
Taxes



Marimbas provision for income
taxes for the years ended December 31, 2002, 2001 and 2000 consists of state income, franchise taxes and foreign taxes. No provision for Federal taxes has been recorded, because we have experienced operating losses from inception through 2002.



As of December 31, 2002, we had Federal net
operating loss carryforwards of approximately $49.0 million. We also had a Federal research and development tax credit carryforward of approximately $1.2 million at that date. The net operating loss and credit carryforwards will expire at various
dates beginning in 2011 through 2021 if not utilized.



Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations contained in the Internal Revenue Code of 1986 and similar state provisions and this annual
limitation may result in the expiration of the net operating loss and credits before utilization.



Liquidity and Capital Resources



As of December 31, 2002, our principal sources of liquidity included approximately $11.7 million of cash and cash equivalents and $24.6 and $13.9 million of short-term and long-term investments in
marketable securities, respectively.



Cash
equivalents consisted of financial instruments, which are readily convertible to cash and have maturities of three months or less at the time of acquisition. Investments with remaining maturities of less than one year are considered short-term and
the ones with maturities longer than one year are considered long-term investments. Investments are reported at fair market value and are managed by professional investment managers.



Net cash used in operating activities decreased to $8.2 million during 2002 from $11.6 million in 2001, due
primarily to a smaller decrease in deferred revenues from 2002 to 2001, compared to the decrease from 2000 to 2001, and to lower direct personnel expenses due to restructuring measures. Net cash used in investing activities increased to $6.5 million
in 2002 from $569,000 in 2001 due primarily to net purchases of short-term investments and the acquisition of technology in relation to the legal settlement of a patent dispute. Net cash provided by financing activities decreased from $5.1 million
in 2001 to $337,000 in 2002, due to lower proceeds from stock option exercises in 2002 and a $3.9 million receivable balance under a purchase facility with a bank in 2001.



Total liquidity and capital resources decreased by $9.8 million from 2001 to 2002 and by $8.0 million from
2000 to 2001. This decrease in total capital resources is primarily due to cash used in operating activities and to a $2.75 million cash payment in relation to the legal settlement of a patent dispute in 2002.



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|                         |  | Year Ended December 31,
|------------------------ |  | -----------------------
|                         |  | 2002                   
|                         |  | (in thousands)         
|Cash and cash equivalent |  | $                      
|Short-term investments   |  |                        
|Long-term investments    |  |                        
|                         |  |                        
|Total capital resources  |  | $                      



Our
primary contractual obligations consist of noncancellable operating lease agreements. As of December 31, 2002, future minimum lease payments under noncancellable operating leases for the period 2003 through 2005 are expected to be approximately
$4.6 million, as presented in the table below:



|                             |  | Operating Leases
|---------------------------- |  | ----------------
|                             |  | (in thousands)  
|Year ending December 31:     |  |                 
|2003                         |  |                 
|2004                         |  |                 
|2005                         |  |                 
|2006 and thereafter          |  |                 
|                             |  |                 
|Total minimum lease payments |  | $               
|                             |  |                 



We
currently anticipate that our current cash, cash equivalents and investments will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. However, it is possible that we could
experience unexpected cash requirements that would force us to seek financing, or at some point in the future we may otherwise seek financing to support our long-term operations. In any such event, we may seek to sell additional equity or debt
securities or obtain a credit facility. Any additional financing, if needed, might not be available on reasonable terms or at all. Failure to raise capital when needed could seriously harm our business and operating results. If additional funds are
raised through the issuance of equity securities, the percentage of ownership of our stockholders would be reduced.



Approval of Non-Audit Services



During the quarter ended December 31, 2002, there were no additional non-audit services performed by Marimbas independent
accountants that had not been previously approved by the audit committee.



Recent Accounting Pronouncements



On July 30, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). The standard replaces
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated
with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 is effective prospectively to exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of this statement to
have a material effect on our financial position or results of operations.



In November 2002, the FASB issued FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that we
recognize the fair value for guarantee and indemnification arrangements issued or modified by us after December 31, 2002, if these



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arrangements are within the scope of the Interpretation. In addition, we must continue to monitor the conditions that are subject to the
guarantees and indemnifications, as required under previously existing generally accepted accounting principles, in order to identify if a loss has occurred. If we determine it is probable that a loss has occurred, then any such estimable loss would
be recognized under those guarantees and indemnifications. Some of the software licenses that we have granted contain provisions that indemnify licensees of the software from damages and costs resulting from claims alleging that our software
infringes the intellectual property rights of a third party. We have historically received only a limited number of requests for indemnification under these provisions and have not been required to make material payments pursuant to these
provisions. Accordingly, we have not recorded a liability related to these indemnification provisions. We will be required to implement the provisions of FIN 45 as of January 1, 2003 and do not believe that FIN 45 will have a material impact on our
financial position, results of operations or cash flows.



On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148), Accounting for Stock-Based CompensationTransition and Disclosure. Statement 148 amends FASB statement No.
123s fair value method of accounting for stock-based employee compensation. Statement 148 also amends the disclosure provisions of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the
summary of significant accounting policies of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. We have
adopted the disclosure provisions for this Form 10-K. We will continue to account for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees using the
intrinsic value method. Accordingly, the adoption of SFAS 148 is not anticipated to have a material effect on our financial position or results of operations.



For a description of the other accounting pronouncements that may apply to our financial results, see note 1
to The Notes to Consolidated Financial Statements in Part II, Item 8 of this report.



Other Factors Affecting Operating Results, Liquidity and Capital Resources



The factors discussed below are cautionary statements that identify important factors that could cause actual results to differ
materially from those anticipated by the forward-looking statements contained in this report. For more information regarding the forward-looking statements contained in this report, see the introductory paragraph to Part I of this report.



We Have Incurred Losses and May Incur
Future Losses



Our total revenues declined
in 2002 compared to 2001 and 2000, and we may not be able to increase our revenues. We have never generated a quarterly operating profit, and we had an accumulated deficit as of December 31, 2002 of approximately $50.0 million. Even if we do achieve
profitability in the future, we may not be able to sustain or increase profitability in the long run. Our history of losses may cause some of our potential and/or actual customers to question our viability, which may in turn hamper our ability to
sell some of our products or collect receivables.



Fluctuations in Our Quarterly Operating Results Could Adversely Affect Our Stock Price



Our quarterly operating results have varied significantly in the past and will likely vary significantly in the future. As a result, we
believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as indicators of our future performance. Our operating results have been below the expectations of securities analysts and investors
in the past and could be so in the future. Our failure to meet these expectations would likely harm the market price of our common stock. Operating results vary depending on a number of factors, many of which are outside our control.



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A substantial
portion of our revenues for most quarters has been recorded in the last month of the quarter and the magnitude of quarterly fluctuations in operating results may not become evident until late in or towards the end of a particular quarter. As a
result, a delay in recognizing revenue, even from a single account, could seriously harm our operating results.



Our expense levels are relatively fixed for a particular quarter and are based, in part, on expectations as to future revenues. As a
result, if revenue levels fall below our expectations for a particular quarter, our operating results will be adversely affected as only a small portion of our expenses vary with our revenues. We have historically operated with little product
backlog, because our products are generally delivered as orders are received. As a result, revenue in any quarter will depend on the volume and timing of, and our ability to fill, orders received in that quarter.



We generally expect that revenues in the first and third
quarters of each year will not substantially exceed, and may be lower than, revenues in the immediate prior quarter due to the annual nature of companies purchasing and budgeting cycles and the year-to-date structure of our sales incentive
program. To the extent that seasonality makes it more difficult to predict our revenues, the volatility of our stock price may increase.



Our Revenues in Any Quarter Depend on a Small Number of Relatively Large Orders



Our quarterly revenues are especially subject to fluctuation
because they depend on the completion of relatively large license transactions. For example, during the fourth quarter of fiscal 2002, one transaction accounted for more than 20% of our overall license revenues for that quarter. This dependence on
large orders makes our net revenue and operating results more likely to vary from quarter to quarter, and more difficult to predict, because the loss of any particular large order is significant. As a result, our operating results could suffer if
any large orders are delayed or canceled in any future period.



We Are Subject to the Effects of General Economic and Geopolitical Conditions and Reductions in Corporate IT Spending, and the Current Economic Downturn May Continue to Adversely Impact Our Business



Our business is subject to the effects of general economic
conditions and, in particular, market conditions in the industries that we serve. We believe that our operating results are being adversely impacted by recent unfavorable general economic and geopolitical conditions and reductions in corporate IT
spending. Recent political turmoil in many parts of the world, including terrorist and military actions, may continue to put pressure on global economic conditions. Our customers decisions to purchase our products are discretionary and subject
to their internal budgets and purchasing processes. In addition, since many of our customers may be suffering adverse effects from the general economic slowdown, we may find that collecting accounts receivable from existing or new customers will
take longer than we expect or that some accounts receivable will become uncollectible. If these conditions do not improve, or if they deteriorate further, our business and operating results are likely to continue to be adversely impacted.



Our Success Depends on our Desktop/Mobile
Management Product Family



We expect to
continue to derive a substantial portion of our revenues from our Desktop/Mobile Management product line and related services. A decline in the price of our Desktop/Mobile Management products or our inability to increase sales of these products
would seriously harm our business and operating results. We cannot predict the success of our Desktop/Mobile Management products. We periodically update our Desktop/Mobile Management products to make improvements and provide additional enhancements.
New versions of this product line may not provide the benefits we expect and could fail to meet customers requirements or achieve widespread market acceptance.



Our strategy requires our Desktop/Mobile Management products to be highly scalablein other words, able
to rapidly increase deployment size from a limited number of end-users to a very large number of end-users. If we are unable to continue to achieve this level of scalability, the attractiveness of our products and services would be diminished.



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We Need to
Continue to Enhance and Develop Our Server Management and Embedded Management Product and Develop New Products and Services



There can be no assurance that the revenues from our newer products, Server Management and Embedded Management, will grow in absolute
amount or as a percentage of total license revenues. In addition, we cannot assure you that our Server Management products and Embedded Management products will meet customer expectations or gain widespread market acceptance.



To provide comprehensive software change management solutions,
we will need to develop and introduce new products and services which offer functionality that we do not currently provide. We may not be able to develop these technologies, and therefore, we may not be able to offer a comprehensive software change
management solution. In addition, we have, in the past, experienced delays in new product releases, and we may experience similar delays in the future. If we fail to release new products on a timely basis, our business and operating results could be
seriously harmed.



We Depend on the Growth of
Our Customer Base and Increased Business from Our Current Customers



Our success is substantially dependent on the continued growth of our customer base. If we fail to increase our customer base, our business and operating results would be seriously harmed. Our ability to attract new
customers will depend on a variety of factors, including the reliability, security, scalability and cost-effectiveness of our products and services, as well as our ability to effectively market our products and services.



If we fail to generate repeat and expanded business from our
current customers, our business and operating results would be seriously harmed. Many of our customers initially make a limited purchase of our products and services for pilot programs. These customers may not choose to purchase additional licenses
to expand their use of our products. In addition, as we deploy new versions of our products or introduce new products, our current customers may not require the functionality provided by our new products and may not ultimately license these
products.



Our Ability to Grow and Sustain
Service Revenues Depends on New License Customers and Service Contract Renewals



Because the total amount of maintenance and support fees we receive in any period depends in large part on the size and number of licenses that we have previously sold, any downturn in our software
license revenues negatively impacts our future service revenues. Our license revenues decreased during 2002, which could lead to a decrease in service revenues in 2003 and beyond.



Our support and maintenance programs are sold on an annual basis. Renewal of annual support and maintenance
is generally at the customers election. If customers elect not to renew their support and maintenance agreements, our service revenues could be significantly adversely impacted. If support and maintenance revenues were to decline, or not grow
as rapidly as expected, we would need to increase our license revenues and other service revenues in order to make up for the decline in support and maintenance revenues.



Failure to Further Develop and Sustain Our Indirect Sales Channel and Third-Party Distribution
Relationships Could Limit or Prevent Future Growth



We have a limited number of distribution relationships for our products with systems integrators and other resellers, and we may not be able to increase our number of distribution relationships or maintain our existing relationships.
We are relying in part on the growth of our indirect sales channel for future revenue growth, and if this does not continue to develop, our ability to grow our revenues may be materially harmed.





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Our current agreements with our distribution partners typically do not prevent these
companies from selling products of other companies, including products that may compete with our products, and do not generally require these companies to purchase minimum quantities of our products. Some of these relationships are governed by
agreements that can be terminated by either party with little or no prior notice. These distributors could give higher priority to the products of other companies or to their own products than they give to our products. In addition, sales through
these channels generally result in lower fees to Marimba than direct sales. The loss of, or significant reduction in, sales volume to any of our current or future distribution partners as a result of any of these or other factors could seriously
harm our revenues and operating results.



We
Rely on Third-Party Marketing and Technology Relationships For Future Sales Growth



We currently have several marketing and technology relationships. These relationships include joint sales and marketing relationships that provide us access to potential sales to large enterprises that
we might not otherwise have access to, as well as product integration and other relationships. If we cannot maintain successful marketing and technology relationships or if we fail to enter into additional marketing and technology relationships, we
could have difficulty expanding the sales of our products and our growth might be limited. Our marketing and technology relationships are generally not documented in writing, or are governed by agreements that can be terminated by either party with
little or no prior notice. In addition, companies with which we have marketing or technology relationships may promote products of several different companies, including those of our competitors. If these companies choose not to promote our products
or if they develop, market or recommend applications that compete with our products, our business would be harmed.



Implementation of Our Products by Large Customers May Be Complex and Customers Could Become Dissatisfied if Implementation of Our
Products Proves Difficult, Costly or Time Consuming



Our products must integrate with many existing computer systems and software programs used by our customers. Integrating with many other computer systems and software programs can be complex, costly and time consuming, and can cause
delays in the deployment of our products for such customers. Customers could become dissatisfied with our products if implementations prove to be difficult, costly or time consuming, and this could negatively impact our ability to sell our products.



Our Business and Financial Performance
Depends on Our Ability to Retain and Attract Key Personnel



Our success depends largely on the skills, experience and performance of the members of our senior management and other key personnel. We have recently had changes in our senior management. Several members of our senior management
are relatively new to Marimba, and our success will depend in part on the successful assimilation and performance of these individuals.



We may not be successful in attracting qualified senior management personnel or be able to attract, assimilate and retain other key
personnel in the future. None of our senior management or other key personnel in the U.S. is bound by an employment agreement. In addition, our future success will depend largely on our ability to continue attracting and retaining highly skilled
personnel. Like other companies in the software industry, we face competition for qualified personnel. To compete, we believe that we must provide personnel with a competitive compensation package, including stock options. The recent downturn in the
trading price of our stock has reduced the incentive effect of many of our previously-granted stock options. If we lose senior management or key employees and are unable to replace them with qualified individuals, our business and operating results
could be seriously harmed.



If Requirements
Relating to Accounting Treatment For Employee Stock Options Are Changed, We May Be Forced to Change Our Business Practices



We currently account for the issuance of stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees. If
proposals currently under consideration by administrative and governmental authorities



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are adopted, we may be required to treat the value of the stock options granted to employees as a compensation expense. As a result, we could
decide to decrease the number of employee stock options which we would grant. This could affect our ability to retain existing employees and attract qualified candidates, and increase the cash compensation we would have to pay to them. In addition,
such a change could have a negative effect on our earnings.



We Have a Long Sales Cycle that Depends upon Factors Outside Our Control



A customers decision to license our products typically involves a significant commitment of resources and is influenced by the customers budget cycles and internal approval procedures for
IT purchases. In addition, selling our products requires us to educate potential customers on our products uses and benefits. As a result, our products have a long sales cycle, which can take over six months, and sales cycles are generally
lengthening during the current economic slowdown. We face difficulty predicting the quarter in which sales to expected customers may occur. The sale of our products is also subject to delays from the lengthy budgeting, approval and competitive
evaluation processes of our customers that typically accompany significant capital expenditures. For example, customers frequently begin by evaluating our products on a limited basis and devote time and resources to test our products before they
decide whether to purchase a license for deployment. Customers may also defer orders as a result of anticipated releases of new products or enhancements by us or our competitors.



Our Markets are Highly Competitive and are Experiencing Consolidation, and Our Operating Results and
Financial Condition Could Be Materially Harmed if We Are Unable to Compete Effectively

The markets for our products are
highly competitive, and we expect this competition to persist and intensify in the future. We compete against both new entrants into our markets as well as existing companies. Our failure to maintain and enhance our competitive position could
seriously harm our business and operating results. We encounter competition from a number of sources, including:



| |  |  | Sellers of enterprise-wide management systems, which include electronic software distribution;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | Companies that market products that support the distribution of software applications and content;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Desktop software management products;
| | - |  | -------------------------------------



| |  |  | Application server vendors and others that have introduced software distribution capabilities into their products; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Our potential customers own information technology departments and internal development efforts.
| | - |  | -------------------------------------------------------------------------------------------------



Many of our competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than we do. Many of these companies have more extensive customer bases and broader customer relationships that they could leverage, including relationships with many of our
current and potential customers. Many also have significantly more established customer support and professional service organizations than we do. In addition, these companies may adopt aggressive pricing policies which we are unable to match. In
the past, we have lost potential customers to competitors for various reasons, including lower prices. Furthermore, these companies may have greater brand name recognition that we do. To achieve widespread market acceptance, we will need to further
establish the Marimba brand and be able to differentiate our product and service offerings from those of our competitors.



Contributing to these challenges, our industry has been subject to consolidation, which subjects us to competition with larger companies
offering integrated solutions and a wider breadth of products. Potential competitors may bundle their products or incorporate additional components into existing products in a manner that discourages users from purchasing our products. Alliances
among competitors or between competitors and other large software companies present similar competitive challenges. As a result of consolidation or alliances, these competitors may also be able to respond more quickly to new or emerging technologies
and changes in customer requirements than we can.



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In addition,
enterprises that have already invested substantial resources in other methods of deploying and managing their applications, content and/or services may be reluctant or slow to adopt a new approach that may replace, limit or compete with their
existing systems.



Protection of Our
Intellectual Property Is Limited



We rely on
a combination of patent, trademark, trade secret and copyright law and contractual restrictions to protect the proprietary aspects of our technology. These legal protections afford only limited protection. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use our proprietary information. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of the proprietary rights of others. To the extent that we have sufficient resources to pursue such litigation, it could result in substantial costs and diversion of resources and could significantly harm our
business and operating results. In addition, we sell our products internationally, and the laws of many countries do not protect our proprietary rights as well as the laws of the United States.



We May Be Found to Infringe Proprietary Rights of Others



Other companies, including our competitors,
may obtain patents or other proprietary rights that could prevent, limit or interfere with our ability to make, use or sell our products. As a result, we may be found to infringe the proprietary rights of others. Furthermore, companies in the
software market are increasingly bringing suits alleging infringement of their proprietary rights, particularly patent rights. We have been involved in two such patent infringement suits in the past.



We could incur substantial costs to defend any intellectual
property litigation, and any such litigation could result in one or more of the following:



| |  |  | Our paying monetary damages, which could be tripled if the infringement is found to have been willful;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | The issuance of a preliminary or permanent injunction requiring us to stop selling one or more of our products in their current forms;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our having to redesign one or more of our products, which could be costly and time-consuming and could substantially delay shipments, assuming that a redesign is
feasible;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our having to reimburse the holder of the infringed intellectual property for some or all of its attorneys fees and costs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Our having to obtain from the holder licenses to its intellectual property, which licenses might not be made available to us on reasonable terms; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our having to indemnify our customers against any losses they may incur due to the alleged infringement.
| | - |  | --------------------------------------------------------------------------------------------------------



In the event of a successful claim of infringement against us
and our failure or inability to license the infringed technology, our business and operating results would be significantly harmed.



We Are Involved in a Securities Class Action Litigation and Are At Risk of Additional Similar Litigation



We are a party to the securities class action litigation
described in Part I, Item 3Legal Proceedings of this report. The defense of this litigation may increase our expenses and divert our managements attention and resources, and an adverse outcome in this litigation could
seriously harm our business and results of operations. In addition, we may in the future be the target of other securities class action or similar litigation.



Our Products and Services Require a Sophisticated Sales Effort



Over the long term, as our business grows, we may need to expand our sales and marketing efforts in order to
increase market awareness of our products, market our products to a greater number of enterprises and



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generate increased revenues. Our products and services require a sophisticated sales effort targeted at senior management of our prospective
customers. New hires require extensive training and typically take at least six months to achieve full productivity. There is no assurance that new sales representatives will ultimately become productive. In prior quarters, our license revenues have
often resulted from contracts closed by just a few sales representatives. If we were to lose qualified and productive sales personnel, our revenues could be adversely impacted. Furthermore, the cost of hiring and training replacement sales personnel
could be significant.



We Need to Expand Our
Professional Services



We believe that
growth in our product sales partly depends on our ability to provide our customers with professional services and to educate third-party resellers and consultants on how to provide similar services. As we grow, we plan to increase our services
personnel to meet these needs. However, due to the competition for qualified services personnel, we may not be able to attract, train or retain the number of highly qualified services personnel that our business needs.



Our Operating Results and Financial Condition May be
Materially Harmed if We Are Not Successful At Expanding Internationally



We plan to increase our international sales force and operations. Expanding internationally requires significant management attention and financial resources, and we may not grow our revenues enough to
cover these expenses. For any such expansion, we will also need to, among other things, expand our international sales channel management and support organizations and develop relationships with international service providers and additional
distributors and system integrators. In addition, as international operations become a larger part of our business, we could encounter, on average, greater difficulty with collecting accounts receivable, longer sales cycles and collection periods,
greater seasonal reductions in business activity and increases in our tax rates. Furthermore, products may need to be localized, or customized to meet the needs of local users, before they can be sold in particular foreign countries. Developing
localized versions of our products for foreign markets is difficult and could take longer than we anticipate.



In addition, our international business activities are subject to a variety of risks, including the adoption of or changes in laws,
currency fluctuations and political and economic conditions that could restrict or eliminate our ability to do business in foreign jurisdictions. To date, we have not adopted a hedging program to protect us from risks associated with foreign
currency fluctuations.



Export clearances, and in
some cases, import clearances must be obtained before our products can be distributed internationally. Current or new government laws and regulations, or the application of existing laws and regulations, could expose us to significant liabilities,
significantly slow our growth and seriously harm our business and operating results.



We Rely on Third-Party Software and Applications



We integrate third-party software and digital certificates as a component of our software. There are inherent limitations in the use and
capabilities of much of the technology that we license from third parties. As a result, we face a number of challenges in integrating these technologies into our products. We would be seriously harmed if the providers from whom we license software
ceased to deliver and support reliable products, enhance their current products or respond to emerging industry standards. In addition, the third-party software may not continue to be available to us on commercially reasonable terms or at all. The
loss of, or inability to maintain or obtain this software, could result in shipment delays or reductions. Furthermore, we might be forced to limit the features available in our current or future product offerings. Either alternative could seriously
harm our business and operating results.



Almost
all of our products are written in Java and require a Java virtual machine in order to operate. Vendors offering these Java virtual machines may not continue to make these implementations of the Java virtual machines available at commercially
reasonable terms or at all. Furthermore, if Sun Microsystems, Inc. were to



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make significant changes to the Java language, if significant changes were to be made to Java virtual machine implementations of Sun
Microsystems, Inc. and other vendors or if they fail to correct defects and limitations in these products, our ability to continue to improve and ship our products could be impaired. In the future, our customers may also require the ability to
deploy our products on platforms for which technically acceptable Java implementations either do not exis or are not available on commercially reasonable terms. Our customers may also use particular implementations of the Java virtual machines that
may not be technically or commercially acceptable for integration into our products.



Software Defects in Our Products Would Harm Our Business



Complex software products like ours often contain errors or defects, including errors relating to security, particularly when first
introduced or when new versions or enhancements are released. Our products extensively utilize digital certificates and other complex technology. Our use of this technology has in the past and may in the future result in product behavior problems
which may not be anticipated by us or our customers. Defects or errors in our current or future products or in products comparable to ours could result in lost or delayed revenues, which would seriously harm our business and operating results.



We offer performance warranties with the
purchase of a license for our software products. Such warranties typically require us to repair or replace a defective or non-conforming product reported to us during the applicable warranty period, or if repairing or replacing the product is
commercially impracticable, to return the license fees paid for the defective or non-conforming product. We do not currently reserve for possible products returns. Because of this, any future product returns that require us to return amounts paid to
us, especially from large customers or with respect to large transactions, could have a material adverse effect on our business and operating results.



In addition, since many of our customers use our products for business-critical applications, errors, defects or other performance
problems could result in financial or other damage to our customers and could significantly impair their operations. Our customers could seek damages for losses related to any of these issues. A product liability claim or warranty claim brought
against us, even if not successful, would likely be time consuming and costly to defend and could adversely affect our marketing efforts.



Our Stock Price Is Likely to Continue to be Volatile



The market price of our common stock has been and is likely to continue to be volatile. The market price of
our common stock may be significantly affected by factors such as actual or anticipated fluctuations in our operating results, announcements of technological innovations, new products or new contracts by us or our competitors, developments with
respect to patents or proprietary rights and related litigation, other material litigation involving Marimba, changes in our management or other key employees, adoption of new accounting standards affecting the software industry, general market
conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market price for the common stock of technology companies. Furthermore, our
common stock is thinly traded, which contributes significantly to the volatility of our stock price. Due to the low trading volume of our stock, stockholders may not be able to purchase or sell shares, particularly large blocks of shares, as quickly
and as inexpensively as if the trading volume were higher. Volatility in the price of our common stock may adversely affect its market price.



Our Future Capital Needs Are Uncertain



We expect that our current cash, cash equivalents and investments will be sufficient to meet our working capital and capital expenditure
needs for at least twelve months. However, it is possible that we could experience unexpected cash requirements that would force us to seek financing, or at some point in the future we may otherwise seek financing to support our long-term
operations. In any such event, we may seek to sell additional equity or debt securities or obtain a credit facility. This could seriously harm our business and operating results.



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Furthermore, if we issue additional equity securities, stockholders may experience dilution, and the new equity securities could have rights
senior to those of existing holders of our common stock. If we cannot raise funds, if needed, on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements.



We Have
Experienced Credit-Related Issues with Certain of Our Customers and We May Not Achieve Anticipated Revenue if We Need to Defer a Significant Amount of Revenue



We have experienced, in the past, credit-related issues with certain of our existing and proposed customers,
primarily due to the economic slowdown in the United States. Because a small number of customers account for a large portion of our revenue in any given quarter, the credit-worthiness of our largest customers is critical to our cash flows. At
December 31, 2002, three customers represented 28%, 13% and 12% of net accounts receivable, and at December 31, 2001, four customers represented 18%, 13%, 13% and 13% of net accounts receivable. We wrote off $1.0 million in uncollectible accounts
during fiscal 2002, which had been previously reserved in 2001. Should we have more customers than we anticipate with liquidity issues, or if payment is not received on a timely basis, our business, operating results and general financial condition
could be seriously harmed.



We Must Respond to
Rapid Technological Change and Evolving Industry Standards



The markets for our software change and configuration management solutions are characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer
demands and evolving industry standards. New solutions based on new technologies or new industry standards can quickly render existing solutions obsolete and unmarketable. Any delays in our ability to develop and release enhanced or new solutions
could seriously harm our business and operating results. Our technology is complex, and new products, enhancements and services can require long development and testing periods. Our failure to conform to prevailing standards could have a negative
effect on our business and operating results.



We Face Risks Associated with Potential Acquisitions



We may make acquisitions in the future. Acquisitions of companies, products or technologies entail numerous risks, including an inability to successfully assimilate acquired operations and products,
diversion of managements attention, loss of key employees of acquired companies and substantial transaction costs. Some of the products acquired may require significant additional development before they can be marketed and may not generate
revenue at anticipated levels. Moreover, future acquisitions by us may result in dilutive issuances of equity securities, the use of a substantial portion of our cash and investment balances, the incurrence of additional debt, large one-time
write-offs and the creation of goodwill or other intangible assets that could result in significant impairment charges or amortization expense. Any of these problems or factors could seriously harm our business, financial condition and operating
results.



31



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##### Table of Contents



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Interest Rate Sensitivity



Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since most of our investments are in
marketable securities with maturities less than two years.



Our investment policy requires us to invest funds in excess of current operating requirements in:



| |  |  | obligations of the U.S. government and its agencies;
| | - |  | ----------------------------------------------------



| |  |  | investment grade state and local government obligations;
| | - |  | --------------------------------------------------------



| |  |  | securities of U.S. corporations that, when purchased, are rated A1 or AA by Standard and Poors or the Moodys equivalent; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | money market funds, deposits or notes issued or guaranteed by U.S. and non-U.S. commercial banks meeting particular credit rating and net worth requirements with
maturities of less than two years.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table presents the amounts of cash equivalents and investments that are subject to market risk and the weighted average interest rates, by year of expected maturity, for our investment portfolio as of December 31, 2002
and 2001. This table does not include money market funds, because those funds are not subject to market risk.



|                                     |  | Maturing during |       
|------------------------------------ |  | --------------- | ------
|                                     |  | 2003            |       
|                                     |  | (in thousands)  |       
|December 31, 2002:                   |  |                 |       
|Cash equivalents                     |  | $               | 9,148 
|Weighted average interest rate       |  |                 | 0.85  
|Long-term and short-term investments |  | $               | 24,643
|Weighted average interest rate       |  |                 | 2.52  
|Total                                |  | $               | 33,791
|Weighted average interest rate       |  |                 | 2.07  
|                                    
|                                     |  | Maturing during |       
|                                     |  | 2002            |       
|                                     |  | (in thousands)  |       
|December 31, 2001:                   |  |                 |       
|Cash equivalents                     |  | $               | 20,841
|Weighted average interest rate       |  |                 | 1.77  
|Long-term and short-term investments |  | $               | 16,054
|Weighted average interest rate       |  |                 | 3.74  
|Total                                |  | $               | 36,895
|Weighted average interest rate       |  |                 | 2.63  



Exchange Rate
Sensitivity



We develop products primarily
in the United States, and sell our products and services primarily in North America, Europe and Asia. As a result, our financial results could be affected by various factors, including changes in foreign currency exchange rates or weak economic
conditions in foreign markets. A portion of our sales are currently transacted in British Pounds and Euros, thereby potentially affecting our financial position, results of operations and cash flows due to fluctuations in exchange rates. Near-term
changes in exchange rates may have a material impact on our future revenues, earnings, fair values or cash flows. We have not engaged in foreign currency hedging transactions during the twelve months ended December 31, 2002. There can be no
assurance that a sudden and significant change in the value of the British Pound or Euro would not seriously harm our financial condition and results of operations.



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##### Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



MARIMBA, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|Report of Ernst & Young LLP, Independent Auditors |  | 34
|------------------------------------------------- |  | --
|Consolidated Balance Sheets                       |  | 35
|Consolidated Statements of Operations             |  | 36
|Consolidated Statements of Stockholders Equity   |  | 37
|Consolidated Statements of Cash Flows             |  | 38
|Notes to Consolidated Financial Statements        |  | 39



34



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##### Table of Contents

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders

Marimba, Inc.



We have audited the accompanying consolidated balance sheets of Marimba, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Companys management. Our responsibility
is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States. These standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial position of Marimba, Inc. at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December
31, 2002, in conformity with accounting principles generally accepted in the United States.



/s/    ERNST & YOUNG LLP



San Francisco, California

January 17, 2003



35



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##### Table of Contents

MARIMBA, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except par value data)



|                                                                                                                                                      |  | December 31, |        
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------
|                                                                                                                                                      |  | 2002         |        
|ASSETS                                                                                                                                                |  |              |        
|Current assets:                                                                                                                                       |  |              |        
|Cash and cash equivalents                                                                                                                             |  | $            | 11,704 
|Short-term investments                                                                                                                                |  |              | 24,643 
|Accounts receivable, net of allowances of $750 and $2,358 at December 31, 2002 and
2001                                                               |  |              | 6,546  
|Prepaid expenses and other current assets                                                                                                             |  |              | 1,321  
|                                                                                                                                                      |  |              |        
|Total current assets                                                                                                                                  |  |              | 44,214 
|Property and equipment, net                                                                                                                           |  |              | 2,333  
|Long-term investments                                                                                                                                 |  |              | 13,917 
|Acquired technology                                                                                                                                   |  |              | 1,536  
|Other assets                                                                                                                                          |  |              | 369    
|                                                                                                                                                      |  |              |        
|                                                                                                                                                      |  | $            | 62,369 
|                                                                                                                                                      |  |              |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |              |        
|Current liabilities:                                                                                                                                  |  |              |        
|Accounts payable                                                                                                                                      |  | $            | 465    
|Accrued liabilities                                                                                                                                   |  |              | 1,576  
|Accrued compensation                                                                                                                                  |  |              | 2,348  
|Deferred revenue                                                                                                                                      |  |              | 8,299  
|                                                                                                                                                      |  |              |        
|Total current liabilities                                                                                                                             |  |              | 12,688 
|Deferred rent                                                                                                                                         |  |              | 286    
|Deferred revenues non-current                                                                                                                         |  |              | 667    
|                                                                                                                                                      |  |              |        
|Total long-term liabilities                                                                                                                           |  |              | 953    
|Stockholders equity:                                                                                                                                 |  |              |        
|Preferred stock; $.0001 par value, 10,000 shares authorized, no shares designated,
issued and outstanding                                             |  |              |       
|Common stock; $.0001 par value, 80,000 shares authorized, 25,201 and 24,142 shares
issued and outstanding at December 31, 2002 and 2001, respectively |  |              | 2      
|Additional paid-in capital                                                                                                                            |  |              | 98,728 
|Deferred compensation                                                                                                                                 |  |              | (239   
|Accumulated other comprehensive income                                                                                                                |  |              | 215    
|Accumulated deficit                                                                                                                                   |  |              | (49,978
|                                                                                                                                                      |  |              |        
|Stockholders equity                                                                                                                                  |  |              | 48,728 
|                                                                                                                                                      |  |              |        
|                                                                                                                                                      |  | $            | 62,369 
|                                                                                                                                                      |  |              |        





See accompanying notes.



36



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##### Table of Contents

MARIMBA, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                                                           |  | Year Ended December 31, |        
|---------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                           |  | 2002                    |        
|Revenues:                                                                                                  |  |                         |        
|License                                                                                                    |  | $                       | 18,223 
|Service                                                                                                    |  |                         | 17,004 
|                                                                                                           |  |                         |        
|Total revenues                                                                                             |  |                         | 35,227 
|Cost of revenues:                                                                                          |  |                         |        
|License                                                                                                    |  |                         | 2,737  
|Service                                                                                                    |  |                         | 5,829  
|                                                                                                           |  |                         |        
|Total cost of revenues                                                                                     |  |                         | 8,566  
|                                                                                                           |  |                         |        
|Gross profit                                                                                               |  |                         | 26,661 
|Operating expenses:                                                                                        |  |                         |        
|Research and development                                                                                   |  |                         | 7,948  
|Sales and marketing                                                                                        |  |                         | 24,060 
|General and administrative                                                                                 |  |                         | 5,683  
|Restructuring costs                                                                                        |  |                         | 200    
|Amortization of deferred compensation                                                                      |  |                         | 1,099  
|                                                                                                           |  |                         |        
|Total operating expenses                                                                                   |  |                         | 38,990 
|                                                                                                           |  |                         |        
|Loss from operations                                                                                       |  |                         | (12,329
|Interest income                                                                                            |  |                         | 1,536  
|Interest and other income (expenses)                                                                       |  |                         | 18     
|                                                                                                           |  |                         |        
|Loss before income taxes                                                                                   |  |                         | (10,775
|Provision for income taxes                                                                                 |  |                         | 79     
|                                                                                                           |  |                         |        
|Net loss                                                                                                   |  | $                       | (10,854
|                                                                                                           |  |                         |        
|                                                                                                          
|Basic and diluted net loss per share                                                                       |  | $                       | (0.44  
|                                                                                                           |  |                         |        
|Weighted-average shares of common stock outstanding used in computing basic and diluted
net loss per share |  |                         | 24,427 
|                                                                                                           |  |                         |        



See
accompanying notes.



37



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##### Table of Contents



MARIMBA,
INC.



CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY

(in thousands)



|                                                                                              |  | Common Stock |   | Additional Paid-in Capital |        |   | Deferred Compensation |   |        | Accumulated Other Comprehensive Income (Loss) |  |   | Accumulated Deficit |   |  | Stockholders Equity |      |   | Comprehensive Income (Loss) |  
|--------------------------------------------------------------------------------------------- |  | ------------ | - | -------------------------- | ------ | - | --------------------- | - | ------ | --------------------------------------------- |  | - | ------------------- | - |  | -------------------- | ---- | - | --------------------------- | -
|                                                                                              |  | Shares       |   |                            | Amount |   |                       |   |        |                                               | 
|Balances at January 1, 2000                                                                   |  | 23,146       |   |                            |        | 2 |                       |   | 93,436 |                                               |  |   | (1,680              | ) |  |                      | (261 | ) |                             |  
|                                                                                              |  |              |   |                            |        |   |                       |   |        |                                               |  |   |                     |   |  |                      |      |   |                             |  
|Issuance of common stock upon exercise of stock options                                       |  | 459          |   |                            |        |  |                       |   | 1,099  |                                               |  |   |                    |   |  |                      |     |   |                             |  
|Issuance of common stock under employee stock purchase plan                                   |  | 89           |   |                            |        |  |                       |   | 924    |                                               |  |   |                    |   |  |                      |     |   |                             |  
|Repurchases of restricted common stock                                                        |  | (109         | ) |                            |        |  |                       |   | (141   | )                                             |  |   |                    |   |  |                      |     |   |                             |  
|Translation adjustment                                                                        |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      | (20  | ) |                             |  
|Unrealized gain on investments                                                                |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      | 272  |   |                             |  
|Deferred compensation, net of cancellation adjustment                                         |  |             |   |                            |        |  |                       |   | 1,011  |                                               |  |   | (1,011              | ) |  |                      |     |   |                             |  
|Amortization of deferred compensation                                                         |  |             |   |                            |        |  |                       |   |       |                                               |  |   | 809                 |   |  |                      |     |   |                             |  
|Net loss                                                                                      |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      |     |   |                             |  
|                                                                                              |  |              |   |                            |        |   |                       |   |        |                                               |  |   |                     |   |  |                      |      |   |                             |  
|Balances at December 31, 2000                                                                 |  | 23,585       |   |                            |        | 2 |                       |   | 96,329 |                                               |  |   | (1,882              | ) |  |                      | (9   | ) |                             |  
|                                                                                              |  |              |   |                            |        |   |                       |   |        |                                               |  |   |                     |   |  |                      |      |   |                             |  
|Issuance of common stock upon exercise of stock options                                       |  | 323          |   |                            |        |  |                       |   | 594    |                                               |  |   |                    |   |  |                      |     |   |                             |  
|Issuance of common stock under employee stock purchase plan                                   |  | 338          |   |                            |        |  |                       |   | 715    |                                               |  |   |                    |   |  |                      |     |   |                             |  
|Issuance of stock option for services                                                         |  |              |   |                            |        |  |                       |   | 120    |                                               |  |   |                    |   |  |                      |     |   |                             |  
|Repurchases of restricted common stock                                                        |  | (104         | ) |                            |        |  |                       |   | (14    | )                                             |  |   |                    |   |  |                      |     |   |                             |  
|Deferred compensation, net of cancellation adjustment                                         |  |             |   |                            |        |  |                       |   | 21     |                                               |  |   | (21                 | ) |  |                      |     |   |                             |  
|Translation adjustment                                                                        |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      | (9   | ) |                             |  
|Unrealized gain on investments                                                                |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      | 159  |   |                             |  
|Amortization of deferred compensation                                                         |  |             |   |                            |        |  |                       |   |       |                                               |  |   | 361                 |   |  |                      |     |   |                             |  
|Net loss                                                                                      |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      |     |   |                             |  
|                                                                                              |  |              |   |                            |        |   |                       |   |        |                                               |  |   |                     |   |  |                      |      |   |                             |  
|Balances at December 31, 2001                                                                 |  | 24,142       |   |                            | $      | 2 |                       | $ | 97,765 |                                               |  | $ | (1,542              | ) |  | $                    | 141  |   |                             | $
|                                                                                              |  |              |   |                            |        |   |                       |   |        |                                               |  |   |                     |   |  |                      |      |   |                             |  
|Issuance of common stock upon exercise of stock options and grant of restricted common
shares |  | 297          |   |                            |        |  |                       |   | 1      |                                               |  |   |                    |   |  |                      |     |   |                             |  
|Issuance of common stock under employee stock purchase plan                                   |  | 285          |   |                            |        |  |                       |   | 371    |                                               |  |   |                    |   |  |                      |     |   |                             |  
|Issuance of common stock in connection with legal settlement and acquired
technology          |  | 500          |   |                            |        |  |                       |   | 830    |                                               |  |   |                    |   |  |                      |     |   |                             |  
|Repurchases of restricted common stock                                                        |  | (23          | ) |                            |        |  |                       |   | (35    | )                                             |  |   |                    |   |  |                      |     |   |                             |  
|Deferred compensation, net of cancellation adjustment                                         |  |             |   |                            |        |  |                       |   | (204   | )                                             |  |   | 204                 |   |  |                      |     |   |                             |  
|Translation adjustment                                                                        |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      | (21  | ) |                             |  
|Unrealized gain on investments                                                                |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      | 95   |   |                             |  
|Amortization of deferred compensation                                                         |  |             |   |                            |        |  |                       |   |       |                                               |  |   | 1,099               |   |  |                      |     |   |                             |  
|Net loss                                                                                      |  |             |   |                            |        |  |                       |   |       |                                               |  |   |                    |   |  |                      |     |   |                             |  
|                                                                                              |  |              |   |                            |        |   |                       |   |        |                                               |  |   |                     |   |  |                      |      |   |                             |  
|Balances at December 31, 2002                                                                 |  | 25,201       |   |                            | $      | 2 |                       | $ | 98,728 |                                               |  | $ | (239                | ) |  | $                    | 215  |   |                             | $
|                                                                                              |  |              |   |                            |        |   |                       |   |        |                                               |  |   |                     |   |  |                      |      |   |                             |  



See
accompanying notes.





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##### Table of Contents

MARIMBA, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                          |  | Year Ended December 31, |        
|----------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                          |  | 2002                    |        
|Operating activities:                                                                     |  |                         |        
|Net loss                                                                                  |  | $                       | (10,854
|Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |  |                         |        
|Depreciation                                                                              |  |                         | 1,864  
|Amortization of deferred compensation                                                     |  |                         | 1,099  
|Amortization of acquired technology                                                       |  |                         | 171    
|Issuance of stock option for services                                                     |  |                         |       
|Issuance of common stock in connection with legal settlement                              |  |                         | 830    
|Loss on disposal of property and equipment                                                |  |                         | 13     
|Changes in operating assets and liabilities:                                              |  |                         |        
|Accounts receivable, net                                                                  |  |                         | 1,245  
|Prepaid expenses and other current assets                                                 |  |                         | 370    
|Other assets                                                                              |  |                         | (9     
|Accounts payable                                                                          |  |                         | 100    
|Accrued liabilities                                                                       |  |                         | (437   
|Accrued compensation                                                                      |  |                         | (1,060 
|Deferred revenue                                                                          |  |                         | (1,592 
|Deferred rent                                                                             |  |                         | 21     
|                                                                                          |  |                         |        
|Net cash provided by (used in) operating activities                                       |  |                         | (8,239 
|                                                                                          |  |                         |        
|Investing activities:                                                                     |  |                         |        
|Acquired technology in connection with legal settlement                                   |  |                         | (1,707 
|Capital expenditures, net                                                                 |  |                         | (310   
|Purchases of investments                                                                  |  |                         | (38,160
|Proceeds from matured investments                                                         |  |                         | 33,665 
|                                                                                          |  |                         |        
|Net cash provided by (used in) investing activities                                       |  |                         | (6,512 
|                                                                                          |  |                         |        
|Financing activities:                                                                     |  |                         |        
|Proceeds from issuance of common stock, net of repurchases                                |  |                         | 337    
|Proceeds from transfer of financial assets                                                |  |                         |       
|Principal payments under capital lease obligations                                        |  |                         |       
|                                                                                          |  |                         |        
|Net cash provided by financing activities                                                 |  |                         | 337    
|                                                                                          |  |                         |        
|Effect of exchange rate changes on cash                                                   |  |                         | (21    
|Net increase (decrease) in cash and cash equivalents                                      |  |                         | (14,437
|Cash and cash equivalents at beginning of year                                            |  |                         | 26,141 
|                                                                                          |  |                         |        
|Cash and cash equivalents at end of year                                                  |  | $                       | 11,704 
|                                                                                          |  |                         |        
|Supplemental disclosure of cash flow information:                                         |  |                         |        
|Interest paid                                                                             |  | $                       |       
|                                                                                          |  |                         |        
|Income taxes paid                                                                         |  | $                       | 17     
|                                                                                          |  |                         |        
|Cash paid for technology acquisition                                                      |  | $                       | 2,750  
|                                                                                          |  |                         |        
|Supplemental disclosure of non-cash investing and financing activities:                   |  |                         |        
|Deferred compensation, net of cancellation adjustment                                     |  | $                       | (204   
|                                                                                          |  |                         |        
|Issuance of stock for technology acquisition                                              |  | $                       | 830    
|                                                                                          |  |                         |        



See
accompanying notes.



39



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##### Table of Contents



MARIMBA,
INC.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.    Summary of Significant Accounting Policies



Description of Business



Marimba, Inc. was incorporated in Delaware in February 1996.
We develop, market and support software change management and software configuration management solutions. Our products help customers reduce their total cost of information technology (IT) ownership and improve quality of IT service by
streamlining the distribution and management of software applications and content. Our customer base spans multiple industries, including financial services, healthcare, insurance, manufacturing and telecommunications. We market our products
worldwide through a combination of a direct sales force and resellers.



Basis of Presentation



The consolidated financial statements include the accounts of Marimba and its wholly-owned subsidiaries in the United Kingdom and France. Intercompany accounts and transactions have been eliminated in consolidation.



Marimba has incurred operating losses to date and had an
accumulated deficit of $50.0 million at December 31, 2002. Marimbas activities have been primarily financed through its initial public offering of common stock and earlier private placements of equity securities. If Marimba is ultimately
unable to achieve profitability and positive cash flows from operations, it may need to raise additional capital through the issuance of debt or equity securities. Such financing may not be available on terms satisfactory to Marimba, if at all.



Reclassification



Certain previously reported amounts have been reclassified to
conform to the current year presentation format with no impact on net income. All financial information has been reclassified to conform to this presentation.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes. On an on-going basis, we evaluate these estimates and judgments, including those related to revenue recognition, bad debts, returns, and litigation.
Actual results could differ materially from those estimates.



Revenue Recognition



Marimba derives its revenues primarily from two sources (i) license revenues, which consist of software license fees and (ii) service revenues, which are comprised of fees for maintenance and support, consulting and training.
Maintenance and support agreements provide technical support and the right to unspecified updates on an if-and-when available basis.



Marimba applies the provisions of Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition, as amended
by Statement of Position 98-9 (SOP 98-9), Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions to all transactions involving the license of software products.



In December 1999, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), which provides guidance on the recognition,



40



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##### Table of Contents

MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue recognition policies. Marimba applied the provisions of SAB 101 to all revenue transactions for fiscal 2002 and 2001. The implementation of SAB 101 has not had a material
impact on our results of operations, financial position or cash flows.



Marimba licenses software products to corporate customers, OEM partners and resellers on a perpetual basis or a term basis. We recognize revenue from the sale of software licenses when persuasive evidence of an arrangement
exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is probable.



Marimba uses either a definitive customer purchase order or signed license agreement as evidence of an arrangement. License revenues in
arrangements with customers who are not the ultimate users, primarily resellers, are not recognized until the software is sold through to the end-user. Advance payments from resellers for guaranteed minimum commitments are deferred until the
software is sold through to the end-user or upon expiration of the specified commitment time period if the minimum commitments have not been met. Delivery generally occurs when license keys have been made available to the customer through e-mail.



At the time of the transaction, Marimba assesses
whether the fee associated with revenue transactions is fixed or determinable and whether collection is probable. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and our history with the
customer or with similar customers. If a significant portion of a fee is due after our normal payment terms, we generally account for the fee as not being fixed or determinable. In these cases, Marimba recognizes revenue as the fees become due.



Marimba assesses the probability of collection
based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not probable, we defer the fee
and recognize revenue at the time collection becomes probable, which is generally upon receipt of cash.



For arrangements with multiple obligations (for example, undelivered maintenance and support), Marimba allocates revenue to each component
of the arrangement using the residual value method based on vendor specific objective evidence of the fair value of the undelivered elements, which is specific to Marimba. This means that we defer revenue from the arrangement fee equivalent to the
fair value of the undelivered elements. Fair values for the ongoing maintenance and support obligations for our licenses are based upon separate sales of renewals to other customers. Fair value of services, such as training or consulting, is based
upon separate sales by us of these services to other customers. Most of our arrangements involve multiple obligations.



Marimbas arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision,
acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period.



Marimba recognizes revenues for maintenance and support ratably over the maintenance term, which is generally one year. Consulting
services are generally billed based on daily rates and training services are generally billed on per student or per class session basis. We generally recognize consulting and training revenues as the services are performed.



Research and Development



Research and development expenditures are generally charged
to operations as incurred. Statement of Financial Accounting Standards No. 86 (FAS 86), Accounting for the Costs of Computer Software to Be



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Sold, Leased or Otherwise Marketed, requires the capitalization of certain software development costs subsequent to the establishment
of technological feasibility, which, for Marimba, is established upon completion of a working model. To date, costs incurred by Marimba between completion of the working model and the point at which the product is ready for general release have been
insignificant and charged to expense as incurred.



Advertising



Marimba expenses advertising costs as incurred. Advertising expense was $54,000, $819,000 and $1.2 million for the years ended December 31, 2002, 2001 and 2000, respectively.



Cash, Cash Equivalents and Investments



Cash equivalents consisted of financial instruments, which
are readily convertible to cash and have original maturities of three months or less at the time of acquisition. Marimbas cash and cash equivalents as of December 31, 2002 and 2001 consist primarily of commercial paper, corporate and municipal
bonds, and demand deposits and money market funds held by large financial institutions in the United States. Investments with remaining maturities of more than three months and less than one year are considered short-term investments. Investments
with remaining maturities longer than one year are considered long-term investments. All investments classified as long-term mature during 2004. The carrying value of cash, cash equivalents and investments approximates fair value.



|                         |  | Year Ended December 31,
|------------------------ |  | -----------------------
|                         |  | 2002                   
|                         |  | (in thousands)         
|Cash and cash equivalent |  | $                      
|Short-term investments   |  |                        
|Long-term investments    |  |                        
|                         |  |                        
|Total capital resources  |  | $                      
|                        
|Interest receivable      |  | $                      



Marimba
classifies, at the date of acquisition, its marketable securities as available-for-sale in accordance with the provisions of Statement of Financial Accounting Standards No. 115 (FAS 115), Accounting for Certain Investments in Debt
and Equity Securities. Available-for-sale securities are reported at fair market value with the related unrealized gains and losses included in stockholders equity. Paid interest and paid dividends on all securities are included in
interest income and interest receivable is included in other current assets.



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MARIMBA, INC.



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Available-for-sale investments are summarized as follows:



|                                                             |  | Amortized Cost |        | Gross Unrealized Gains |   | Gross Unrealized Losses |  |   | Fair Value
|------------------------------------------------------------ |  | -------------- | ------ | ---------------------- | - | ----------------------- |  | - | ----------
|December 31, 2002:                                           |  |               
|Corporate notes                                              |  | $              | 20,665 |                        | $ | 196                     |  | $ | (1        
|Market auction rate preferred stock                          |  |                |       |                        |   |                        |  |   |          
|Debt securities from U.S. Government and government agencies |  |                | 17,608 |                        |   | 92                      |  |   |          
|                                                             |  |                |        |                        |   |                         |  |   |           
|Total investments                                            |  | $              | 38,273 |                        | $ | 288                     |  | $ | (1        
|                                                             |  |                |        |                        |   |                         |  |   |           
|                                                            
|Short-term investments                                       |  | $              | 24,455 |                        | $ | 188                     |  | $ |          
|Long-term investments                                        |  |                | 13,818 |                        |   | 100                     |  |   | (1        
|                                                             |  |                |        |                        |   |                         |  |   |           
|Total investments                                            |  | $              | 38,273 |                        | $ | 288                     |  | $ | (1        
|                                                             |  |                |        |                        |   |                         |  |   |           
|December 31, 2001:                                           |  |                |        |                        |   |                         |  |   |           
|Corporate notes                                              |  | $              | 22,128 |                        | $ | 182                     |  | $ | (15       
|Market auction rate preferred stock                          |  |                | 1,150  |                        |   |                        |  |   |          
|Debt securities from U.S. Government and government agencies |  |                | 10,500 |                        |   | 25                      |  |   |          
|                                                             |  |                |        |                        |   |                         |  |   |           
|Total investments                                            |  | $              | 33,778 |                        | $ | 207                     |  | $ | (15       
|                                                             |  |                |        |                        |   |                         |  |   |           
|                                                            
|Short-term investments                                       |  | $              | 16,009 |                        | $ | 46                      |  | $ | (1        
|Long-term investments                                        |  |                | 17,769 |                        |   | 161                     |  |   | (14       
|                                                             |  |                |        |                        |   |                         |  |   |           
|Total investments                                            |  | $              | 33,778 |                        | $ | 207                     |  | $ | (15       
|                                                             |  |                |        |                        |   |                         |  |   |           



The cost
of securities sold is based on the specific identification method.



At December 31, 2002, the amortized cost and estimated fair values of short-term and long-term investments (excluding cash equivalents) by contractual maturity were as follows:



|                    |  | Amortized Cost |        | Fair Value
|------------------- |  | -------------- | ------ | ----------
|                    |  | (in thousands)
|Less than one year  |  | $              | 24,455 |           
|Mature in 1-2 year  |  |                | 13,818 |           
|Mature in 3-4 years |  |                |       |           
|                    |  |                |        |           
|Total investments   |  | $              | 38,273 |           
|                    |  |                |        |           



Property and Equipment



Marimba records property and equipment at cost and calculates depreciation using the straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized over the
shorter of the estimated useful lives of the respective assets or the term of the lease. Repairs and maintenance costs are expensed as incurred.



Income Taxes



Marimba accounts for income taxes using the asset and liability method in accordance with Statement of Financial Accounting Standards No.
109 (FAS 109), Accounting for Income Taxes. Under the asset and



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



liability method, a current tax asset or liability is recognized for the estimated taxes payable or refundable on tax returns for the current
year. A deferred tax asset or liability is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. Marimba has recorded a full valuation allowance as of December 31, 2002, because we believe it is
more likely than not that our deferred tax assets will not be realized in the foreseeable future.



Accounting for Stock-Based Compensation



Marimba has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees, and related interpretations in accounting for its employee stock options because, as discussed in Note 6, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 (FAS
123), Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of Marimbas employee stock
options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. See the pro forma disclosures of applying FAS 123 included in Note 6.



Stock options issued to non-employees are accounted for in accordance with FAS 123 and Emerging Issues Task
Force Issue No. 96-18 (EITF 96-18), Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in conjunction With Selling, Goods or Services.



The following table summarizes relevant information as to
reported results under the Companys intrinsic value method of accounting for stock awards, with supplemental information as if the fair value recognition provisions of SFAS No. 123, Accounting for Stock Based Compensation, had been
applied:



|                                                            |  | Year Ended December 31,               |        
|----------------------------------------------------------- |  | ------------------------------------- | -------
|                                                            |  | 2002                                  |        
|                                                            |  | (in thousands, except per share data) |        
|Net loss as reported                                        |  | $                                     | (10,854
|Add: Stock-based compensation included in reported net loss |  |                                       | 1,099  
|Deduct: Total stock-based compensation cost under SFAS 123  |  |                                       | (5,287 
|                                                            |  |                                       |        
|Pro forma net loss                                          |  | $                                     | (15,042
|Basic and diluted net loss per share:                       |  |                                       |        
|Reported net loss per common share                          |  | $                                     | (.44   
|                                                            |  |                                       |        
|Pro forma net loss per common share                         |  | $                                     | (.62   
|                                                            |  |                                       |        



Concentrations of Credit Risk and Other Risks



Financial instruments that subject Marimba to credit risk consist primarily of uninsured cash, cash equivalents and short-term and long-term investment balances held at commercial banks and institutions primarily in the
United States and trade receivables from Marimbas customers. Marimba sells to customers in many different industries. Marimba performs ongoing credit evaluations of customers, but does not generally require collateral. We grant credit terms to
most customers ranging from 30 to 90 days, however in some instances Marimba may provide longer payment terms.



For the years ended December 31, 2002, 2001 and 2000, no single customer represented more than 10% of total revenues. At December 31,
2002, three customers represented 28%, 13% and 12% of net accounts receivable, and at December 31, 2001, four customers represented 18%, 13%, 13% and 13% of net accounts receivable.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Accounts Receivable Risks



Marimbas accounts receivable are subject to both collections risks and returns risks. Our gross accounts receivable is reserved against these risks through an allowance for doubtful accounts and a returns reserve.



The allowance for doubtful accounts is established through a
charge to general and administrative expenses. This allowance is for estimated losses resulting from the inability of our customers to make required payments. It is a significant estimate and is regularly evaluated by us for adequacy by taking into
consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in aggregate, and current economic conditions that may affect a customers ability to pay or suggest that
a particular market sector is more prone to liquidity issues. The use of different estimates or assumptions could produce different allowance balances. If the financial condition of our customers were to deteriorate, subsequent to the date of our
arrangements with them, this could result in an impairment of their ability to make payments and additional allowances would be required.



Prior to December 31, 2002, we maintained a returns reserve, established through a debit to license revenue. The reserve was for estimated
losses resulting from the possibility of product returns by customers. At December 31, 2002, we analyzed our past returns history and determined that we had insignificant history of returns to serve as a quantitative basis for our reserve. As a
result of this analysis, the entire reserve was reversed in the fourth quarter of 2002, resulting in a net increase to license revenue of $527,000 during fiscal year 2002. If in the future we experience customer returns, this may materially
negatively impact our business.



The following
table presents the allowance for doubtful accounts and the returns reserve for 2002, 2001 and 2000:



|                             |  | Allowance for Doubtful Accounts |        |   | Returns Reserve |   |      | Total Accounts Receivable Reserves | 
|---------------------------- |  | ------------------------------- | ------ | - | --------------- | - | ---- | ---------------------------------- | 
|                             |  | (in thousands)                  |       
|Balance at January 1, 2000   |  | $                               | 104    |   |                 | $ |     |                                    | 
|Additions                    |  |                                 | 2,144  |   |                 |   | 237  |                                    | 
|Adjustments                  |  |                                 | (263   | ) |                 |   |      |                                    | 
|Write-offs                   |  |                                 |       |   |                 |   |     |                                    | 
|                             |  |                                 |        |   |                 |   |      |                                    | 
|Balance at December 31, 2000 |  |                                 | 1,985  |   |                 |   | 237  |                                    | 
|                             |  |                                 |        |   |                 |   |      |                                    | 
|Additions                    |  |                                 | 172    |   |                 |   | 290  |                                    | 
|Adjustments                  |  |                                 |       |   |                 |   |     |                                    | 
|Write-offs                   |  |                                 | (326   | ) |                 |   |     |                                    | 
|                             |  |                                 |        |   |                 |   |      |                                    | 
|Balance at December 31, 2001 |  |                                 | 1831   |   |                 |   | 527  |                                    | 
|                             |  |                                 |        |   |                 |   |      |                                    | 
|Additions                    |  |                                 |       |   |                 |   |     |                                    | 
|Adjustments                  |  |                                 | (40    | ) |                 |   | (527 | )                                  | 
|Write-offs                   |  |                                 | (1,041 | ) |                 |   |     |                                    | 
|                             |  |                                 |        |   |                 |   |      |                                    | 
|Balance at December 31, 2002 |  | $                               | 750    |   |                 | $ |     |                                    | 
|                             |  |                                 |        |   |                 |   |      |                                    | 



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Accrued
Warranty



Marimba maintains a warranty
accrual in the event that we incur expenses associated with customer claims made under the warranty provisions of their license agreement. The following table reflects the activity with our warranty accrual:



|                                 |  | Accrued Warranty
|-------------------------------- |  | ----------------
|                                 |  | (in thousands)  
|Balance at January 1, 2000       |  | $               
|Increase to warranty accrual     |  |                 
|Expenses incurred under warranty |  |                 
|                                 |  |                 
|Balance at December 31, 2001     |  | $               
|                                 |  |                 
|Increase to warranty accrual     |  |                 
|Expenses incurred under warranty |  |                 
|Balance at December 31, 2002     |  | $               
|                                 |  |                 



Long-Lived Assets



Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. The Company does not perform a periodic assessment of assets for
impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which
an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its
carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.



Financing



In June 2001, Marimba entered into a $5 million receivables purchase facility with a bank, pursuant to which Marimba could transfer
qualifying accounts receivables to the bank on a non-recourse basis. Transfers under this facility were recorded as sales and accounted for in accordance with Statement of Financial Accounting Standards No. 140 (FAS 140),
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. During the second quarter of 2001, Marimba transferred to the bank accounts receivable totaling approximately $3.9 million, which approximated
fair value. The transfer of accounts receivable for cash was reported in the consolidated statement of cash flows as a financing activity. All amounts under this facility were repaid in full, and the purchase facility expired in June 2002.



Segment Information



Marimba operates in one operating segment, the development
and marketing of change management software, and has operations in the United States and Europe. For the years ended December 31, 2002, 2001 and 2000, sales in Europe were approximately 12%, 6% and 3% of total revenue, respectively.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table presents our revenues by regions:



|               |  | Year Ended December 31, |       
|-------------- |  | ----------------------- | ------
|               |  | 2002                    |       
|               |  | (in thousands)          |       
|Revenue:       |  |                         |       
|United States  |  | $                       | 29,753
|Europe         |  |                         | 4,342 
|Other regions  |  |                         | 1,132 
|               |  |                         |       
|Total revenues |  | $                       | 35,227



Net
Loss Per Share



Basic and diluted net loss
per common share are presented in conformity with Statement of Financial Accounting Standards No. 128 (FAS 128), Earnings Per Share, for all periods presented. In accordance with FAS 128, basic and diluted net loss per share
have been computed by dividing the net loss by weighted-average shares of common stock outstanding during the periods, less weighted average shares subject to repurchase.



The following table presents the calculation of basic and diluted net loss per share:



|                                                                                                           |  | Year Ended December 31,               |        
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | -------
|                                                                                                           |  | 2002                                  |        
|                                                                                                           |  | (in thousands, except per share data) |        
|Net loss                                                                                                   |  | $                                     | (10,854
|                                                                                                           |  |                                       |        
|Basic and diluted:                                                                                         |  |                                       |        
|Weighted-average shares of common stock outstanding                                                        |  |                                       | 24,484 
|Less weighted-average shares subject to repurchase                                                         |  |                                       | (57    
|                                                                                                           |  |                                       |        
|Weighted-average shares of common stock outstanding used in computing basic and diluted
net loss per share |  |                                       | 24,427 
|                                                                                                           |  |                                       |        
|Basic and diluted net loss per share                                                                       |  | $                                     | (0.44  
|                                                                                                           |  |                                       |        



Marimba
has excluded all outstanding stock options from the calculation of diluted loss per share because all such securities are antidilutive for all periods presented. Weighted-average options outstanding to purchase 7,078,000, 6,220,000, and 4,714,000
shares of common stock for the years ended December 31, 2002, 2001 and 2000, respectively, were not included in the computation of diluted net loss per share because the effect would be antidilutive. Such securities, had they been dilutive, would
have been included in the computation of diluted net loss per share using the treasury stock method.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Accumulated Other Comprehensive Income (Loss)



Comprehensive income (loss) is defined as net loss as adjusted by changes in equity such as foreign currency translation adjustments and unrealized gains and losses that have historically been excluded from net income (loss)
and reflected instead in equity. As of December 31, the components of accumulated other comprehensive income (loss) reflected in the Statement of Stockholders Equity were as follows:



|                                                 |  | 2002           |     |   | 2001 |   |     | 2000 | 
|------------------------------------------------ |  | -------------- | --- | - | ---- | - | --- | ---- | 
|                                                 |  | (in thousands) |    
|Unrealized gain on available-for-sale securities |  | $              | 287 |   |      | $ | 192 |      | 
|Foreign currency translation adjustment          |  |                | (72 | ) |      |   | (51 | )    | 
|                                                 |  |                |     |   |      |   |     |      | 
|Accumulated other comprehensive income (loss)    |  | $              | 215 |   |      | $ | 141 |      | 
|                                                 |  |                |     |   |      |   |     |      | 



Acquired Technology



On
July 19, 2002, Marimba executed an agreement settling patent litigation brought against the Company. Under the terms of the agreement, Marimba obtained a license to patents in exchange for consideration consisting of a $2.75 million cash payment and
the issuance of 500,000 shares of our common stock. The portion of the settlement which related to payment for alleged past infringement was expensed to cost of license during the quarter ended June 30, 2002, in the amount of $1.9 million. In the
quarter ended September 30, 2002, we recorded an acquired technology asset of $1.7 million, representing the proportion of the total settlement relating to the future benefit to Marimba of the ongoing license to the acquired patent. This asset is
being amortized to cost of license revenues ratably over five years, the estimated remaining useful life of the license.



Foreign Currency



The functional currency of all our foreign subsidiaries is the local currency. Assets and liabilities of our foreign subsidiaries are
translated at the exchange rate on the balance sheet date. Revenue, costs and expenses are translated at average rates of exchange in effect during the year. We report translation gains and losses as a separate component of stockholders
equity. We include net gains and losses resulting from foreign exchange transactions in the statement of operations and they were immaterial in all periods presented.



Recent Accounting Pronouncements



In June 2001, the EITF issued EITF Issue No. 00-25 (EITF 00-25), Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendors Products, effective for periods beginning after December 15, 2001. EITF 00-25 addresses whether consideration from a vendor to a reseller is (a) an adjustment of the
selling prices of the vendors products and, therefore, should be deducted from revenue when recognized in the vendors statement of operations or (b) a cost incurred by the vendor for assets or services received from the reseller and,
therefore, should be included as a cost or expense when recognized in the vendors statement of operations. Upon application of EITF 00-25, financial statements for prior periods presented for comparative purposes should be reclassified to
comply with the income statement display requirements. We adopted EITF-00-25 during the first quarter of 2002, and it did not have a material effect on our operating results or financial position.



In July 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 141, Business Combinations (FAS 141). FAS 141 establishes new standards for accounting and reporting business combinations and requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. We adopted this statement during the first quarter of 2002.



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In July
2001, the FASB issued Statement of Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets, which supersedes Accounting Principles Board Opinion No. 17 (APB 17), Intangible
Assets. FAS 142 establishes new standards for goodwill, including the elimination of goodwill amortization to be replaced with methods of periodically evaluating goodwill for impairment. We adopted this statement during 2002. SFAS 142 did not
have a material effect on our operating results or financial position.



In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (FAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets,which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets and supersedes Statement of Financial Accounting Standards No. 121 (FAS 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of , and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 (APB 30), Reporting the Results of Operations for a disposal of a segment of a business. We adopted FAS
144 as of January 1, 2002 and do not believe that the adoption of the Statement had a significant impact on our financial position or results of operations.



In September 2001, the EITF issued EITF Issue No. 01-09 (EITF 01-09), Accounting for Consideration Given by Vendor to a
Customer or a Reseller of the Vendors Products, which is a codification of EITF 00-14, EITF 00-25 and EITF 00-22, Accounting for Points and Certain Other Time-or Volume-Based Sales Incentive Offers and Offers for Free Products or
Services to be Delivered in the Future. Marimba is currently assessing the impact of the adoption of these issues on our financial statements.



In November 2001, the FASB issued a Staff Announcement, Topic D-103 and the EITF issued EITF Issue No. 01-14, Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred, which concluded that the reimbursement of out-of-pocket expenses should be classified as revenue in the statement of operations for
financial reporting periods beginning after December 15, 2001 and comparative financial statements for prior periods should be reclassified to comply with the guidance in this announcement. Effective January 1, 2002, we applied this announcement and
EITF issue but did not reclassify out-of-pocket expenses for prior years, as they were immaterial. Marimba currently records out-of-pocket expenses in cost of service revenues and records the reimbursement of such expenses in
service revenues. In fiscal 2002, we recorded $306,000 of such revenues. The announcement and EITF issue had no impact on gross profit or net loss.



On July 30, 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Statement No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (FAS No. 146). The standard replaces EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring) and requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS 146 is effective prospectively to exit or
disposal activities initiated after December 31, 2002



In November 2002, the FASB issued FIN 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that we recognize the fair value for guarantee
and indemnification arrangements issued or modified by us after December 31, 2002, if these arrangements are within the scope of the Interpretation. In addition, we must continue to monitor the conditions that are subject to the guarantees and
indemnifications, as required under previously existing generally accepted accounting principles, in order to identify if a loss has occurred. If we determine it is probable that a loss has occurred, then any such estimable loss would be recognized
under those guarantees and indemnifications. Some of the software licenses that we have granted contain provisions that indemnify licensees of the software



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



from damages and costs resulting from claims alleging that our software infringes the intellectual property rights of a third party. We have
historically received only a limited number of requests for indemnification under these provisions and have not been required to make material payments pursuant to these provisions. Accordingly, we have not recorded a liability related to these
indemnification provisions. We will be required to implement the provisions of FIN 45 as of January 1, 2003 and do not believe that FIN 45 will have a material impact on our financial position, results of operations or cash flows.



On December 31, 2002, the FASB issued Statement of Financial
Accounting Standards No. 148 (FAS 148), Accounting for Stock-Based Compensation  Transition and Disclosure. FAS 148 amends FASB statement No. 123s fair value method of accounting for stock-based employee compensation. FAS 148
also amends the disclosure provisions of FAS 123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entitys accounting policy with
respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. We have adopted the disclosure provisions for this report. We will continue to account for stock-based
compensation under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, using the intrinsic value method. Accordingly, the adoption of SFAS 148 is not anticipated to have a
material effect on our financial position or results of operations.



2.    Property and Equipment



Property and equipment consist of the following:



|                            |  | December 31,   |       
|--------------------------- |  | -------------- | ------
|                            |  | 2002           |       
|                            |  | (in thousands) |       
|Furniture and equipment     |  | $              | 1,598 
|Computer equipment          |  |                | 5,997 
|Purchased software          |  |                | 1,340 
|Leasehold improvements      |  |                | 1,191 
|                            |  |                |       
|                            |  |                | 10,126
|Accumulated depreciation    |  |                | (7,793
|                            |  |                |       
|Property and equipment, net |  | $              | 2,333 
|                            |  |                |       



3.    Commitments



Marimbas contractual obligations consist of noncancellable operating lease agreements. As of December 31, 2002, future minimum lease payments under noncancellable operating leases are as follows:



|                             |  | Operating Leases
|---------------------------- |  | ----------------
|                             |  | (in thousands)  
|Year ending December 31:     |  |                 
|2003                         |  |                 
|2004                         |  |                 
|2005                         |  |                 
|2006 and thereafter          |  |                 
|                             |  |                 
|Total minimum lease payments |  | $               
|                             |  |                 



Marimbas headquarters facility lease expires in April 2005. Rent expense under operating leases totaled approximately, $2.5 million, $3.1 million and $2.4 million for the years ended December 31, 2002, 2001 and 2000,
respectively.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





4.    Deferred Compensation



We record deferred compensation representing the difference between the exercise prices of options granted to acquire shares of common stock and the deemed fair value for financial reporting purposes of our common stock on
the grant dates. We also record deferred compensation to represent the intrinsic value of certain restricted stock awards. This compensation relates to individuals in all operating expense categories.



Deferred compensation is amortized over the vesting periods of
the options and stock using the graded vesting method. The graded vesting method can result in amortization of deferred compensation at a schedule which is faster then the shares actually vest. As a result, when an employee is terminated prior to
full vesting we record a credit to deferred compensation armortization expense, which reflects the difference between the amount of deferred compensation we have previously amortized for this employee less the amount the employee had actually vested
upon termination. A summary of Marimbas deferred compensation activity is as follows:



|                             |  | Deferred Compensation |       
|---------------------------- |  | --------------------- | ------
|                             |  | (in thousands)        |       
|Balance at January 1, 2000   |  | $                     | 1,680 
|Increase due to new grants   |  |                       | 2,606 
|Decrease due to terminations |  |                       | (1,595
|Amortization                 |  |                       | (809  
|                             |  |                       |       
|Balance at December 31, 2000 |  |                       | 1,882 
|                             |  |                       |       
|Increase due to new grants   |  |                       | 2,450 
|Decrease due to terminations |  |                       | (2,429
|Amortization                 |  |                       | (361  
|                             |  |                       |       
|Balance at December 31, 2001 |  |                       | 1,542 
|                             |  |                       |       
|Increase due to new grants   |  |                       | 310   
|Decrease due to terminations |  |                       | (514  
|Amortization                 |  |                       | (1,099
|                             |  |                       |       
|Balance at December 31, 2002 |  | $                     | 239   
|                             |  |                       |       



5.    Stockholders Equity



As of December 31, 2002, our authorized capital stock consisted of 80,000,000 shares of common stock and 10,000,000 shares of undesignated preferred stock. The following is a summary description of our
capital stock:



Common Stock



The holders of common stock are entitled to one vote per
share on all matters to be voted upon by the stockholders. Holders of common stock do not have cumulative voting rights, and, therefore, holders of the remaining shares voting for the election of directors can elect all of the directors. Subject to
preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive dividends, if any, as may be declared from time to time by the board of directors out of funds legally available. In the event
of the liquidation, dissolution or winding up of Marimba, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then
outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and
nonassessable.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Marimba
has reserved shares of common stock for future issuance as follows:



|                                                                |  | December 31, 2002
|--------------------------------------------------------------- |  | -----------------
|                                                                |  | (in thousands)   
|Exercise of options                                             |  | 11,284           
|Issuance of common stock under the employee stock purchase plan |  | 1,163            
|                                                                |  |                  
|Total                                                           |  | 12,447           
|                                                                |  |                  



Preferred Stock



Marimbas Board of Directors has the authority to issue preferred stock in one or more series and to fix the rights, preferences, privileges and related restrictions, including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of the series, without further vote or action by the stockholders. The issuance of preferred stock may
have the effect of delaying, deferring or preventing a change in control of the company without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others.



Dividend Policy



Marimba did not declare nor pay any cash dividends on our capital stock during the fiscal years ended December 31, 2002, 2001 and 2000,
and does not expect to do so in the foreseeable future. Any future determination with respect to the payment of dividends will be at the discretion of our Board of Directors and will depend upon, among other things, our operating results, financial
condition and capital requirements, the terms of then-existing indebtedness, general business conditions and such other factors as the Board of Directors deems relevant.



6.    Stock Option and Other Employee Benefit Plans



1996 Stock Option Plan



In November 1996, the Board of Directors adopted the 1996
Stock Plan (the 1996 Plan) for issuance of common stock to eligible participants. A total of 6,474,603 shares of common stock were originally reserved for issuance to eligible participants under the 1996 Plan. Effective in April 1999
(concurrently with Marimbas initial public offering), Marimba ceased granting awards under the 1996 Plan. Options granted under the 1996 Plan expire after 10 years. Options under the plan are immediately exercisable; however, shares issued are
subject to Marimbas right to repurchase such shares at the original issuance price, which right lapses in a series of installments measured from the vesting commencement date of the option. Options generally vest and the repurchase rights
lapse ratably over a period of three or four years from the date of grant.



1999 Omnibus Equity Incentive Plan



In March 1999, stockholders approved the adoption of Marimbas 1999 Omnibus Equity Incentive Plan (the 1999 Omnibus Plan), and a total of 1,250,000 shares of common stock were
originally reserved for issuance to eligible participants under the 1999 Omnibus Plan. As of January 1stof each
plan year, annual increases to the share reserve are equal to the lesser of 1,250,000 shares or 4% of the outstanding common stock of Marimba on such date. Effective in September 2001, the stockholders approved an amendment to the 1999 Omnibus Plan



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



which increased the number of shares reserved for issuance under the 1999 Omnibus Plan by the number of shares that are available for
issuance under the 1996 Stock Plan, up to a maximum of 2,103,973 shares. A total of 5,997,849 shares of common stock were reserved for issuance under the 1999 Omnibus Plan as of December 31, 2002, and an additional 1,008,050 shares of common stock
were added to the reserve on January 1, 2003. The types of awards that may be made under the 1999 Omnibus Plan to eligible participants are options to purchase shares of common stock, stock appreciation rights, restricted shares and stock units. The
exercise price for incentive stock options may not be less than 100% of the fair market value of Marimbas common stock on the date of grant (and 85% for nonstatutory options). In the event of a change in control of Marimba, an option or award
under the 1999 Omnibus Plan will become fully exercisable and fully vested if the option or award is not assumed by the surviving corporation or the surviving corporation does not substitute comparable awards for the awards granted under the 1999
Omnibus Plan.



In 2002, Marimba issued 100,000
restricted shares under the 1999 Omnibus Plan and repurchased 22,967 under this plan.



2000 Supplemental Stock Plan



Shares Subject to Plan.    In March 2000, the Board of Directors adopted the 2000 Supplemental Stock Plan (the
2000 Plan). A total of 3,500,000 shares of common stock have been originally reserved for issuance to eligible participants under the 2000 Plan. As of December 31, 2002, 2,889,943 option shares were outstanding under the 2000 Plan, and
474,641 shares were available for future grant.



Eligibility.    Options and restricted shares, referred to collectively as awards, may be granted under the 2000 Plan to employees, consultants, independent contractors and advisors of Marimba. Officers and
directors of Marimba are not eligible to participate in the 2000 Plan.



Terms of Awards.    Marimbas compensation committee determines many of the terms and conditions of each award granted under the 2000 Plan, including the number of shares for which the award
will be granted, and, if applicable, the exercise price of the award and the periods during which the award may be exercised. Each award is evidenced by an agreement in such form as the committee approves and is subject to the following conditions,
as described in further detail in the plan:



Vesting and Exercisability:    Awards become vested and exercisable, as applicable, within such periods, or upon such events, as determined by the compensation committee in its discretion and as set forth
in the related stock option or restricted stock agreement. To date, as a matter of practice, awards under the plan have generally been subject to a four-year vesting period (which means, in the case of restricted shares, that the right of repurchase
by the company that applies to such shares lapses over such time period). Options terminate ten years or less from the date of grant.



Exercise Price:    The exercise price of each option granted may not be less than 85% of the
fair market value of the shares of Marimba common stock on the date of the grant.



Tax Status:    All options granted under the plan are non-qualified stock options.



Method of
Exercise:    The option exercise price is typically payable in cash or by check, but may also be payable, at the discretion of the committee, in a number of other forms of consideration, including cancellation of
indebtedness, fully paid shares of Marimba common stock, delivery of a promissory note, through a same day sale, through a margin commitment, or any combination of the foregoing.



Termination of
Employment:    Awards cease vesting on the date of termination of service or death of the participant. Options granted under the plan generally expire three months after the termination of the



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



| | optionees service to Marimba, except in the case of death or disability, in which case the options generally may be exercised up to 12
months following the date of death or termination of service. However, if the optionee is terminated for cause (i.e. for committing an alleged criminal act or intentional tort against Marimba), that optionees options expire upon termination.
Restricted shares which have not yet vested are subject to a right of repurchase by the company, generally within 60 days after termination of employment, at the original purchase price of the shares by the participant.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Change of
Control:    In the event of a change of control of Marimba (as defined in the plan), then the buyer may either assume the outstanding awards or substitute equivalent awards. In the event the buyer fails to assume or
substitute awards issued under the plan, all awards will become fully vested and exercisable.



Term and Amendment of the Plan.    The term of the plan commenced on the date the plan was adopted in March 2000, and will end upon termination by the Board of Directors. The
plan may be amended or terminated without stockholder approval.



1999 Non-Employee Directors Option Plan



In March 1999, stockholders approved the adoption of Marimbas Non-Employee Directors Option Plan (the Directors Plan), and a total of 150,000 shares of common stock were originally reserved for issuance under the
Directors Plan. As of January 1stof each plan year, the number of shares reserved for issuance is increased
automatically to restore the total number of shares available under the Directors Plan to 150,000 shares. An additional 37,500, 85,000 and 82,500 shares of common stock were added to the reserve on January 1,2001, 2002 and 2003, respectively.
Under the Directors Plan, as amended in September 2001:



| |  |  | each non-employee director who becomes a member of the Board of Directors is automatically granted an option to purchase 30,000 shares upon becoming a director. The
option vests 50% upon each of the two anniversaries following the date of grant, provided that the director has served continuously on the Board;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | beginning two years after receipt of the initial grant described above, each incumbent non-employee director will be automatically granted an option to purchase
10,000 shares at the date of each annual stockholders meeting if the director is serving on the Board of Directors at the time of such meeting. The option vests in full one year from the date of grant, provided that the director has served
continuously on the Board during such period; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | each incumbent non-employee director who is a member of a committee of the Board will automatically be granted an option to purchase 2,500 shares for each committee
on which the director is serving. The option vests in full one year from the date of grant, provided that the director has served continuously on the applicable committee during such period.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The exercise price for each option grant is equal to the fair
market value per share of common stock on the option grant date. In the event of a change of control of Marimba, the vesting of each option that is not assumed by the acquirer will accelerate as to 100% of the unvested shares. If the acquirer does
assume an option but the holder does not become a director of the acquirer, then the vesting of the option will accelerate as to 50% of the unvested shares.



Stock Option Exchange



During the period from April 27 to July 23, 2001, Marimba offered a voluntary stock option exchange program to its employees, and a total
of 1,369,500 shares of the Marimbas common stock were accepted for



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



exchange under the program. Members of our Board of Directors and our executive officers, however, were not eligible to participate in the
program. Under the program, Marimba employees were given the opportunity, if they so chose, to cancel outstanding stock options previously granted to them at an exercise price of at least $7.50 per share, in exchange for new options to be granted no
earlier than six months and one day after July 23, 2001; provided, however, that options granted on or after January 23, 2001 (even if they had an exercise price under $7.50 per share) had also to be exchanged if the option holder chose to exchange
one or more options granted prior to January 23, 2001 at an exercise price of at least $7.50 per share. The number of shares subject to the new options were determined by applying an exchange ratio in the range of 1:1 to 1:2 (i.e., one new option
share for every two canceled option shares) based on the exercise price of the canceled option. On January 25, 2002, new options to purchase a total 829,452 shares of Marimbas common stock were granted under the 2000 Plan in exchanged for the
canceled options accepted for exchange under the program. The exercise price of these new options is $3.10 per share, the closing price of Marimbas common stock on the Nasdaq National Market on the date of grant. The exchange program was
designed to comply with Financial Accounting Standards Board Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation, and did not to result in any additional compensation charges or
variable plan accounting.



A summary of
Marimbas stock option activity for all of its option plans and other option grants is as follows:



|                             |  |                            |   |  | Options Outstanding
|---------------------------- |  | -------------------------- | - |  | -------------------
|                             |  | Shares Available for Grant |   |  | Number of Shares   
|Balance at January 1, 2000   |  | 814,684                    |   |  | 3,462,795          
|Authorized                   |  | 5,440,810                  |   |  |                    
|Granted                      |  | (5,979,392                 | ) |  | 5,979,392          
|Exercised                    |  |                           |   |  | (458,964           
|Repurchased                  |  | 108,546                    |   |  |                   
|Canceled                     |  | 2,383,870                  |   |  | (2,383,870         
|                             |  |                            |   |  |                    
|Balance at December 31, 2000 |  | 2,768,518                  |   |  | 6,599,353          
|                            
|Authorized                   |  | 1,380,879                  |   |  |                    
|Granted                      |  | (4,614,250                 | ) |  | 4,614,250          
|Exercised                    |  |                            |   |  | (322,574           
|Repurchased                  |  | 103,693                    |   |  |                   
|Canceled                     |  | 4,599,805                  |   |  | (4,599,805         
|                             |  |                            |   |  |                    
|Balance at December 31, 2001 |  | 4,238,645                  |   |  | 6,291,224          
|                             |  |                            |   |  |                    
|                            
|Authorized                   |  | 1,050,658                  |   |  |                    
|Granted                      |  | (2,536,352                 | ) |  | 2,536,352          
|Exercised                    |  |                            |   |  | (297,916           
|Repurchased                  |  | 22,967                     |   |  | 21,529             
|Canceled                     |  | 2,483,340                  |   |  | (2,526,398         
|                             |  |                            |   |  |                    
|Balance at December 31, 2002 |  | 5,259,258                  |   |  | 6,024,791          
|                             |  |                            |   |  |                    



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table details outstanding and exercisable options, including 589,584 shares of common stock subject to repurchase at an average price of $0.0001, as of December 31, 2002:



|                         |  | Outstanding      |  | Exercisable                                
|------------------------ |  | ---------------- |  | -------------------------------------------
|Range of Exercise Prices |  | Number of Shares |  | Weighted-Average Remaining Contractual Life
|$.0001 $1.29            |  | 1,014,484        |  | 9.05                                       
|1.49   2.45             |  | 1,046,740        |  | 8.89                                       
|2.50  2.52              |  | 882,666          |  | 8.56                                       
|2.58  4.31              |  | 1,591,526        |  | 8.48                                       
|4.87  5.25              |  | 999,167          |  | 7.86                                       
|7.6239.63               |  | 488,208          |  | 7.22                                       
|46.0046.00              |  | 2,000            |  | 7.22                                       
|                         |  |                  |  |                                            
|Total                    |  | 6,024,791        |  | 8.45                                       
|                         |  |                  |  |                                            



As of
December 31, 2002, 2001 and 2000, 2.8 million, 758,353 and 217,048 options were vested and exercisable with weighted average exercise prices of $5.46, $18.16 and $42.53 per share, respectively.



1999 Employee Stock Purchase Plan



The 1999 employee stock purchase plan (the 1999
Purchase Plan) provides for a total of 500,000 shares of common stock reserved for issuance under this plan. As of January 1stof each plan year, annual increases to the share reserve are to equal the lesser of 500,000 shares or 2% of the outstanding common stock of Marimba on such date. A total of 1,163,154 shares of common stock were reserved for issuance
under the 1999 Purchase Plan as of December 31, 2002, and an additional 500,000 shares of common stock were added to the reserve on January 1, 2003. The 1999 Purchase Plan permits eligible employees to acquire shares of Marimbas common stock
through periodic payroll deductions of up to 10% of base cash compensation. No more than 1,500 shares may be purchased by each employee on any purchase date. Each offering period will have a maximum duration of 24 months. The price at which the
common stock may be purchased is 85% of the lesser of the fair market value of Marimbas common stock on the first day of the applicable offering period or on the last day of the respective purchase period. A total of 285,077 shares at an
average price of $1.30, 338,076 shares at an average price of $2.12 and 88,811 shares at an average price of $10.41 were issued under the 1999 Purchase Plan for the years ended December 31, 2002, 2001 and 2000, respectively.



Pro Forma Disclosures of the Effect of Stock-Based
Compensation



We utilize the intrinsic
value-based method to account for all of our stock-based benefit plans. Pro forma information regarding net loss and net loss per share is required by FAS 123, and has been determined as if Marimba had accounted for its employee stock-based benefit
plans under the fair value method of that statement.



The fair value of each option granted through December 31, 2002 was estimated on the date of grant using the Black-Scholes method. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. The Black-Scholes model requires the input of highly subjective assumptions including the expected stock price volatility. Because Marimbas stock-based awards have
characteristics significantly different from those in traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion, the existing models do not necessarily provide
a reliable single measure of the fair value



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of its stock based awards. The fair value of Marimbas stock-based awards was estimated using the following assumptions:



|                        |  | Year Ended December 31, |  
|----------------------- |  | ----------------------- | -
|                        |  | 2002                    |  
|Risk-free interest rate |  | 4                       | %
|Expected life           |  | 3 years                 |  
|Volatility              |  | 114                     | %
|Dividend yield          |  |                        |  



The
weighted average fair value of options granted was $2.54, $3.36 and $17.85 pre share for the years ended December 31, 2002, 2001 and 2000.



The fair value under the 1999 Purchase Plan was estimated using the following assumptions:



|                        |  | Year Ended December 31, |  
|----------------------- |  | ----------------------- | -
|                        |  | 2002                    |  
|Risk-free interest rate |  | 4                       | %
|Expected life           |  | 2 years                 |  
|Volatility              |  | 114                     | %
|Dividend yield          |  |                        |  



The
weighted-average fair market value of shares granted under the 1999 Purchase Plan were $1.30, $2.49 and $12.24 for the years ended December 31, 2002, 2001 and 2000, respectively.



For purposes of pro forma disclosures, the estimated fair value at grant date for awards under all
stock-based benefit plans is amortized to pro forma expense over the options vesting period using the graded vesting method. Pro forma information is as follows:



|                                                            |  | Year Ended December 31,               |        
|----------------------------------------------------------- |  | ------------------------------------- | -------
|                                                            |  | 2002                                  |        
|                                                            |  | (in thousands, except per share data) |        
|Net loss as reported                                        |  | $                                     | (10,854
|Add: Stock-based compensation included in reported net loss |  |                                       | 1,099  
|Deduct: Total stock-based compensation cost under SFAS 123  |  |                                       | (5,287 
|                                                            |  |                                       |        
|Pro forma net loss                                          |  | $                                     | (15,042
|                                                            |  |                                       |        
|Basic and diluted net loss per share:                       |  |                                       |        
|Reported net loss per common share                          |  | $                                     | (.44   
|                                                            |  |                                       |        
|Pro forma net loss per common share                         |  | $                                     | (.62   
|                                                            |  |                                       |        



The
effects of applying FAS 123 for pro forma disclosures are not likely to be representative of the effects on reported net loss for future years.



7.    Income Taxes



Marimbas provision for income taxes for the years ended December 31, 2002, 2001 and 2000, consists of state income and franchise
taxes and foreign taxes.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Marimbas deferred
tax assets are as follows:



|                                           |  | December 31,   |        
|------------------------------------------ |  | -------------- | -------
|                                           |  | 2002           |        
|                                           |  | (in thousands) |        
|Deferred tax assets:                       |  |                |        
|Net operating loss carryforwards           |  | $              | 17,700 
|Research credit carryforwards              |  |                | 1,780  
|Deferred revenue                           |  |                | 3,600  
|Capitalized research and development costs |  |                | 1,300  
|Other                                      |  |                | 1,960  
|                                           |  |                |        
|Total deferred tax assets                  |  |                | 26,340 
|Valuation allowance                        |  |                | (26,340
|                                           |  |                |        
|Net deferred tax assets                    |  | $              |       
|                                           |  |                |        



Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by $7.1 million and $4.6 million during 2002 and 2001, respectively.



As of December 31, 2002, Marimba had net operating loss carryforwards for federal income tax purposes of approximately $49.0 million, which expire in the years 2011 through 2021 and federal research
and development tax credits of approximately $1.2 million, which expire in the years 2018 through 2021.



Utilization of Marimbas net operating loss may be subject to substantial annual limitations due to the ownership change limitations
provided by Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization.



8.    Legal Matters



Securities Litigation



Beginning in April 2001, a number of substantially identical class action complaints alleging violations of
the federal securities laws were filed in the United States District Court for the Southern District of New York naming Marimba, Inc., certain of its officers and directors, and certain underwriters of the companys initial public offering
(Morgan Stanley & Co., Inc., Credit Suisse First Boston Corp. and Bear Stearns & Co., Inc.) as defendants. The complaints have since been consolidated into a single action, and a consolidated amended complaint was filed in April 2002. The
complaint alleges, among other things, that the underwriters of our initial public offering violated the securities laws by failing to disclose certain alleged compensation and tie-in arrangements (such as undisclosed commissions or stock
stabilization practices) in the registration statement filed in connection with the offering. Marimba and certain of its officers and directors were named in the complaint pursuant to Section 11 of the Securities Act of 1933, and Section 10(b) and
Rule 10b-5 of the Securities Exchange Act of 1934. The complaint seeks unspecified damages, attorney and expert fees, and other unspecified litigation costs. Similar complaints have been filed against over 300 other issuers that have had initial
public offerings since 1998 and all such actions have been included in a single coordinated proceeding. In July 2002, the defendants in the consolidated actions filed motions to dismiss all of the cases in the litigation (including the case
involving Marimba).



Beck Systems,
Inc. vs. Marimba Software, Inc.



On July 6,
2001, Beck Systems, Inc. filed a complaint against Marimba, Inc. and two of its customers in the United States District Court for the Northern District of Illinois (Beck Systems, Inc. v. Marimba, Inc. et al., Civil



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##### Table of Contents

Action No. 01 C 5207), alleging infringement of two patents held by Beck Systems. On July 19, 2002, Marimba and Beck Systems, Inc. executed
an agreement settling the action, subject to court approval. On July 25, 2002, the court approved the settlement and the parties to the action dismissed the claims against each other in the action with prejudice. Under the terms of the agreement,
Marimba obtained a license to Beck Systems patents in exchange for consideration consisting of a $2.75 million cash payment and the issuance of 500,000 shares of our common stock. During the quarter ended June 30, 2002, we recorded a charge of
$1.9 million to cost of license revenues related to the settlement.



9.    Related Party Transactions



In July 2000, Marimba provided a loan facility of up to $1,000,000 to one of its executive officers to assist him in paying withholding taxes incurred upon the purchase of restricted stock. The note
bore interest at the rate of 6.6%, had an outstanding principal amount of $751,093 and became due and payable in full on October 9, 2001, which was three months from the executive officers employment termination date with Marimba on
July 9, 2001. No amounts were drawn in 2000. The outstanding principal amount due under the note was repaid by the executive officer in October 2001.



In 2001, Marimba executed a software license agreement in the amount of $443,000 with a customer, whose chief executive officer is a
member of Marimbas board of directors. All amounts under this license agreement were collected in full as of December 31, 2001.



10.    Restructuring



In April 2001, Marimba eliminated approximately 20% of the workforce, or 60 employees and independent contractors across all company
departments. Marimba recorded a charge of $789,000 in the second quarter of 2001 related to the restructuring plan, which consisted of personnel costs of $583,000, facilities and equipment costs of $136,000 and other costs of $70,000. Of the
$789,000 accrued in April 2001, $666,000 of the restructuring accrual was reduced by cash payments made during the year ended December 31, 2001 and the remaining balance of $123,000 was reversed out in 2002 once we determined that all outstanding
obligations had been settled.



In July 2002,
Marimba eliminated approximately 12% of its workforce, or 24 employees, across all company departments. Marimba recorded a restructuring charge of $200,000 in connection with this plan, which consisted of severance and benefits related to the
workforce reduction.



The following table sets
forth the charges for these restructurings (in thousands):



|                          |  | Additions |     | Cash Expenditures |   |      | Balance at Dec. 31, 2001 |  | Additions |     |  | Cash Expenditures |      |   | Balance at Dec. 31, 2002
|------------------------- |  | --------- | --- | ----------------- | - | ---- | ------------------------ |  | --------- | --- |  | ----------------- | ---- | - | ------------------------
|April 2001 Restructuring  |  |           |     |                   |   |      |                          |  |           |     |  |                   |      |   |                         
|Severance and benefits    |  | $         | 583 |                   | $ | (460 | )                        |  | $         | 123 |  | $                 | (123 | ) |                         
|Facilities and equipment  |  |           | 136 |                   |   | (136 | )                        |  |           | 0   |  |                   | 0    |   |                         
|Other costs               |  |           | 70  |                   |   | (70  | )                        |  |           | 0   |  |                   | 0    |   |                         
|                          |  |           |     |                   |   |      |                          |  |           |     |  |                   |      |   |                         
|2001 Subtotal             |  |           | 789 |                   |   | (666 | )                        |  |           | 123 |  |                   | (123 | ) |                         
|July 2002 Restructuring   |  |           |     |                   |   |      |                          |  |           |     |  |                   |      |   |                         
|Severance                 |  |           | 0   |                   |   | 0    |                          |  |           | 0   |  |                   | 303  |   |                         
|Outplacement and benefits |  |           | 0   |                   |   | 0    |                          |  |           |     |  |                   | 20   |   |                         
|                          |  |           |     |                   |   |      |                          |  |           |     |  |                   |      |   |                         
|2002 Subtotal             |  |           | 0   |                   |   | 0    |                          |  |           | 0   |  |                   | 323  |   |                         
|                          |  |           |     |                   |   |      |                          |  |           |     |  |                   |      |   |                         
|Total                     |  | $         | 789 |                   | $ | (666 | )                        |  | $         | 123 |  | $                 | 200  |   |                         
|                          |  |           |     |                   |   |      |                          |  |           |     |  |                   |      |   |                         



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11.    Subsequent Event (unaudited)



On February 19, 2003, the United States District Court for the Southern District of New York ruled on the filed motions pertaining to the securities litigation (see Footnote 8) and granted
Marimbas motion to dismiss the claims against it under Section 10(b) and Rule 10b-5. The motions to dismiss the claims under Section 11 were denied as to virtually all of the defendants in the consolidated cases, including Marimba. In
addition, the Marimba individual defendants in the litigation each signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002. Marimba intends to defend this litigation vigorously. However, due to the inherent
uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation. Any unfavorable outcome of this litigation could have a material adverse impact on our business, financial condition and results of operations.



ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE



None.



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PART III



The information required by this Part III will be provided in our definitive proxy statement for our 2003
Annual Meeting of Stockholders (involving the election of directors), which definitive proxy statement will be filed pursuant to Regulation 14A not later than 120 days following our fiscal year ended December 31, 2002, and is incorporated herein by
this reference to the following extent:



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The information required by Item 10 is incorporated herein by reference from the section entitled Proposal No. 1Election of
Directors of the Proxy Statement.



Effective January 31, 2003, Matt A. Thompson and Christopher J. Hessler ceased serving as officers of Marimba and ceased employment with Marimba shortly thereafter.



Effective January 31, 2003, Marimba appointed Richard E. Novak as Vice President, North American Sales, and
Adrian G. Rayner as General Manager of European Sales and Operations.



Effective February 12, 2003, Marimba appointed Andrew Chmyz as Vice President, Finance and Chief Financial Officer. Mr. Chmyz previously served as Marimbas Acting Vice President, Finance and Chief Financial Officer.



ITEM 11.    EXECUTIVE COMPENSATION



The information required by Item 11 is incorporated herein by reference from the section entitled Executive Compensation and Related Information of the Proxy Statement.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED STOCKHOLDER MATTERS



The information required by Item 12 is incorporated herein by reference from the sections entitled
Stock Ownership of Certain Beneficial Owners and Management and Equity Compensation Plans of the Proxy Statement.



Please see Note 6 to the Consolidated Financial Statements for a description of the material features of each compensation plan of Marimba
that was approved without the approval of security holders.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required by Item 13 is incorporated herein by reference from the section entitled Certain Relationships and Related
Transactions of the Proxy Statement.



ITEM 14.    CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



The SEC defines the term disclosure controls and procedures to mean a companys controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SECs rules
and forms. Our chief executive officer and our chief financial officer, based on their evaluation of our disclosure controls and procedures within 90 days before the filing date of this report, concluded that our disclosure controls and procedures
were effective for this purpose.



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Changes in
Internal Controls



There were no significant
changes in our internal controls or, to our knowledge, in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced above.



PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON FORM 8-K



| | (a)    (1)  Financial |  | Statements
| | --------------------- |  | ----------



| |  |  | See the Consolidated Financial Statements and Supplementary Data beginning on page 29 of this Form 10-K.
| |  |  | --------------------------------------------------------------------------------------------------------



| | (2)    Financial |  | Statement Schedules
| | ---------------- |  | -------------------



| |  |  | No schedules have been filed because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes
thereto.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3)    Exhibits |  | required by Item 601 of Regulation S-K.
| | --------------- |  | ---------------------------------------



| |  |  | See Exhibit Index of this Form 10-K for the exhibits filed as part of or incorporated by reference into this Form 10-K.
| |  |  | -----------------------------------------------------------------------------------------------------------------------



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| |  |  | On October 23, 2002, we filed a report on Form 8-K to report under Item 5 the adjustment of our financial results for the years ended December 31, 2000 and 2001 due
to an overstatement of the amortization of deferred stock compensation in those periods.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  | MARIMBA, INC.
|-------------------- |  |  |  | -------------
|                    
|Date: March 27, 2003 |  |  |  | By:          
|                     |  |  |  |              



POWER
OF ATTORNEY



KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and appoints Richard C. Wyckoff and Andrew Chmyz, jointly and severally, his attorney in fact, each with the full power of substitution, for such person, in any and all capacities,
to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might do or could do in person hereby ratifying and confirming all
that each of said attorneys-in-fact and agents, or his substitute, may do or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf
of the Registrant in the capacities and on the dates indicated:



|                                            |  | Title                                               |  | Date          
|------------------------------------------- |  | --------------------------------------------------- |  | --------------
|                                           
|PRINCIPAL EXECUTIVE OFFICER:                |  |                                                     |  |               
|                                           
|/s/    RICHARD C.
WYCKOFFRichard C. Wyckoff |  | President and Chief Executive Officer               |  | March 27, 2003
|                                           
|PRINCIPAL FINANCIAL/ACCOUNTING OFFICER:     |  |                                                     |  |               
|                                           
|/s/    ANDREW
CHMYZAndrew
Chmyz             |  | Vice President, Finance and Chief Financial Officer |  | March 27, 2003



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|                                                |  | Title                 |  | Date          
|----------------------------------------------- |  | --------------------- |  | --------------
|                                               
|ADDITIONAL DIRECTORS:                           |  |                       |  |               
|                                               
|/s/    KIM K.
POLESEKim
K. Polese               |  | Chairman and Director |  | March 26, 2003
|                                               
|/s/    ANEEL
BHUSRIAneel
Bhusri                 |  | Director              |  | March 25, 2003
|                                               
|/s/    STRATTON D.
SCLAVOSStratton D. Sclavos   |  | Director              |  | March 25, 2003
|                                               
|/s/    RAYMOND J.
LANERaymond
J. Lane           |  | Director              |  | March 26, 2003
|                                               
|/s/    ERIC J.
KELLEREric
J. Keller             |  | Director              |  | March 27, 2003
|                                               
|/s/    DOUGLAS J.
MACKENZIEDouglas J. Mackenzie |  | Director              |  | March 27, 2003
|                                               
|/s/    ANTHONY
ZINGALEAnthony Zingale           |  | Director              |  | March 25, 2003



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CERTIFICATIONS



I,
Richard C. Wyckoff, certify that:



1.  I have reviewed this annual report on Form 10-K of Marimba, Inc.;



2.  Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;



3.  Based on my knowledge, the
financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this annual report;



4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



(a)  designed such disclosure
controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being
prepared;



(b)  evaluated the
effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation Date); and



(c)  presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;



5.  The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent functions):



a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in internal controls; and



(b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and



6.  The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date:  March 27, 2003



/s/    RICHARD C.
WYCKOFFRichard C. Wyckoff President and Chief Executive Officer (Principal Executive Officer)




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CERTIFICATIONS



I, Andrew Chmyz, certify that:



1.  I have reviewed this annual report on Form 10-K of Marimba, Inc.;



2.  Based on my knowledge, this
annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report;



3.  Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;



4.  The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the registrant and have:



(a)  designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;



(b)  evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the Evaluation
Date); and



(c)  presented in
this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5.  The registrants other certifying officers and I have disclosed, based on our most recent evaluation,
to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):



(a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and



(b)  any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal controls; and



6.  The registrants other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date:  March 27, 2003



/s/    ANDREW
CHMYZAndrew Chmyz Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting
Officer)




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MARIMBA, INC.



EXHIBIT INDEX



|Exhibit Number |                     |                                                                                                                                              |      | Incorporated by Reference |          | Filed Herewith
|-------------- | ------------------- | -------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------- | -------- | --------------
|               | Exhibit Description |                                                                                                                                              | Form |                           | File No. |               
|3.1            |                     | Third Amended and Restated Certificate of Incorporation of the registrant, as filed with the Delaware Secretary of
State on May 5, 1999.     |      | S-1                       |          | 333-72353     
|3.2            |                     | Amended and Restated Bylaws of the registrant, as adopted on September 10, 1999.                                                             |      | 10-K                      |          |               
|4.1            |                     | Form of certificate representing shares of the registrants common stock.                                                                    |      | S-1                       |          | 333-72353     
|10.1+          |                     | Form of Indemnification Agreement entered into by the registrant with each of its directors and executive
officers.                          |      | S-1                       |          | 333-72353     
|10.2+          |                     | 1999 Omnibus Equity Incentive Plan and forms of agreements thereunder, as amended to date.                                                   |      | 10-Q                      |          |               
|10.3+          |                     | 1999 Employee Stock Purchase Plan, as amended to date.                                                                                       |      | 10-K                      |          |               
|10.4+          |                     | International Employee Stock Purchase Plan, as amended to date.                                                                              |      | 10-K                      |          |               
|10.5+          |                     | 1999 Non-Employee Directors Option Plan, as amended to date.                                                                                 |      | 10-Q                      |          |               
|10.6+          |                     | 2000 Supplemental Stock Plan and forms of agreements thereunder, as amended to date.                                                         |      |                           |          |               
|10.7+          |                     | Forms of Employee Incentive Agreement, entered into by the registrant with certain of its executive
officers.                                |      |                           |          |               
|10.8+          |                     | Form of Amendment to the Agreements Governing Restricted Stock Award, entered into by the registrant with certain of
its executive officers. |      |                           |          |               
|10.9+          |                     | Form of 2002 Executive Incentive Plan, entered into by registrant with certain of its executive
officers.                                    |      |                           |          |               
|10.10+         |                     | Bonus Agreement between Matt A. Thompson and the registrant dated June 17, 2002.                                                             |      |                           |          |               
|10.11+         |                     | Separation Agreement between Christopher J. Hessler and the registrant dated February 4, 2003.                                               |      |                           |          |               
|10.12+         |                     | Separation Agreement between Matt Thompson and the registrant dated February 4, 2003.                                                        |      |                           |          |               
|10.13+         |                     | Separation Agreement between Lee Bieber and the registrant dated August 9, 2002.                                                             |      |                           |          |               
|10.14          |                     | Lease between ilicon, Inc. and the registrant dated February 27, 2000.                                                                       |      | 10-K                      |          |               
|10.15          |                     | Non-Recourse Receivables Purchase Agreement between Silicon Valley Bank and the registrant dated as of June 25,
2001.                        |      | 10-Q                      |          |               
|21.1           |                     | List of subsidiaries of the registrant.                                                                                                      |      |                           |          |               
|23.1           |                     | Consent of Ernst & Young LLP, Independent Auditors.                                                                                          |      |                           |          |               
|24.1           |                     | Power of Attorney (see signature page)                                                                                                       |      |                           |          |               



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|Exhibit Number |                     |                                                                       |      | Incorporated by Reference |          | Filed Herewith
|-------------- | ------------------- | --------------------------------------------------------------------- | ---- | ------------------------- | -------- | --------------
|               | Exhibit Description |                                                                       | Form |                           | File No. |               
|99.1#          |                     | Certification of Chief Executive Officer and President.               |      |                           |          |               
|99.2#          |                     | Certification of Vice President, Finance and Chief Financial Officer. |      |                           |          |               

---

|+ |  | Indicates a management contract or compensatory plan or arrangement.
|- |  | --------------------------------------------------------------------



# A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to
the registrant and will be retained by the registrant and furnished to the Securities and Exchange Commission or its staff upon request.



68