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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



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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, 2003



| ̈ | 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 30, 2003 was approximately $46 million. As of February 29, 2004, there were
26,381,486 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 2004 annual meeting of stockholders scheduled to be held on June 10, 2004
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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##### Table of Contents

MARIMBA, INC.



TABLE OF CONTENTS



|           |  |                                                                                                |  |   
|---------- |  | ---------------------------------------------------------------------------------------------- |  | --
|PART I    
|           |  |                                                                                               
|Item 1.    |  | Business                                                                                       |  | 3 
|           |  |                                                                                               
|Item 2.    |  | Properties                                                                                     |  | 8 
|           |  |                                                                                               
|Item 3.    |  | Legal Proceedings                                                                              |  | 9 
|           |  |                                                                                               
|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 Operations          |  | 14
|           |  |                                                                                               
|Item 7a.   |  | Quantitative and Qualitative Disclosures About Market Risk                                     |  | 30
|           |  |                                                                                               
|Item 8.    |  | Financial Statements and Supplementary Data                                                    |  | 31
|           |  |                                                                                               
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 54
|           |  |                                                                                               
|Item 9a.   |  | Controls and Procedures                                                                        |  | 54
|          
|PART III  
|           |  |                                                                                               
|Item 10.   |  | Directors and Executive Officers of the Registrant                                             |  | 55
|           |  |                                                                                               
|Item 11.   |  | Executive Compensation                                                                         |  | 55
|           |  |                                                                                               
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |  | 55
|           |  |                                                                                               
|Item 13.   |  | Certain Relationships and Related Transactions                                                 |  | 55
|           |  |                                                                                               
|Item 14.   |  | Principal Accountant Fees and Services                                                         |  | 55
|          
|PART IV   
|           |  |                                                                                               
|Item 15.   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 56
|           | 
|Signatures |  | 57                                                                                            



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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.



PART I



|ITEM 1. | BUSINESS
|------- | --------



Marimba, Inc. was incorporated in Delaware in February 1996. We develop, market and support software change and configuration management solutions. Our
products automate the distribution and management of software applications and content, helping customers reduce their total cost of information technology (IT) ownership and improve the quality of IT service. Specific software solutions
we provide include data center automation, security patch management, license compliance and inventory, and others. Our customer base spans multiple industries, and we market our products worldwide through a combination of a direct sales force and
resellers.



Marimba operates in one operating segment, the
development and marketing of change management software, and has operations in the United States and Europe. For information regarding revenues by geographic region, see Note 1 of the Notes to the Consolidated Financial Statements. In
addition, for information regarding the seasonality of our business, see Other Factors Affecting Operating Results, Liquidity and Capital ResourcesOur Quarterly Operating Results May be Volatile, which Could Adversely Affect Our Stock
Price.



Marimba Products



Marimbas products allow companies to perform policy-based
distributions, updates, and repairs of software on desktops, laptops, servers and handheld 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 reduce
the complexity and cost of distributing, managing and updating their software and content on endpoints that are both inside and outside a customers corporate firewall. For information regarding the percentage of revenue contribution from our
major products and services, see Management Discussion and Analysis of Financial Condition and Results of OperationRevenue.



Marimbas products include the following:



Desktop/Mobile Management Product Family



Marimbas Desktop/Mobile Management product family is an enterprise-level change and configuration 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 ongoing 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 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 use in software license
compliance, security patch management, asset management, desktop refresh planning and helpdesk diagnostic purposes.



Included within our Desktop/Mobile Management product family are our Embedded Management products. 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.



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Server Management Product Family



Marimbas Server Management product family provides data center administrators with a solution to automate 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 server environments, which enables IT departments to automate the collection of hardware and software application and configuration information from remote servers. This
information can be stored in a central location for use in resource planning, server consolidation planning, patch management, and helpdesk diagnostic purposes.



Marimba Six



On December 19, 2003, Marimba released Marimba Six, which includes an extensive update to both our Desktop/Mobile and Server Management product families.
Marimba Six includes a redesigned user interface, enhanced reporting capabilities, as well as a number of features which we believe will make the product easier to deploy and use. Furthermore, Marimba Six has been architected, packaged and priced to
allow customers to purchase components of our product lines to meet their specific needs. We believe that the Marimba Six architecture will, over time, make our products accessible to more customers. We also believe that our new Marimba Six pricing
may, over time, result in a lower average license transaction size, however we cannot determine how much lower at this time. For more information about the risks associated with our transition to the Marimba Six products, see Other Factors
Affecting Operating Results, Liquidity and Capital ResourcesWe Depend on the Growth of Our Customer Base and Increased Business from Our Current Customers.



Technology



We believe that our investment in research and development has resulted in technology that provides us with a strategic advantage. Marimba products have
been built from the ground up to provide a robust, secure and scalable solution. Marimba provides a lightweight, cross-platform, and easy to deploy solution that helps solve complex software application deployment and management problems.



Marimba products make extensive use of a broad range of
technologies, including Java, JSP, TCP/IP, HTTP, LDAP, XML, SSL, 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 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.



Infrastructure



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. The three major components of the Marimba infrastructure are
Channels, Transmitters and Tuners. In addition to these components, a variety of features are available for reporting, asset tracking, license compliance, software usage, policy-based distribution, staging updates, resource planning, certificate
management, and others. Together with the three major infrastructure components, these features provide the necessary functionality to distribute, manage and maintain mission critical software.



Marimba packages applications and/or related data as a channel. For example,
a channel could consist of a custom financial application, a file containing recently updated data, or even 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 software prepares the channel for distribution, and 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).



After an application is packaged as a channel, it is published to a transmitter, the server-side component of the Marimba infrastructure. The transmitter distributes channels and subsequent updates,
communicating using the Marimba protocol. Additional transmitter features include synchronization, replication, personalization, client feedback, bandwidth management, mirroring, and policy administration.



The tuner is the client-side component of the Marimba infrastructure, a
software agent that resides on each managed device. The tuner subscribes to channels located on transmitters, and downloads and installs updates of each channel. 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.



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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 enhanced 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.



The Marimba Protocol



The Marimba protocol is designed to distribute applications and data to multiple intermittently connected endpoints. The 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 and interruptible, 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.



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. 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.



Cross-Platform Framework



Our OSD (Open Software Distribution) 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. 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, while our
Server Management products our usually targeted at either the IT organization or the data center operations function. For the years ended December 31, 2003, 2002 and 2001, no single customer represented more than 10% of total revenues.



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 74 individuals as of December 31, 2003, 25 of whom were located at our Mountain View, California headquarters, 34 in regional offices located in California, Georgia, Illinois, New York
and Texas, 13 in the United Kingdom and 2 in France. We expect to increase the number of employees in our sales organization during 2004.



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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, 2003, 2002, and 2001, sales to customers outside of
the United States were approximately 15%, 16%, and 8% of total revenue respectively. 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 often 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 finance 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. 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,
and we plan to increase both the number and the importance of these relationships. 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, 2003, augmented by 8 outsourced personnel located in India.
Our support and maintenance programs are generally priced as a percentage of software license fees and provide 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 Silver Service plus proactive support from designated technical account managers and certain other benefits.



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Research and Development



As of December 31, 2003, our engineering organization was comprised of 49 employees, augmented by 18 outsourced personnel located in India. Our product
development organization is divided into development groups organized with regards to our product architecture. These development groups are supported by quality assurance, user experience and documentation groups. The quality assurance group works
with the development group to identify software defects through the entire development cycle. The user experience group develops the look and feel and functional flow of our products. 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 $8.3 million in
2003, $7.9 million in 2002, and $10.5 million in 2001. 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 scalability, 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.
| | - | -----------------------------------------------------



With the recent release of Marimba Six, we believe that we generally have a competitive advantage with respect to performance, features, scalability,
reliability and customer service



We encounter competition from
a number of different sources, including sellers of enterprise-wide management systems, which include electronic software distribution, including Tivoli, Computer Associates, and others; companies such as Novadigm (recently agreed to be acquired by
Hewlett Packard), ON Technology (recently acquired by Symantec) and others, which market products that support the distribution of software applications; and other software management suites, such as LanDesk, Altiris, Microsofts SMS and
others. 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. See Other Factors Affecting Operating
Results, Liquidity and Capital ResourcesOur Markets are Highly Competitive and Experiencing Consolidation.



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.



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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 eight 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, 2003, we had a total of 168 employees, 151 of whom were
based in the United States and 17 of whom were based in Europe. Of the total, 49 were in research and development, 74 were engaged in sales and marketing, 23 were engaged in customer support and training, and 22 were in administration and finance.
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 June 2007. 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.



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|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 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. On June 30, 2003, a special committee of our Board of Directors
conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of Marimba and Marimbas individual defendants for the conduct alleged in the action to be
wrongful. Marimba would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert and release certain potential claims Marimba may have against its underwriters. Any direct financial impact
of the proposed settlement is expected to be borne by Marimbas insurers. The special committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants
in the proposed settlement, the consent of Marimbas insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the court
overseeing the litigation. In the event the settlement is not consummated, the defense of the litigation may increase our expenses and divert our managements attention and resources. Due to the inherent uncertainties of litigation, we cannot
accurately predict the ultimate outcome of the litigation, and any unfavorable outcome could have a material adverse impact on our business, financial condition and operating results.



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



At Marimbas 2003 Annual Meeting of Stockholders held on December 11, 2003, our stockholders voted on and approved each of the below two proposals by
the votes indicated below. A total of 24,352,959 shares were represented and voting in person or by proxy at the meeting.



| | 1. | Proposal to elect the following directors to serve for a term ending upon Marimbas 2004 Annual Meeting of Stockholders or until their successors have been duly elected and
qualified:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                     |  |            |  |          
|-------------------- |  | ---------- |  | ---------
|                     |  | For        |  | Withheld 
|Aneel Bhusri         |  | 23,135,412 |  | 1,217,547
|John R. Harding      |  | 24,319,346 |  | 33,613   
|Eric J. Keller       |  | 24,320,333 |  | 32,626   
|Raymond J. Lane      |  | 24,102,381 |  | 250,128  
|Douglas J. MacKenzie |  | 24,104,031 |  | 248,928  
|Kim K. Polese        |  | 23,128,504 |  | 1,224,455
|Stephen E. Recht     |  | 24,318,346 |  | 34,613   
|Richard C. Wyckoff   |  | 23,127,275 |  | 1,225,684



| | 2. | Proposal to ratify the appointment of Ernst & Young LLP as Marimbas independent public accountants for the fiscal year ending December 31, 2003:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------



|                  |  |           
|----------------- |  | ----------
|For:              |  | 24,322,993
|Against:          |  | 25,515    
|Abstain:          |  | 4,451     
|Broker Non-Votes: |  | 0         



10



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##### Table of Contents

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 2003:   |  |      |      |     |   |     
|Fourth Quarter |  | $    | 5.87 |     | $ | 3.68
|Third Quarter  |  | $    | 4.35 |     | $ | 2.55
|Second Quarter |  | $    | 3.74 |     | $ | 1.44
|First Quarter  |  | $    | 1.75 |     | $ | 1.34
|               |  |     
|Fiscal 2002:   |  |      |      |     |   |     
|Fourth Quarter |  | $    | 1.77 |     | $ | 1.10
|Third Quarter  |  | $    | 1.85 |     | $ | 1.21
|Second Quarter |  | $    | 3.15 |     | $ | 1.50
|First Quarter  |  | $    | 3.42 |     | $ | 2.60



On February 29, 2004,
the closing price of our common stock on The Nasdaq National Market was $6.37 per share. As of February 29, 2004, there were approximately 251 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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##### Table of Contents

|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, 2003. 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, |        
|                                                                                                          |  | 2003                    |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|                                                                                                          |  | (in thousands)          |        
|Consolidated Statements of Operations Data:                                                               |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Revenues:                                                                                                 |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|License                                                                                                   |  | $                       | 24,114  |   |      | $ | 18,223  |      |  | $ | 27,801  |   |  | $    | 31,329  |   |  | $ | 23,637  |  
|Service                                                                                                   |  |                         | 16,762  |   |      |   | 17,004  |      |  |   | 16,229  |   |  |      | 12,718  |   |  |   | 7,776   |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total revenues                                                                                            |  |                         | 40,876  |   |      |   | 35,227  |      |  |   | 44,030  |   |  |      | 44,047  |   |  |   | 31,413  |  
|Cost of revenues:                                                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|License                                                                                                   |  |                         | 550     |   |      |   | 2,737   |      |  |   | 595     |   |  |      | 681     |   |  |   | 402     |  
|Service                                                                                                   |  |                         | 5,491   |   |      |   | 5,829   |      |  |   | 5,940   |   |  |      | 4,256   |   |  |   | 3,036   |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total cost of revenues                                                                                    |  |                         | 6,041   |   |      |   | 8,566   |      |  |   | 6,535   |   |  |      | 4,937   |   |  |   | 3,438   |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Gross profit                                                                                              |  |                         | 34,835  |   |      |   | 26,661  |      |  |   | 37,495  |   |  |      | 39,110  |   |  |   | 27,975  |  
|Operating expenses                                                                                        |  |                         | 32,751  |   |      |   | 38,990  |      |  |   | 51,557  |   |  |      | 52,251  |   |  |   | 34,598  |  
|Net income (loss)                                                                                         |  | $                       | 2,995   |   |      | $ | (10,854 | )    |  | $ | (11,487 | ) |  | $    | (8,779  | ) |  | $ | (4,214  | )
|Basic net income (loss) per share                                                                         |  | $                       | 0.12    |   |      | $ | (0.44   | )    |  | $ | (0.48   | ) |  | $    | (0.38   | ) |  | $ | (0.22   | )
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Diluted net income (loss) per share                                                                       |  | $                       | 0.11    |   |      | $ | (0.44   | )    |  | $ | (0.48   | ) |  | $    | (0.38   | ) |  | $ | (0.22   | )
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Weighted-average shares of common stock outstanding used in computing basic net income (loss) per share   |  |                         | 25,646  |   |      |   | 24,427  |      |  |   | 23,943  |   |  |      | 23,200  |   |  |   | 19,029  |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Weighted-average shares of common stock outstanding used in computing diluted net income (loss) per share |  |                         | 27,356  |   |      |   | 24,427  |      |  |   | 23,943  |   |  |      | 23,200  |   |  |   | 19,029  |  
|                                                                                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                                                                          | 
|                                                                                                          |  | As of December 31,      |        
|                                                                                                          |  | 2003                    |         |   | 2002 |   |         | 2001 |  |   | 2000    |   |  | 1999 |        
|                                                                                                          |  | (in thousands)          |        
|Consolidated Balance Sheet Data:                                                                          |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash, cash equivalents, short-term and long-term investments                                              |  | $                       | 53,097  |   |      | $ | 50,264  |      |  | $ | 60,109  |   |  | $    | 68,071  |   |  | $ | 79,012  |  
|Working capital (current assets, less current liabilities)                                                |  |                         | 50,673  |   |      |   | 45,444  |      |  |   | 54,592  |   |  |      | 61,442  |   |  |   | 68,281  |  
|Total assets                                                                                              |  |                         | 66,508  |   |      |   | 62,369  |      |  |   | 73,851  |   |  |      | 87,408  |   |  |   | 90,487  |  
|Long-term liabilities                                                                                     |  |                         | 1,183   |   |      |   | 953     |      |  |   | 1,610   |   |  |      | 1,033   |   |  |   | 1,463   |  
|Accumulated deficit                                                                                       |  |                         | (46,983 | ) |      |   | (49,978 | )    |  |   | (39,124 | ) |  |      | (27,637 | ) |  |   | (18,858 | )
|Total stockholders equity                                                                                |  |                         | 52,495  |   |      |   | 48,728  |      |  |   | 57,242  |   |  |      | 66,803  |   |  |   | 72,639  |  



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##### Table of Contents

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, 2003. 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.



|                                                     |  |    |        |   |    |   |        |    |  |   |        |   |  |   |       
|---------------------------------------------------- |  | -- | ------ | - | -- | - | ------ | -- |  | - | ------ | - |  | - | ------
|2003                                                 |  | Q1 |        |   | Q2 |   |        | Q3 |  |   | Q4    
|Revenues                                             |  | $  | 10,131 |   |    | $ | 10,229 |    |  | $ | 9,791  |   |  | $ | 10,725
|Gross profit                                         |  |    | 8,605  |   |    |   | 8,592  |    |  |   | 8,277  |   |  |   | 9,361 
|Net income                                           |  |    | 343    |   |    |   | 704    |    |  |   | 723    |   |  |   | 1,225 
|Net income per basic common share                    |  | $  | 0.01   |   |    | $ | 0.03   |    |  | $ | 0.03   |   |  | $ | 0.05  
|Net income per diluted common share                  |  | $  | 0.01   |   |    | $ | 0.03   |    |  | $ | 0.03   |   |  | $ | 0.04  
|                                                     |  |    |        |  
|2002                                                 |  | Q1 |        |   | Q2 |   |        | Q3 |  |   | Q4    
|Revenues                                             |  | $  | 8,061  |   |    | $ | 9,038  |    |  | $ | 8,572  |   |  | $ | 9,555 
|Gross profit                                         |  |    | 6,479  |   |    |   | 5,532  |    |  |   | 6,736  |   |  |   | 7,915 
|Net income (loss)                                    |  |    | (3,949 | ) |    |   | (5,282 | )  |  |   | (1,824 | ) |  |   | 201   
|Net income (loss) per basic and diluted common share |  | $  | (0.16  | ) |    | $ | (0.22  | )  |  | $ | (0.07  | ) |  | $ | 0.01  



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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##### Table of Contents

|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, including but not limited to
the statements in the fifth and sixth paragraphs of Overview below. 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 and
configuration management solutions. Our products automate the distribution and management of software applications and content, helping customers reduce their total cost of information technology (IT) ownership and improve the quality of
IT service. Specific software solutions we provide include data center automation, security patch management, license compliance and inventory, and others. Our customer base spans multiple industries, and 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. 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.



Our two primary product lines consist of our Desktop/Mobile
Management and Server Management product lines. On December 19, 2003, Marimba released Marimba Six, which was a major release of both of these product lines. Marimba Six includes a redesigned user interface, enhanced reporting capabilities and a
number of other features and functionality which we believe will make these products easier to deploy and use. Furthermore, Marimba Six has been architected, packaged and priced to allow customers to more easily license single solution modules in
our product lines to meet their specific needs. We believe that our Marimba Six architecture will, over time, allow us to sell into more opportunities. However, we also believe that our new Marimba Six pricing may, over time, result in a lower
average license transaction size, although we cannot determine how much lower at this time.



We consider our business to be in a single industry segment, specifically the license, implementation and support of our software products. We evaluate the performance of our geographic regions based on revenues only.
We do not currently assess the performance of our geographic regions on other measures of income or expense, such as depreciation and amortization, operating income or net income. In addition, our assets are primarily located in our corporate office
in the United States and are not allocated to any specific region.



Fiscal 2003 represented the first year in the companys history in which we generated positive net income on a GAAP basis. Net income was $0.12 per share, compared with a net loss of $(0.44) per share in 2002. The increase was due to
an increase in total revenues of 16%, primarily due to a 32% increase in license revenues, combined with increased gross margins as a result of increased license revenues, and a 16% decrease in operating expenses due primarily to cost controls.
Although we were profitable during 2003, since inception we have incurred significant losses and had an accumulated deficit of approximately $47.0 million at December 31, 2003. We believe that our future success depends in part on our ability to
increase our customer base and on overall growth in our market.



An important challenge for our management team is to identify and then execute on the areas of our business, that have the highest potential for growth. We believe the areas which currently offer substantial potential are patch management
and data center automation. Patch management customers use our technology to automate the distribution of updates and patches, often security related, to their computer endpoints. With recent high profile viruses, worms, and other malicious code,
the quality, reliability and automation of patch management processes have become in our opinion, a key strategic area of focus for IT departments in large enterprises. Data center automation customers use our Server Management products to automate
many of the tasks that they currently perform manually in their data center operations. These are relatively new markets that we believe offer growth potential over the long term. In the short term, we plan to focus much of our incremental
investment on both further development and marketing of our products in these areas.



In view of the rapidly changing nature of our business, 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.



14



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Critical Accounting Policies and Estimates



Discussion and analysis of Marimbas financial condition and results of operations 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.



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. We regularly evaluate the adequacy of this estimate 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, our current average deal size, 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 reduction of 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. During the
year ended December 31, 2003, we experienced no customer returns and accordingly did not maintain a returns reserve. Our agreements generally do not include a right to return. 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 effect 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.



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 of the settlement was allocated between cost of
license revenues and acquired technology based on their relative fair values. The amount charged to cost of license revenues during the quarter ended June 30, 2002 presents the proportion of the total amount which related to payment for the alleged
past infringement. The remaining amount, which was recorded as acquired 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 was based, respectively, on our license revenues since inception versus our projection of the revenue
relating to the technology that we expected 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



15



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##### Table of Contents

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.



Income Taxes.    Prior to 2003, we generated losses each year. As a result, we were not subject to United States federal income
taxes, and our income tax provision consisted primarily of taxes owed to foreign jurisdictions. For the year ended December 31, 2003, we were profitable, and as a result we have to estimate our income tax liability for the period. Our tax situation
is complex, and the interplay between our net operating loss balances, the alternative minimum tax, state income tax laws and other variables makes the determination of our tax liability difficult at any specific point in time. Each period we review
our tax situation with outside tax advisers and estimate our liability. Changes to our assumptions, or significant adjustments as detail compliance work is performed, could result in us recording additional or reduced provisions.



Results of Operation



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



|                                      |  |                         |   |  |       |    |  |       |   
|------------------------------------- |  | ----------------------- | - |  | ----- | -- |  | ----- | --
|                                      |  | Year Ended December 31, |  
|                                      |  | 2003                    |   |  | 2002  |    |  | 2001  |   
|Statement of Operations Data:         |  |                         |   |  |       |    |  |       |   
|Revenues:                             |  |                         |   |  |       |    |  |       |   
|License                               |  | 59.0                    | % |  | 51.7  | %  |  | 63.1  | % 
|Service                               |  | 41.0                    |   |  | 48.3  |    |  | 36.9  |   
|                                      |  |                         |   |  |       |    |  |       |   
|Total revenues                        |  | 100.0                   |   |  | 100.0 |    |  | 100.0 |   
|                                      |  |                         |  
|Cost of revenues:                     |  |                         |   |  |       |    |  |       |   
|License                               |  | 1.4                     |   |  | 7.8   |    |  | 1.4   |   
|Service                               |  | 13.4                    |   |  | 16.5  |    |  | 13.4  |   
|                                      |  |                         |   |  |       |    |  |       |   
|Total cost of revenues                |  | 14.8                    |   |  | 24.3  |    |  | 14.8  |   
|                                      |  |                         |   |  |       |    |  |       |   
|Gross margin                          |  | 85.2                    |   |  | 75.7  |    |  | 85.2  |   
|                                      |  |                         |  
|Operating expenses                    |  |                         |   |  |       |    |  |       |   
|Research and development              |  | 20.4                    |   |  | 22.6  |    |  | 23.9  |   
|Sales and marketing                   |  | 48.0                    |   |  | 68.3  |    |  | 72.5  |   
|General and administrative            |  | 11.4                    |   |  | 16.1  |    |  | 18.0  |   
|Restructuring costs                   |  | 0.0                     |   |  | 0.6   |    |  | 1.8   |   
|Amortization of deferred compensation |  | 0.3                     |   |  | 3.1   |    |  | 0.8   |   
|                                      |  |                         |   |  |       |    |  |       |   
|Total operating expenses              |  | 80.1                    |   |  | 110.7 |    |  | 117.1 |   
|                                      |  |                         |   |  |       |    |  |       |   
|Income (loss) from operations         |  | 5.1                     | % |  | (35.0 | )% |  | (31.9 | )%
|                                      |  |                         |  
|Net income (loss)                     |  | 7.3                     | % |  | (30.8 | )% |  | (26.1 | )%
|                                      |  |                         |   |  |       |    |  |       |   



16



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##### Table of Contents

Revenues



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



|                              |  |                         |        |   |      |   |        |      |  |   |        |  
|----------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                              |  | Year Ended December 31, |       
|                              |  | 2003                    |        |   | 2002 |   |        | 2001 | 
|                              |  | (in thousands)          |       
|Revenues:                     |  |                         |        |   |      |   |        |      |  |   |        |  
|License                       |  | $                       | 24,114 |   |      | $ | 18,223 |      |  | $ | 27,801 |  
|Service                       |  |                         | 16,762 |   |      |   | 17,004 |      |  |   | 16,229 |  
|                              |  |                         |        |   |      |   |        |      |  |   |        |  
|Total revenues                |  | $                       | 40,876 |   |      | $ | 35,227 |      |  | $ | 44,030 |  
|Percentage of total revenues: |  |                         |        |   |      |   |        |      |  |   |        |  
|License                       |  |                         | 59     | % |      |   | 52     | %    |  |   | 63     | %
|Service                       |  |                         | 41     |   |      |   | 48     |      |  |   | 37     |  



Total revenues in 2003
were $40.9 million, compared to revenues of $35.2 million in 2002 and revenues of $44.0 million in 2001. The fluctuations in total annual revenues from 2001 to 2003 were primarily due to changes in license revenues, as service revenues were
basically flat. Each component of revenues is discussed below in more detail.



License Revenues.    License revenues increased $5.9 million, or 32%, to $24.1 million in 2003 from $18.2 million in 2002. License revenues decreased $9.6 million, or 34%, to $18.2 million
in 2002 from $27.8 million in 2001. The increase in license revenues during 2003 was the result of many factors to varying degrees, including: a generally stronger IT spending environment; higher productivity in our sales force, aided by increased
support from our indirect sales partners; and quality and functionality improvements in our products. The decrease in license revenues in 2002 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 our Embedded Management products are included within the Desktop/Mobile Management product line:



|                                      |  |                        |   |  |      |   |  |      |  
|------------------------------------- |  | ---------------------- | - |  | ---- | - |  | ---- | -
|                                      |  | Year EndedDecember 31, |  
|                                      |  | 2003                   |   |  | 2002 |   |  | 2001 |  
|Percentage of total license revenues: |  |                        |   |  |      |   |  |      |  
|Desktop/Mobile Management             |  | 74                     | % |  | 81   | % |  | 82   | %
|Server Management                     |  | 26                     |   |  | 19   |   |  | 18   |  



Our Desktop/Mobile
Management product license revenues include our sales of management solutions for desktops, laptops, handheld devices, and embedded applications. Our large, enterprise customers typically already have a desktop management solution from one of our
competitors, often purchased as part of a larger systems management bundle. As a result, much of our sales in this market is replacement business, and growth is driven by increases in market share. Our Server Management products include both
products to manage smaller servers within the enterprise, such as file and print servers, as well as solutions to automate the management of larger, more complex servers often found within the data center. Large enterprises have only recently begun
to realize the opportunities of automation in the data center, and we anticipate that sales of our Server Management products may comprise a larger percentage of license revenues going forward. Additionally, we feel that offering both Desktop/Mobile
Management solutions and Server Management solutions within a single product suite will provide us with a competitive advantage.



Service Revenues.    Service revenues include support and maintenance, consulting and training. Service revenues in 2003
decreased by $242 thousand, or 1%, to $16.8 million from $17.0 million in 2002. Service revenues increased by $775,000, or 5%, to $17.0 million in 2002 from $16.2 million in 2001. The following table presents the components of service revenues for
the periods indicated:



|                        |  |                         |        |      |   |        |  |   |       
|----------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                        |  | Year Ended December 31,
|                        |  | 2003                    |        | 2002 |   | 2001  
|Total service revenues: |  |                         |        |      |   |        |  |   |       
|Consulting              |  | $                       | 2,482  |      | $ | 2,925  |  | $ | 2,965 
|Support and maintenance |  | $                       | 13,574 |      | $ | 13,242 |  | $ | 12,518
|Training                |  | $                       | 706    |      | $ | 837    |  | $ | 746   



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Since 2001, support and maintenance revenues have generally increased. 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 negatively impacted our growth in support and maintenance revenues in the first half of 2003, although strong
license sales in the first half of 2003 resulted in full year 2003 growth in support and maintenance revenues over 2002. Both consulting and training revenues have trended down from 2001 to 2003, the result we believe of heightened scrutiny on
services spending by our customers, and also of improvements in the ease of use and ease of deployment of our products.



International.    Revenues outside the United States represented approximately 15%, 15%, and 8% of total revenues in 2003, 2002
and 2001, respectively. In 2003, international revenues increased by $0.5 million, or 9%, to approximately $6.0 million from $5.5 million in 2002. International revenues increased by $2.0 million, or 55%, to approximately $5.5 million in 2002 when
compared to 2001. The increase in revenues outside the United States was due primarily to our sales and marketing efforts in Europe and more specifically to increased sales efficiency in United Kingdom and commencing sales and marketing efforts in
France in mid 2002. The following table presents our revenues by region as a percentage of total revenues for the period indicated:



|              |  |                         |   |  |      |   |  |      |  
|------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|              |  | Year Ended December 31, |  
|              |  | 2003                    |   |  | 2002 |   |  | 2001 |  
|Revenue:      |  |                         |   |  |      |   |  |      |  
|United States |  | 85                      | % |  | 85   | % |  | 92   | %
|Europe        |  | 14                      |   |  | 12   |   |  | 6    |  
|Other regions |  | 1                       |   |  | 3    |   |  | 2    |  



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. The following table presents our costs of license revenues and our gross margin on license revenues for the
periods indicated:



|                                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Year Ended December 31, |       
|                                                                     |  | 2003                    |        |   | 2002 |   |        | 2001 | 
|                                                                     |  | (in thousands)          |       
|License revenues                                                     |  | $                       | 24,114 |   |      | $ | 18,223 |      |  | $ | 27,801 |  
|Cost of license revenues                                             |  |                         | 550    |   |      |   | 2,737  |      |  |   | 595    |  
|                                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Gross margin on license revenues                                     |  | $                       | 23,564 |   |      | $ | 15,486 |      |  | $ | 27,206 |  
|Gross margin on license revenues as a percentage of license revenues |  |                         | 98     | % |      |   | 85     | %    |  |   | 98     | %



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 dispute, which involved a patent license, and to a lesser extent an increase in sales of third
party products. The decrease in cost of license revenues in 2003 was due primarily to not having the $1.9 million charge related to the legal settlement of a dispute, which involved a patent license, and to a lesser extent a decrease in sales of
third party products, offset partially by additional charges to cost of license revenues of approximately $85,000 per quarter in connection with the capitalized license part of the patent settlement. We anticipate further charges of approximately
$85,000 per quarter for five years following the settlement, ending in June 2007.



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.
| | - | ----------------------------------------------------------------------------------



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##### Table of Contents

The following table presents our cost of service revenues and our gross margin on service revenues for
the periods indicated:



|                                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                     |  | Year Ended December 31, |       
|                                                                     |  | 2003                    |        |   | 2002 |   |        | 2001 | 
|                                                                     |  | (in thousands)          |       
|Service revenues                                                     |  | $                       | 16,762 |   |      | $ | 17,004 |      |  | $ | 16,229 |  
|Cost of service revenues                                             |  |                         | 5,491  |   |      |   | 5,829  |      |  |   | 5,940  |  
|                                                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Gross margin on service revenues                                     |  | $                       | 11,271 |   |      | $ | 11,175 |      |  | $ | 10,289 |  
|Gross margin on service revenues as a percentage of service revenues |  |                         | 67     | % |      |   | 66     | %    |  |   | 63     | %



Cost of service
revenues represented 33%, 34%, and 37% of service revenue in 2003, 2002 and 2001, respectively. The decrease in cost of service revenues as a percentage of service revenues is primarily driven by the mix of our service revenues, as maintenance and
support costs less to provide, as a percentage of revenues, than does consulting and training.



Gross Margin



Gross
margin was 85%, 76% and 85% in 2003, 2002 and 2001, respectively. The primary factor in our gross margin is the mix between high margin license revenues and lower margin service revenues. Additionally, during 2002, our 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.



Operating Expenses



Research and Development.    Research and development costs, 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 $8.3 million, $7.9 million, and $10.5 million in 2003, 2002, and 2001, respectively. The increase in
absolute dollars during 2003 was the result of additional headcount and an increase in spending on outsourced research and development, primarily in India. The decrease in absolute dollars in 2002 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. 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 $19.6 million, $24.1 million, and $32.0 million in 2003, 2002, and 2001 respectively.
Sales and marketing expenses decreased in absolute dollars due primarily to fewer promotional activities and to reductions of headcount in both sales and sales management. 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 $4.7 million, $5.7 million, and $7.9 million in 2003, 2002, and 2001, respectively.
General and administrative expenses decreased in absolute dollars due primarily to reductions of headcount and general cost cutting measures. We anticipate our general and administrative expenses to increase as the company grows and as we absorb
additional costs imposed by increased regulatory requirements, particularly as a result of the Sarbanes-Oxley Act and recent related regulatory changes.



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 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. In 2003, we recorded a reversal in deferred compensation of approximately $128,000 due to forfeited stock options and
repurchased shares. Deferred compensation was being amortized over the vesting periods of the stock options and stock using the graded vesting method. We currently have no deferred compensation balances, as they have all been either fully amortized,
forfeited, or repurchased.



We amortized deferred compensation
expense, net of gains resulting from the forfeiture of stock options and repurchase of shares due to employee departures, of $111,000, $1.1 million, and $361,000 for fiscal years 2003, 2002, and 2001, respectively. This compensation expense relates
to stock options and stock awarded to individuals in all operating expense categories. At December 31, 2003, our deferred compensation balances have been fully amortized.



Interest Income and Other Expenses, Net



The following table presents our average cash and available-for-sale securities and total interest earned for the periods indicated:



|                                               |  |                         |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                               |  | Year Ended December 31, |       
|                                               |  | 2003                    |        |   | 2002 |   |        | 2001 | 
|                                               |  | (in thousands):         |       
|Average cash and available-for-sale securities |  | $                       | 51,681 |   |      | $ | 55,450 |      |  | $ | 64,656 |  
|Interest income                                |  | $                       | 949    |   |      | $ | 1,536  |      |  | $ | 2,817  |  
|Average return                                 |  |                         | 1.8    | % |      |   | 2.8    | %    |  |   | 4.4    | %



Interest income, net,
consists primarily of interest earned on our cash, cash equivalents and available-for-sale securities offset by other miscellaneous expenses. Interest income, net was $949,000, $1.5 million, and $2.8 million in 2003, 2002, and 2001, respectively.
The decrease in interest income, net, from 2001 to 2002 to 2003 was due primarily to lower invested balances and lower interest rates.



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Additionally, the decrease in interest rates from 2002 to 2003 was partially the result of a decision by the company to shorten the average maturity of its
invested balances.



Provision for Income Taxes



Marimbas provision for income taxes for the year ended December 31,
2003 consists of state income taxes, franchise taxes, federal income taxes, and foreign taxes. Marimbas provision for income taxes for the years ended December 31, 2002, and 2001 consisted of state income, franchise taxes and foreign taxes. No
provision for federal taxes was recorded in 2001 and 2002, as prior to 2003 we had experienced only operating losses since inception.



As of December 31, 2003, we had federal net operating loss carryforwards of approximately $46.0 million. We also had a total research and development tax
credit carryforward of approximately $4.1 million, $2.6 million of which was for federal research and development tax credit. The net operating loss and credit carryforwards will expire at various dates beginning in 2011 through 2023 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. Given our losses incurred to date and the difficulty in accurately forecasting our future results, we do not believe that the realization of the
related deferred income tax asset meets the criteria required by generally accepted accounting principles. Therefore, we have recorded a 100% valuation allowance against the deferred income tax asset.



Liquidity and Capital Resources



As of December 31, 2003, our principal sources of liquidity included
approximately $25.9 million of cash and cash equivalents and $27.2 million of available-for-sale securities.



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. Cash equivalents consisted primarily of investments in commercial paper, U.S. government and agency securities and money market funds. These investments are recorded at cost, which approximates fair value, and are managed by
professional investment managers.



All marketable debt
securities classified as available-for-sale are available for working capital purposes, as necessary. Available-for-sale securities are recorded at fair market value. The unrealized gains and losses related to these securities are included in Other
Comprehensive Income (Loss). Fair market values are based on quoted market prices. When securities are sold, their cost is determined based on the specific identification method. Available-for-sale securities as of December 31, 2003 consisted of
cost of $27.2 million, gross unrealized gain of $30,000, and fair market value of $27.2 million. The following table represents the maturities of our cash and cash equivalents and available-for-sale securities (in thousands):



|                              |  |                      |        |                                   |   |                           |  |       |       |  |   |       
|----------------------------- |  | -------------------- | ------ | --------------------------------- | - | ------------------------- |  | ----- | ----- |  | - | ------
|December 31, 2003             |  | Three months or less |        | Between three months and one year |   | Between one and two years |  | Total
|Cash and cash equivalents     |  | $                    | 25,902 |                                   |   |                          |  |       |      |  | $ | 25,902
|Available for sale securities |  |                      |       |                                   | $ | 19,122                    |  | $     | 8,073 |  |   | 27,195
|                              |  |                      |        |                                   |   |                           |  |       |       |  |   |       
|Total                         |  | $                    | 25,902 |                                   | $ | 19,122                    |  | $     | 8,073 |  | $ | 53,097



|                              |  |                      |        |                                   |   |                           |  |       |        |  |   |       
|----------------------------- |  | -------------------- | ------ | --------------------------------- | - | ------------------------- |  | ----- | ------ |  | - | ------
|December 31, 2002             |  | Three months or less |        | Between three months and one year |   | Between one and two years |  | Total
|Cash and cash equivalents     |  | $                    | 11,704 |                                   |   |                          |  |       |       |  | $ | 11,704
|Available for sale securities |  |                      |       |                                   | $ | 24,643                    |  | $     | 13,917 |  |   | 38,560
|                              |  |                      |        |                                   |   |                           |  |       |        |  |   |       
|Total                         |  | $                    | 11,704 |                                   | $ | 24,643                    |  | $     | 13,917 |  | $ | 50,264



Total cash, cash
equivalents and available for sale securities increased by $2.8 million from 2002 to 2003, primarily due to cash generated from operating profits. Total cash, cash equivalents and available for sale securities decreased by $9.8 million from 2001 to
2002, primarily due to cash used to fund operating losses and to a $2.75 million cash payment in relation to the legal settlement of a patent dispute in 2002.



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On our GAAP consolidated statements of cash flows, net cash provided by operating activities increased by
$2.7 million during 2003 from a decrease of $8.2 million in 2002, due primarily to net income for the period, an increase in deferred revenues from 2003 to 2002, compared to the decrease from 2001 to 2002, and to lower direct personnel expenses due
to restructuring measures undertaken in 2002. In general, the primary factor in affecting our cash flows provided by operating activities is our net income for the period, and in the long term our ability to continue to generate positive cash from
operations is dependent upon our ability to maintain positive net income. In the short term, our accounts receivable balances also play an important role in cash provided by operating activities each quarter. A significant portion of our license
transactions occur at or near the end of each quarter, and as a result the cash received for these transactions is usually received in the quarter after the transaction occurs. Consequently, the primary uses of operating cash each quarter are the
expenses incurred that quarter, while the primary sources of operating cash each quarter are the revenues from the prior quarter.



Net cash provided by investing activities increased by $10.5 million in 2003 from a decrease of $6.5 million, due primarily to higher maturities of
available-for-sale investments. Net cash provided by financing activities increased to $1.0 million in 2003 from $337,000 in 2002, due to higher proceeds from stock option exercises in 2003.



We currently anticipate that our current cash, cash equivalents and available
for sale securities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Historically, our primary use of cash has been to fund payroll and related expenses, which are
the majority of our expenses. Our primary source of cash, subsequent to our initial public offering on 1999, has been payments from customers for products or services.



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.



Contractual Obligation



The following table summarizes our significant contractual obligations at
December 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in the future. This table excludes amounts already recorded on our balance sheet as current liabilities at December 31, 2003:



|                            |  |                       |       |                 |   |          |  |          |       |                  |   |     |  |  
|--------------------------- |  | --------------------- | ----- | --------------- | - | -------- |  | -------- | ----- | ---------------- | - | --- |  | -
|                            |  | Payment due by period
|Contractual Obligations     |  | Total                 |       | Less than1 year |   | 1-3years |  | 3-5years |       | More than5 years
|Operating Lease Obligations |  | $                     | 4,046 |                 | $ | 1,237    |  | $        | 2,268 |                  | $ | 541 |  | 0



Recent Accounting Pronouncements



In January 2003, Financial Accounting Standards Board
(FASB) issued FIN 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 and amended the Interpretation in December 2003. Generally, a variable interest entity (VIE) is a corporation,
partnership, trust or any other legal structure used for business purposes that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for the entity to support
its activities. FIN 46 requires that a VIE be consolidated by a company if that company is subject to a majority of the VIEs risk of loss or entitled to receive a majority of the VIEs residual returns or both. A company that consolidates
a VIE is referred to as the primary beneficiary of that entity. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. The adoption of this statement did not have any effect on our results of operation or
financial position.



In May 2003, FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The adoption of this statement did not have any effect on our results of operation or financial position.



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.



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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 immediately preceding Part I of this report.



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



Our quarterly revenues are especially subject to fluctuation, because they normally depend on the completion of relatively large license transactions. For
example, two transactions accounted for approximately 30% of our total revenues during the fourth quarter of 2003. 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 be adversely impacted if any large orders are delayed or canceled in any future period.



Our Quarterly Operating Results May be Volatile, which Could Adversely
Affect Our Stock Price



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



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. To the extent that seasonality makes it more difficult to predict our revenues, the volatility of our stock price may
increase.



Our quarterly operating results have been volatile
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 should not be relied upon as indicators of our future performance. Operating results vary depending on a
number of factors, many of which are outside our control. Volatility in our operating results could adversely affect our stock price.



Recent Changes to our Product Packaging and Pricing May Cause Revenues to Decline



We recently changed the way we package and price our products, allowing our customers to more easily license single solution
modules instead of having to license an entire product suite. The pricing of each solution module is significantly lower than the price of the entire product suite. We believe that, over time, the more modular packaging of our products will allow us
to sell into more opportunities, and that in the future we will be able to better upsell existing customers who choose to license single solution modules. In the near term, however, if our customers choose to purchase single modules instead of
purchasing full suites, this could adversely affect our revenues. Any such decrease in license revenues would adversely impact our gross profits and ultimately our net income.



Our Markets are Highly Competitive and are Experiencing Consolidation



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;
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | Hardware suppliers that offer or bundle software management capabilities in conjunction with their hardware offerings; 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



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companies may have greater brand name recognition than 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.



Furthermore, Microsoft has publicized its intentions to expand its offerings
in the systems management software market that may compete with our products. If Microsoft were to grow its market share in the systems management market with competing products, the demand for our products and our ability to increase or sustain our
market share may be harmed. In addition, the possible perception among our customers and potential customers that Microsoft is going to be successful in marketing expanded systems management software offerings that may compete with our products may
delay their buying decisions and harm our ability to market our products and services to them.



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 distributor relationships for
our products with systems integrators and other resellers, and we may not be able to increase the 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 generate revenues may be materially harmed.



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 they 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 from 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 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. Also, with the release of Marimba Six, which enables customers to more easily license single solution modules instead of having to license an entire
product suite, we may depend on increased repeat business from our customers to sustain and grow revenues. 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 Success Depends on Our Desktop/Mobile Management Product Line



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 could 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.



In December 2003, we released Marimba Six, which includes a new version of our Desktop/Mobile Management product line. This
new version and other future versions of the Desktop/Mobile Management product line may not provide the functionality and benefits we expect and could fail to meet customers requirements or achieve widespread market acceptance.



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



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



In December 2003, we released Marimba Six,
which includes a new version of our Server Management product line. This new version of the Server Management product line, as well as other future versions of the Server Management product line, may not provide the functionality and benefits we
expect and could fail to meet customers requirements or achieve widespread market acceptance.



To provide comprehensive software change and configuration management solutions, we will need to develop and introduce new products and services, which
offer functionalities 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 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.



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 over the
long term. Expanding internationally requires significant management attention and financial resources, and we may not generate sufficient revenues 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 increased tax rates. Furthermore, products may need to
be localized or customized to meet the needs of local users, before they can be sold in certain 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 conduct business in foreign jurisdictions. To date, we have not adopted a
hedging program to protect us against 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.



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. 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. If we lose senior management or key employees and are unable to replace them with qualified
individuals, our business and operating results could be negatively affected.



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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 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 that 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 and Our Products Require a Sophisticated Sales Effort



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. 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 our competitors or us.



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, a large portion of our license revenues has 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.



Implementation of Our Products by Large Customers May Be Complex and
Customers Could Become Dissatisfied if Implementation 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.



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 our customers or us. Defects or errors in our current or future products or in products comparable to ours could result in lost or delayed revenues or harm to the reputation of our business, either of 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 product 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 harm 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.



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 impacted 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



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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 were to make
significant changes to the Java language, if significant changes were to be made to Java virtual machine implementations of Sun Microsystems 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 exist 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.



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 license 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. Regardless of the merits, these claims could be time-consuming and divert our managements attention from the operation of our business.



We May Have Difficulty Collecting Amounts Owed to Us



Certain of our existing and proposed customers have experienced
credit-related issues. Because a small number of customers account for a large portion of our revenue and cash flow in any given quarter, the credit-worthiness of our largest customers is critical to our business. At December 31, 2003, two customers
represented 20% and 16% of net accounts receivable. We wrote off $1.0 million in uncollectible accounts during fiscal 2002, which had been previously reserved in 2001. We perform ongoing credit evaluations of customers, but do not generally require
collateral. We grant credit terms to most customers ranging from 30 to 90 days, however in some instances we provide longer payment terms. 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.



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



The total amount of maintenance and support fees
we receive in any period depends in large part on the size and number of license orders that we have previously sold. Any downturn in our software license revenues could negatively impact our future service revenues. 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 generate additional license revenues and other service revenues in order to compensate for the decline in support and
maintenance revenues.



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. In addition, the success of key initiatives going forward depends in part on our ability to form and sustain strategic technology and product relationships. If we cannot maintain successful marketing and
technology relationships or if we fail to enter into additional marketing and technology relationships, we could experience 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 and
services 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 products or services that compete with our products, our business would be
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 Are Subject to the Effects of General
Economic and Geopolitical Conditions



Our business is
subject to the effects of general economic conditions and, in particular, market conditions in the industries that we serve. Recent political turmoil in many parts of the world, including terrorist and military actions, may put pressure on global
economic conditions. Our customers decisions to purchase our products are discretionary and subject to their internal budget and purchasing processes, which may be impacted by the above factors. If economic conditions deteriorate, our business
and operating results are likely to be adversely impacted.



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 relatively 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.



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 II, Item 1Legal Matters of this report. We have agreed to a settlement with the plaintiffs in this action. However, the
settlement is subject to several conditions, including a hearing on fairness and approval by the court overseeing the litigation, and we cannot assure you that the settlement will be consummated. In the event the settlement is not consummated, the
defense of this litigation may increase our expenses and divert our managements attention and resources, and any unfavorable outcome could have a material adverse effect on our business and results of operations. In addition, we may in the
future be the target of other securities class actions or similar litigation.



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Provisions in Our Charter Documents and in Delaware Law May Discourage or Delay Potential Acquisition
Bids for Marimba and Prevent Changes in Our Management



Our charter documents authorize us to issue shares of preferred stock with rights, preferences and privileges designated by our Board of Directors, without further stockholder approval. While this provides desirable flexibility in
connection with possible acquisitions and other corporate purposes, any issued preferred stock could have the effect of delaying, deferring or preventing a change in control of our company. As a result, the market price of our common stock and the
voting and other rights of the holders of our common stock may be adversely affected. The issuance of preferred stock may result in the loss of voting control to others.



In addition, provisions in our charter documents eliminate the right of stockholders to act by written consent without a
meeting and limit the right of stockholders to call, and present items of business at, a special meeting of stockholders. These provisions are intended to increase the likelihood of continuity and stability in the composition of our Board of
Directors and in the policies set by the Board. These provisions also discourage certain types of transactions that may involve an actual or threatened change of control transaction, and are designed to reduce our vulnerability to an unsolicited
acquisition proposal. As a result, these provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. These provisions are also intended to discourage certain tactics that may be used in
proxy fights. However, they could have the effect of discouraging others from making tender offers for outstanding shares of our stock, and may prevent the market price of our common stock from reflecting the effects of actual or rumored takeover
attempts. These provisions may also have the effect of preventing changes in the management of our company.



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|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. 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 at least 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
amount 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, 2003 and 2002. This table does not include money market
funds, because those funds are not subject to market risk:



|                               |  |                 |        |   |      |   |        |  
|------------------------------ |  | --------------- | ------ | - | ---- | - | ------ | -
|                               |  | Maturing during |       
|                               |  | 2004            |        |   | 2005 |  
|December 31, 2003:             |  | (in thousands)  |       
|Cash equivalents               |  | $               | 9,900  |   |      | $ |       |  
|Weighted average interest rate |  |                 | 1.22   | % |      |   |       |  
|Available-for-sale investments |  | $               | 19,122 |   |      | $ | 8,073  |  
|Weighted average interest rate |  |                 | 1.65   | % |      |   | 1.71   | %
|Total                          |  | $               | 29,022 |   |      | $ | 8,073  |  
|Weighted average interest rate |  |                 | 1.51   | % |      |   | 1.71   | %
|                               |  |                 |        |   |      |   |        |  
|                               |  | Maturing during |       
|                               |  | 2003            |        |   | 2004 |  
|December 31, 2002:             |  | (in thousands)  |       
|Cash equivalents               |  | $               | 9,148  |   |      | $ |       |  
|Weighted average interest rate |  |                 | 0.85   | % |      |   |       |  
|Available-for-sale investments |  | $               | 24,643 |   |      | $ | 13,917 |  
|Weighted average interest rate |  |                 | 2.52   | % |      |   | 2.09   | %
|Total                          |  | $               | 33,791 |   |      | $ | 13,917 |  
|Weighted average interest rate |  |                 | 2.07   | % |      |   | 2.09   | %



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 and expenses are currently transacted in British Pounds and Euros, which potentially affects 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, 2003. 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, results of operations, and cash flows.



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|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



MARIMBA, INC.



INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS



|                                                  |  |   
|------------------------------------------------- |  | --
|Report of Ernst & Young LLP, Independent Auditors |  | 32
|Consolidated Balance Sheets                       |  | 33
|Consolidated Statements of Operations             |  | 34
|Consolidated Statements of Stockholders Equity   |  | 35
|Consolidated Statements of Cash Flows             |  | 36
|Notes to Consolidated Financial Statements        |  | 37



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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, 2003 and 2002, and the related consolidated statements of
operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2003. 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, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.



/s/    ERNST & YOUNG
LLP



San Francisco, California

January 23, 2004



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MARIMBA, INC.



CONSOLIDATED
BALANCE SHEETS

(in thousands, except par value data)



|                                                                                                                                                      |  |              |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                                                      |  | December 31, |        
|                                                                                                                                                      |  | 2003         |         |   | 2002 |  
|ASSETS                                                                                                                                                |  |              |         |   |      |   |         |  
|Current assets:                                                                                                                                       |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                             |  | $            | 25,902  |   |      | $ | 11,704  |  
|Available-for-sale securities                                                                                                                         |  |              | 27,195  |   |      |   | 38,560  |  
|Accounts receivable, net of allowances of $551 and $750 at December 31, 2003 and 2002                                                                 |  |              | 9,530   |   |      |   | 6,546   |  
|Prepaid expenses and other current assets                                                                                                             |  |              | 876     |   |      |   | 1,321   |  
|                                                                                                                                                      |  |              |         |   |      |   |         |  
|Total current assets                                                                                                                                  |  |              | 63,503  |   |      |   | 58,131  |  
|Property and equipment, net                                                                                                                           |  |              | 1,511   |   |      |   | 2,333   |  
|Acquired technology                                                                                                                                   |  |              | 1,194   |   |      |   | 1,536   |  
|Other assets                                                                                                                                          |  |              | 300     |   |      |   | 369     |  
|                                                                                                                                                      |  |              |         |   |      |   |         |  
|                                                                                                                                                      |  | $            | 66,508  |   |      | $ | 62,369  |  
|                                                                                                                                                      |  |              |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |              |         |   |     
|                                                                                                                                                      |  |             
|Current liabilities:                                                                                                                                  |  |              |         |   |      |   |         |  
|Accounts payable                                                                                                                                      |  | $            | 428     |   |      | $ | 465     |  
|Accrued liabilities                                                                                                                                   |  |              | 945     |   |      |   | 1,576   |  
|Accrued compensation                                                                                                                                  |  |              | 3,015   |   |      |   | 2,348   |  
|Deferred revenue                                                                                                                                      |  |              | 8,442   |   |      |   | 8,299   |  
|                                                                                                                                                      |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                                                             |  |              | 12,830  |   |      |   | 12,688  |  
|Deferred rent                                                                                                                                         |  |              | 234     |   |      |   | 286     |  
|Deferred revenues non-current                                                                                                                         |  |              | 949     |   |      |   | 667     |  
|                                                                                                                                                      |  |              |         |   |      |   |         |  
|Total long-term liabilities                                                                                                                           |  |              | 1,183   |   |      |   | 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, 26,251 and 25,201 shares issued and outstanding at December 31, 2003 and 2002,
respectively |  |              | 2       |   |      |   | 2       |  
|Additional paid-in capital                                                                                                                            |  |              | 99,563  |   |      |   | 98,728  |  
|Deferred compensation                                                                                                                                 |  |              |        |   |      |   | (239    | )
|Accumulated other comprehensive income                                                                                                                |  |              | (87     | ) |      |   | 215     |  
|Accumulated deficit                                                                                                                                   |  |              | (46,983 | ) |      |   | (49,978 | )
|                                                                                                                                                      |  |              |         |   |      |   |         |  
|Stockholders equity                                                                                                                                  |  |              | 52,495  |   |      |   | 48,728  |  
|                                                                                                                                                      |  |              |         |   |      |   |         |  
|                                                                                                                                                      |  | $            | 66,508  |   |      | $ | 62,369  |  
|                                                                                                                                                      |  |              |         |   |      |   |         |  





See accompanying notes.



33



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##### Table of Contents

MARIMBA, INC.



CONSOLIDATED
STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)



|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                          |  | Year Ended December 31, |       
|                                                                                                          |  | 2003                    |        | 2002 |   |         | 2001 | 
|Revenues:                                                                                                 |  |                         |        |      |   |         |      |  |   |         |  
|License                                                                                                   |  | $                       | 24,114 |      | $ | 18,223  |      |  | $ | 27,801  |  
|Service                                                                                                   |  |                         | 16,762 |      |   | 17,004  |      |  |   | 16,229  |  
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Total revenues                                                                                            |  |                         | 40,876 |      |   | 35,227  |      |  |   | 44,030  |  
|Cost of revenues:                                                                                         |  |                         |        |      |   |         |      |  |   |         |  
|License                                                                                                   |  |                         | 550    |      |   | 2,737   |      |  |   | 595     |  
|Service                                                                                                   |  |                         | 5,491  |      |   | 5,829   |      |  |   | 5,940   |  
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Total cost of revenues                                                                                    |  |                         | 6,041  |      |   | 8,566   |      |  |   | 6,535   |  
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Gross profit                                                                                              |  |                         | 34,835 |      |   | 26,661  |      |  |   | 37,495  |  
|                                                                                                          |  |                         |       
|Operating expenses:                                                                                       |  |                         |        |      |   |         |      |  |   |         |  
|Research and development                                                                                  |  |                         | 8,343  |      |   | 7,948   |      |  |   | 10,508  |  
|Sales and marketing                                                                                       |  |                         | 19,636 |      |   | 24,060  |      |  |   | 31,965  |  
|General and administrative                                                                                |  |                         | 4,661  |      |   | 5,683   |      |  |   | 7,934   |  
|Restructuring costs                                                                                       |  |                         |       |      |   | 200     |      |  |   | 789     |  
|Amortization of deferred compensation                                                                     |  |                         | 111    |      |   | 1,099   |      |  |   | 361     |  
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Total operating expenses                                                                                  |  |                         | 32,751 |      |   | 38,990  |      |  |   | 51,557  |  
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Income (loss) from operations                                                                             |  |                         | 2,084  |      |   | (12,329 | )    |  |   | (14,062 | )
|Interest income                                                                                           |  |                         | 949    |      |   | 1,536   |      |  |   | 2,817   |  
|Other income and (expenses)                                                                               |  |                         | 87     |      |   | 18      |      |  |   | (43     | )
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Income (loss) before income taxes                                                                         |  |                         | 3,120  |      |   | (10,775 | )    |  |   | (11,288 | )
|Provision for income taxes                                                                                |  |                         | 125    |      |   | 79      |      |  |   | 199     |  
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                         |  | $                       | 2,995  |      | $ | (10,854 | )    |  | $ | (11,487 | )
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Basic net income (loss) per share                                                                         |  | $                       | 0.12   |      | $ | (0.44   | )    |  | $ | (0.48   | )
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Diluted net income (loss) per share                                                                       |  | $                       | 0.11   |      | $ | (0.44   | )    |  | $ | (0.48   | )
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Weighted-average shares of common stock outstanding used in computing basic net income (loss) per share   |  |                         | 25,646 |      |   | 24,427  |      |  |   | 23,943  |  
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  
|Weighted-average shares of common stock outstanding used in computing diluted net income (loss) per share |  |                         | 27,356 |      |   | 24,427  |      |  |   | 23,943  |  
|                                                                                                          |  |                         |        |      |   |         |      |  |   |         |  



See accompanying notes.



34



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##### Table of Contents

MARIMBA, INC.



CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                                              |  |              |        |                          |        |   |                      |  |   |                                 |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------- |  | ------------ | ------ | ------------------------ | ------ | - | -------------------- |  | - | ------------------------------- | - |  | ------------------ | ------ | - | ------------------- | - | ---- | -------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                              |  | Common Stock |        | AdditionalPaid-inCapital |        |   | DeferredCompensation |  |   | OtherComprehensiveIncome (Loss) |   |  | AccumulatedDeficit |        |   | StockholdersEquity |   |      | ComprehensiveIncome (Loss) | 
|                                                                                              |  | Shares       |        |                          | Amount |   |                      |  |   |                                 |  
|Balances at January 1, 2001                                                                   |  | $            | 23,585 |                          |        | $ | 2                    |  | $ | 96,329                          |   |  | $                  | (1,882 | ) |                     | $ | (9   | )                          |  | $ | (27,637 | ) |  | $ | 66,803  |   |  | $ | (8,527  | )
|                                                                                              |  |              |        |                          |        |   |                      |  |   |                                 |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   |         |   |  |   |         |  
|Issuance of common stock upon exercise of stock options                                       |  |              | 323    |                          |        |   |                     |  |   | 594                             |   |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | 594     |   |  |   |         |  
|Issuance of common stock under employee stock purchase plan                                   |  |              | 338    |                          |        |   |                     |  |   | 715                             |   |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | 715     |   |  |   |         |  
|Issuance of stock options for services                                                        |  |              |        |                          |        |   |                     |  |   | 120                             |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   | 120     |   |  |   |         |  
|Repurchases of restricted common stock                                                        |  |              | (104   | )                        |        |   |                     |  |   | (14                             | ) |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | (14     | ) |  |   |         |  
|Deferred compensation, net of cancellation adjustment                                         |  |              |       |                          |        |   |                     |  |   | 21                              |   |  |                    | (21    | ) |                     |   |     |                            |  |   |        |   |  |   |        |   |  |   |         |  
|Translation adjustment                                                                        |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   | (9   | )                          |  |   |        |   |  |   | (9      | ) |  |   | (9      | )
|Unrealized gain on investments                                                                |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   | 159  |                            |  |   |        |   |  |   | 159     |   |  |   | 159     |  
|Amortization of deferred compensation                                                         |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    | 361    |   |                     |   |     |                            |  |   |        |   |  |   | 361     |   |  |   |         |  
|Net (loss)                                                                                    |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   |     |                            |  |   | (11,487 | ) |  |   | (11,487 | ) |  |   | (11,487 | )
|                                                                                              |  |              |        |                          |        |   |                      |  |   |                                 |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   |         |   |  |   |         |  
|Balances at December 31, 2001                                                                 |  |              | 24,142 |                          |        |   | 2                    |  |   | 97,765                          |   |  | $                  | (1,542 | ) |                     | $ | 141  |                            |  | $ | (39,124 | ) |  | $ | 57,242  |   |  | $ | (11,337 | )
|                                                                                              |  |              |        |                          |        |   |                      |  |   |                                 |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   |         |   |  |   |         |  
|Issuance of common stock upon exercise of stock options and grant of restricted common shares |  |              | 297    |                          |        |   |                     |  |   | 1                               |   |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | 1       |   |  |   |         |  
|Issuance of common stock under employee stock purchase plan                                   |  |              | 285    |                          |        |   |                     |  |   | 371                             |   |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | 371     |   |  |   |         |  
|Issuance of common stock in connection with legal settlement and acquired technology          |  |              | 500    |                          |        |   |                     |  |   | 830                             |   |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | 830     |   |  |   |         |  
|Repurchases of restricted common stock                                                        |  |              | (23    | )                        |        |   |                     |  |   | (35                             | ) |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | (35     | ) |  |   |         |  
|Deferred compensation, net of cancellation adjustment                                         |  |              |       |                          |        |   |                     |  |   | (204                            | ) |  |                    | 204    |   |                     |   |     |                            |  |   |        |   |  |   |        |   |  |   |         |  
|Translation adjustment                                                                        |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   | (21  | )                          |  |   |        |   |  |   | (21     | ) |  |   | (21     | )
|Unrealized gain (loss) on investments                                                         |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   | 95   |                            |  |   |        |   |  |   | 95      |   |  |   | 95      |  
|Amortization of deferred compensation                                                         |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    | 1,099  |   |                     |   |     |                            |  |   |        |   |  |   | 1,099   |   |  |   |         |  
|Net (loss)                                                                                    |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   |     |                            |  |   | (10,854 | ) |  |   | (10,854 | ) |  |   | (10,854 | )
|                                                                                              |  |              |        |                          |        |   |                      |  |   |                                 |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   |         |   |  |   |         |  
|Balances at December 31, 2002                                                                 |  |              | 25,201 |                          |        | $ | 2                    |  | $ | 98,728                          |   |  | $                  | (239   | ) |                     | $ | 215  |                            |  | $ | (49,978 | ) |  | $ | 48,728  |   |  | $ | (10,780 | )
|                                                                                              |  |              |        |                          |        |   |                      |  |   |                                 |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   |         |   |  |   |         |  
|Issuance of common stock upon exercise of stock options                                       |  |              | 894    |                          |        |   |                     |  |   | 835                             |   |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | 835     |   |  |   |         |  
|Issuance of common stock under employee stock purchase plan                                   |  |              | 367    |                          |        |   |                     |  |   | 497                             |   |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | 497     |   |  |   |         |  
|Repurchases of restricted common stock                                                        |  |              | (211   | )                        |        |   |                     |  |   | (369                            | ) |  |                    |       |   |                     |   |     |                            |  |   |        |   |  |   | (369    | ) |  |   |         |  
|Deferred compensation, net of cancellation adjustment                                         |  |              |       |                          |        |   |                     |  |   | (128                            | ) |  |                    | 128    |   |                     |   |     |                            |  |   |        |   |  |   |        |   |  |   |         |  
|Translation adjustment                                                                        |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   | (45  | )                          |  |   |        |   |  |   | (45     | ) |  |   | (45     | )
|Unrealized gain (loss) on investments                                                         |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   | (257 | )                          |  |   |        |   |  |   | (257    | ) |  |   | (257    | )
|Amortization of deferred compensation                                                         |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    | 111    |   |                     |   |     |                            |  |   |        |   |  |   | 111     |   |  |   |         |  
|Net income                                                                                    |  |              |       |                          |        |   |                     |  |   |                                |   |  |                    |       |   |                     |   |     |                            |  |   | 2,995   |   |  |   | 2,995   |   |  |   | 2,995   |  
|                                                                                              |  |              |        |                          |        |   |                      |  |   |                                 |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   |         |   |  |   |         |  
|Balances at December 31, 2003                                                                 |  |              | 26,251 |                          |        | $ | 2                    |  | $ | 99,563                          |   |  | $                  |       |   |                     | $ | (87  | )                          |  | $ | (46,983 | ) |  | $ | 52,495  |   |  | $ | 2,693   |  
|                                                                                              |  |              |        |                          |        |   |                      |  |   |                                 |   |  |                    |        |   |                     |   |      |                            |  |   |         |   |  |   |         |   |  |   |         |  



See accompanying notes.





35



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##### Table of Contents

MARIMBA, INC.



CONSOLIDATED
STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                   |  | Year Ended December 31, |        
|                                                                                                   |  | 2003                    |         |   | 2002 |   |         | 2001 | 
|Operating activities:                                                                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Net income (loss)                                                                                  |  | $                       | 2,995   |   |      | $ | (10,854 | )    |  | $ | (11,487 | )
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                         |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                                       |  |                         | 1,383   |   |      |   | 1,864   |      |  |   | 2,096   |  
|Amortization of deferred compensation                                                              |  |                         | 111     |   |      |   | 1,099   |      |  |   | 361     |  
|Amortization of acquired technology                                                                |  |                         | 342     |   |      |   | 171     |      |  |   |        |  
|Issuance of stock option for services                                                              |  |                         |        |   |      |   |        |      |  |   | 120     |  
|Issuance of common stock in connection with legal settlement                                       |  |                         |        |   |      |   | 830     |      |  |   |        |  
|Loss on disposal of property and equipment                                                         |  |                         |        |   |      |   | 13      |      |  |   | 64      |  
|Changes in operating assets and liabilities:                                                       |  |                         |         |   |      |   |         |      |  |   |         |  
|Accounts receivable, net                                                                           |  |                         | (2,984  | ) |      |   | 1,245   |      |  |   | 856     |  
|Prepaid expenses and other current assets                                                          |  |                         | 445     |   |      |   | 370     |      |  |   | 435     |  
|Other assets                                                                                       |  |                         | 69      |   |      |   | (9      | )    |  |   |        |  
|Accounts payable                                                                                   |  |                         | (37     | ) |      |   | 100     |      |  |   | (715    | )
|Accrued liabilities                                                                                |  |                         | (631    | ) |      |   | (437    | )    |  |   | 212     |  
|Accrued compensation                                                                               |  |                         | 667     |   |      |   | (1,060  | )    |  |   | (647    | )
|Deferred revenue                                                                                   |  |                         | 425     |   |      |   | (1,592  | )    |  |   | (2,958  | )
|Deferred rent                                                                                      |  |                         | (52     | ) |      |   | 21      |      |  |   | 112     |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) operating activities                                                |  |                         | 2,733   |   |      |   | (8,239  | )    |  |   | (11,551 | )
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Investing activities:                                                                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Acquired technology in connection with legal settlement                                            |  |                         |        |   |      |   | (1,707  | )    |  |   |        |  
|Capital expenditures, net                                                                          |  |                         | (561    | ) |      |   | (310    | )    |  |   | (1,786  | )
|Purchases of available-for-sale securities                                                         |  |                         | (33,373 | ) |      |   | (38,160 | )    |  |   | (63,820 | )
|Proceeds from maturities and sales of available-for-sale securities                                |  |                         | 44,481  |   |      |   | 33,665  |      |  |   | 65,037  |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) investing activities                                                |  |                         | 10,547  |   |      |   | (6,512  | )    |  |   | (569    | )
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Financing activities:                                                                              |  |                         |         |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of common stock, net of repurchases                                         |  |                         | 963     |   |      |   | 337     |      |  |   | 1,295   |  
|Proceeds from transfer of financial assets                                                         |  |                         |        |   |      |   |        |      |  |   | 3,853   |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                          |  |                         | 963     |   |      |   | 337     |      |  |   | 5,148   |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Effect of exchange rate changes on cash                                                            |  |                         | (45     | ) |      |   | (21     | )    |  |   | (9      | )
|Net increase (decrease) in cash and cash equivalents                                               |  |                         | 14,198  |   |      |   | (14,437 | )    |  |   | (6,981  | )
|Cash and cash equivalents at beginning of year                                                     |  |                         | 11,704  |   |      |   | 26,141  |      |  |   | 33,122  |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                           |  | $                       | 25,902  |   |      | $ | 11,704  |      |  | $ | 26,141  |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flow information:                                                  |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest paid                                                                                      |  | $                       |        |   |      | $ |        |      |  | $ | 4       |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Income taxes paid                                                                                  |  | $                       | 134     |   |      | $ | 17      |      |  | $ | 199     |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash paid for technology acquisition                                                               |  | $                       |        |   |      | $ | 2,750   |      |  | $ |        |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of non-cash investing and financing activities:                            |  |                         |         |   |      |   |         |      |  |   |         |  
|Deferred compensation, net of cancellation adjustment                                              |  | $                       | (128    | ) |      | $ | (204    | )    |  | $ | 21      |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Issuance of stock for technology acquisition                                                       |  | $                       |        |   |      | $ | 830     |      |  | $ |        |  
|                                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  



See accompanying notes.



36



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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 and configuration management solutions. Our products automate the distribution and management of software applications and content, helping customers reduce their total cost of
information technology (IT) ownership and improve the quality of IT service. Specific software solutions we provide include data center automation, security patch management, license compliance and inventory, and others. Our customer
base spans multiple industries, and 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.



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 ongoing 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.



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.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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, revenue is
recognized upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period, assuming all other requirements for revenue recognition have been met.



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 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 $32,000, $54,000 and $819,000 for the years ended December 31, 2003, 2002 and 2001, respectively.



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 liability method in accordance
with Statement of Financial Accounting Standards No. 109 (FAS 109), Accounting for Income Taxes. Under the asset and 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, 2003, because we believe it is more likely than not that our deferred tax assets will not be realized in the foreseeable future.



Cash, Cash Equivalents and Available-for-sale Securities



Cash equivalents consisted of financial instruments, which are readily convertible to cash and have maturities at the time of acquisition of three
months or less. Cash equivalents consisted primarily of investments in commercial paper, U.S. government and agency securities and money market funds. These investments are recorded at cost, which approximates fair value and are managed by
professional investment managers.



All marketable debt
securities classified as available-for-sale are available for working capital purposes, as necessary. Available-for-sale securities are recorded at fair market value. The unrealized gains and losses related to these securities are included in Other
Comprehensive Income (Loss). Fair market values are based on quoted market prices. When securities are sold, their cost is determined based on the specific identification method. Available-for-sale securities consist of cost of $27.2 million, gross
unrealized gain of $30,000 and fair market value of $27.2 million as of December 31, 2003. The following table represents the maturities of our cash and cash equivalents and available-for-sale securities (in thousands):



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                              |  |                     |        |                                 |   |                         |  |       |        |  |   |       
|----------------------------- |  | ------------------- | ------ | ------------------------------- | - | ----------------------- |  | ----- | ------ |  | - | ------
|                              |  | Three monthsor less |        | Betweenthree monthsand one year |   | Betweenone andtwo years |  | Total
|December 31, 2003             |  |                     |        |                                 |   |                         |  |       |        |  |   |       
|Cash and cash equivalents     |  | $                   | 25,902 |                                 |   |                        |  |       |       |  | $ | 25,902
|Available for sale securities |  |                     |       |                                 | $ | 19,122                  |  | $     | 8,073  |  |   | 27,195
|                              |  |                     |        |                                 |   |                         |  |       |        |  |   |       
|Total                         |  | $                   | 25,902 |                                 | $ | 19,122                  |  | $     | 8,073  |  | $ | 53,097
|                              |  |                     |        |                                
|December 31, 2002             |  |                     |        |                                 |   |                         |  |       |        |  |   |       
|Cash and cash equivalents     |  | $                   | 11,704 |                                 |   |                        |  |       |       |  | $ | 11,704
|Available for sale securities |  |                     |       |                                 | $ | 24,643                  |  | $     | 13,917 |  |   | 38,560
|                              |  |                     |        |                                 |   |                         |  |       |        |  |   |       
|Total                         |  | $                   | 11,704 |                                 | $ | 24,643                  |  | $     | 13,917 |  | $ | 50,264



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. Available-for-sale investments are summarized as follows:



|                                                             |  |               |        |                      |   |                       |  |   |           |   |  |   |       
|------------------------------------------------------------ |  | ------------- | ------ | -------------------- | - | --------------------- |  | - | --------- | - |  | - | ------
|                                                             |  | AmortizedCost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | FairValue
|December 31, 2003:                                           |  |               |       
|Corporate notes                                              |  | $             | 6,717  |                      | $ | 23                    |  | $ |          |   |  | $ | 6,740 
|Asset backed auction rate securities                         |  |               | 3,998  |                      |   | 2                     |  |   |          |   |  |   | 4,000 
|Debt securities from U.S. Government and government agencies |  |               | 16,450 |                      |   | 5                     |  |   |          |   |  |   | 16,455
|                                                             |  |               |        |                      |   |                       |  |   |           |   |  |   |       
|Total available-for sale securities                          |  | $             | 27,165 |                      | $ | 30                    |  | $ |          |   |  | $ | 27,195
|                                                             |  |               |        |                      |   |                       |  |   |           |   |  |   |       
|December 31, 2002:                                           |  |               |        |                      |   |                       |  |   |           |   |  |   |       
|Corporate notes                                              |  | $             | 20,665 |                      | $ | 196                   |  | $ | (1        | ) |  | $ | 20,860
|Debt securities from U.S. Government and government agencies |  |               | 17,608 |                      |   | 92                    |  |   |          |   |  |   | 17,700
|                                                             |  |               |        |                      |   |                       |  |   |           |   |  |   |       
|Total available-for sale securities                          |  | $             | 38,273 |                      | $ | 288                   |  | $ | (1        | ) |  | $ | 38,560
|                                                             |  |               |        |                      |   |                       |  |   |           |   |  |   |       



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



At
December 31, 2003, the amortized cost and estimated fair values of available-for-sale securities (excluding cash equivalents) by contractual maturity were as follows:



|                   |  |                |        |           |   |       
|------------------ |  | -------------- | ------ | --------- | - | ------
|                   |  | Amortized Cost |        | FairValue
|                   |  | (in thousands)
|Less than one year |  | $              | 19,098 |           | $ | 19,122
|Mature in 1-2 year |  |                | 8,067  |           |   | 8,073 
|                   |  |                |        |           |   |       
|Total investments  |  | $              | 27,165 |           | $ | 27,195
|                   |  |                |        |           |   |       



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.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The below table summarizes relevant information as to reported results under Marimbas intrinsic
value method of accounting for stock awards, with supplemental information as if the fair value recognition provisions of SFAS No. 123, had been applied. 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 option vesting period using the graded vesting method. Pro forma information is as follows:



|                                                                     |  |                                       |        |   |      |   |         |      |  |   |         |  
|-------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                     |  | Year Ended December 31,               |       
|                                                                     |  | 2003                                  |        |   | 2002 |   |         | 2001 | 
|                                                                     |  | (in thousands, except per share data) |       
|Net income (loss) as reported                                        |  | $                                     | 2,995  |   |      | $ | (10,854 | )    |  | $ | (11,487 | )
|Add: Stock-based compensation included in reported net income (loss) |  |                                       | 111    |   |      |   | 1,099   |      |  |   | 361     |  
|Deduct: Total stock-based compensation cost under SFAS 123           |  |                                       | (1,690 | ) |      |   | (5,287  | )    |  |   | (2,324  | )
|                                                                     |  |                                       |        |   |      |   |         |      |  |   |         |  
|Pro forma net income (loss)                                          |  | $                                     | 1,416  |   |      | $ | (15,042 | )    |  | $ | (13,450 | )
|Basic net income (loss) per share:                                   |  |                                       |        |   |      |   |         |      |  |   |         |  
|Reported net income (loss) per common share                          |  | $                                     | 0.12   |   |      | $ | (0.44   | )    |  | $ | (0.48   | )
|                                                                     |  |                                       |        |   |      |   |         |      |  |   |         |  
|Pro forma net income (loss) per common share                         |  | $                                     | 0.06   |   |      | $ | (0.62   | )    |  | $ | (0.56   | )
|                                                                     |  |                                       |        |   |      |   |         |      |  |   |         |  
|Diluted net income (loss) per share:                                 |  |                                       |        |   |      |   |         |      |  |   |         |  
|Reported net income (loss) per common share                          |  | $                                     | 0.11   |   |      | $ | (0.44   | )    |  | $ | (0.48   | )
|                                                                     |  |                                       |        |   |      |   |         |      |  |   |         |  
|Pro forma net income (loss) per common share                         |  | $                                     | 0.05   |   |      | $ | (0.62   | )    |  | $ | (0.56   | )
|                                                                     |  |                                       |        |   |      |   |         |      |  |   |         |  



Concentrations of
Credit Risk and Other Risks



Financial instruments that
subject Marimba to credit risk consist primarily of uninsured cash, cash equivalents and available for sale securities 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, 2003, 2002 and 2001, no single customer represented more than 10% of total revenues. At December 31, 2003, two customers represented 20%, and 16% of net accounts receivable, and at December 31, 2002, three customers
represented 28%, 13% and 12% of net accounts receivable.



Accounts Receivable Risks



Marimbas
accounts receivable is subject to collection risks. Our gross accounts receivable is reserved against this risk through an allowance for doubtful accounts and, prior to December 31, 2002, 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 reduction of 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.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table presents the allowance for doubtful accounts and the returns reserve for 2003,
2002 and 2001:



|                             |  |                              |        |   |                |   |      |                                 |  |   |        |  
|---------------------------- |  | ---------------------------- | ------ | - | -------------- | - | ---- | ------------------------------- |  | - | ------ | -
|                             |  | AllowanceforDoubtfulAccounts |        |   | ReturnsReserve |   |      | TotalAccountsReceivableReserves | 
|                             |  | (in thousands)               |       
|Balance at January 1, 2001   |  | $                            | 1,985  |   |                | $ | 237  |                                 |  | $ | 2,222  |  
|                             |  |                              |        |   |                |   |      |                                 |  |   |        |  
|Additions                    |  |                              | 172    |   |                |   | 290  |                                 |  |   | 462    |  
|Adjustments                  |  |                              |       |   |                |   |     |                                 |  |   |       |  
|Write-offs                   |  |                              | (326   | ) |                |   |     |                                 |  |   | (326   | )
|                             |  |                              |        |   |                |   |      |                                 |  |   |        |  
|Balance at December 31, 2001 |  |                              | 1,831  |   |                |   | 527  |                                 |  |   | 2,358  |  
|                             |  |                              |        |   |                |   |      |                                 |  |   |        |  
|Additions                    |  |                              |       |   |                |   |     |                                 |  |   |       |  
|Adjustments                  |  |                              | (40    | ) |                |   | (527 | )                               |  |   | (567   | )
|Write-offs                   |  |                              | (1,041 | ) |                |   |     |                                 |  |   | (1,041 | )
|                             |  |                              |        |   |                |   |      |                                 |  |   |        |  
|Balance at December 31, 2002 |  |                              | 750    |   |                |   |     |                                 |  |   | 750    |  
|                             |  |                              |        |   |                |   |      |                                 |  |   |        |  
|Additions                    |  |                              |       |   |                |   |     |                                 |  |   |       |  
|Adjustments                  |  |                              | (191   | ) |                |   |     |                                 |  |   | (191   | )
|Write-offs                   |  |                              | (8     | ) |                |   |     |                                 |  |   | (8     | )
|                             |  |                              |        |   |                |   |      |                                 |  |   |        |  
|Balance at December 31, 2003 |  | $                            | 551    |   |                | $ |     |                                 |  | $ | 551    |  
|                             |  |                              |        |   |                |   |      |                                 |  |   |        |  



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. Marimba 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, Marimba 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.



Segment Information



Marimba operates in one operating segment, the development and marketing of change management software, and primarily has operations in the United States and Europe. Marimbas chief operating decision maker reviews financial
information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, Marimba considers itself to be
in a single industry segment, specifically the license, implementation and support of its software products.



Marimba evaluates the performance of its geographic regions based on revenues only. Marimba does not assess the performance of its geographic regions on
other measures of income or expense, such as depreciation and amortization, operating income or net income. In addition, as Marimbas assets are primarily located in its corporate office in the United States and not allocated to any specific
region, Marimba does not produce reports for, or measure the performance of, its geographic regions based on any asset-based metrics. Therefore, geographic information is presented only for revenues. The following table presents our revenues and
percentage of revenues by region:



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|               |  |                         |        |  |       |   |  |      |        |  |       |   |  |   |        |  |       |  
|-------------- |  | ----------------------- | ------ |  | ----- | - |  | ---- | ------ |  | ----- | - |  | - | ------ |  | ----- | -
|               |  | Year Ended December 31, |       
|               |  | 2003                    |        |  | 2002  |   |  | 2001 |       
|               |  | (in thousands)          |       
|Revenue:       |  |                         |        |  |       |   |  |      |        |  |       |  
|United States  |  | $                       | 34,906 |  | 85.4  | % |  | $    | 29,753 |  | 84.5  | % |  | $ | 40,507 |  | 92.0  | %
|Europe         |  |                         | 5,630  |  | 13.8  |   |  |      | 4,342  |  | 12.3  |   |  |   | 2,466  |  | 5.6   |  
|Other regions  |  |                         | 340    |  | 0.8   |   |  |      | 1,132  |  | 3.2   |   |  |   | 1,057  |  | 2.4   |  
|               |  |                         |        |  |       |   |  |      |        |  |       |   |  |   |        |  |       |  
|Total revenues |  | $                       | 40,876 |  | 100.0 | % |  | $    | 35,227 |  | 100.0 | % |  | $ | 44,030 |  | 100.0 | %



Net Income (Loss)
Per Share



Basic and diluted net income (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 income (loss) per share
have been computed by dividing the net income (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 income (loss) per share for the periods indicated:



|                                                                                                          |  |                                       |        |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                          |  | Year Ended December 31,               |       
|                                                                                                          |  | 2003                                  |        |   | 2002 |   |         | 2001 | 
|                                                                                                          |  | (in thousands, except per share data) |       
|Net income (loss)                                                                                         |  | $                                     | 2,995  |   |      | $ | (10,854 | )    |  | $ | (11,487 | )
|                                                                                                          |  |                                       |        |   |      |   |         |      |  |   |         |  
|Basic:                                                                                                    |  |                                       |        |   |      |   |         |      |  |   |         |  
|Weighted-average shares of common stock outstanding                                                       |  |                                       | 25,675 |   |      |   | 24,484  |      |  |   | 24,012  |  
|Less weighted-average shares subject to repurchase                                                        |  |                                       | (29    | ) |      |   | (57     | )    |  |   | (69     | )
|                                                                                                          |  |                                       |        |   |      |   |         |      |  |   |         |  
|Weighted-average shares of common stock outstanding used in computing basic net income (loss) per share   |  |                                       | 25,646 |   |      |   | 24,427  |      |  |   | 23,943  |  
|                                                                                                          |  |                                       |        |   |      |   |         |      |  |   |         |  
|Basic net income (loss) per share                                                                         |  | $                                     | 0.12   |   |      | $ | (0.44   | )    |  | $ | (0.48   | )
|                                                                                                          |  |                                       |        |   |      |   |         |      |  |   |         |  
|Diluted:                                                                                                  |  |                                       |        |   |      |   |         |      |  |   |         |  
|Weighted-average shares of common stock outstanding                                                       |  |                                       | 27,385 |   |      |   | 24,484  |      |  |   | 24,012  |  
|Less weighted-average shares subject to repurchase                                                        |  |                                       | (29    | ) |      |   | (57     | )    |  |   | (69     | )
|                                                                                                          |  |                                       |        |   |      |   |         |      |  |   |         |  
|Weighted-average shares of common stock outstanding used in computing diluted net income (loss) per share |  |                                       | 27,356 |   |      |   | 24,427  |      |  |   | 23,943  |  
|                                                                                                          |  |                                       |        |   |      |   |         |      |  |   |         |  
|Diluted net income (loss) per share                                                                       |  | $                                     | 0.11   |   |      | $ | (0.44   | )    |  | $ | (0.48   | )
|                                                                                                          |  |                                       |        |   |      |   |         |      |  |   |         |  



Earnings Per Share



The shares used in the computation of Marimbas
basic and diluted earnings per common share were as follows:



|                                                              |  |        |  |        |  |       
|------------------------------------------------------------- |  | ------ |  | ------ |  | ------
|                                                              |  | 2003   |  | 2002   |  | 2001  
|Weighted average common shares outstanding                    |  | 25,646 |  | 24,427 |  | 23,943
|Dilutive effect of employee stock options                     |  | 1,710  |  |       |  |      
|                                                              |  |        |  |        |  |       
|Weighted-average common shares outstanding, assuming dilution |  | 27,356 |  | 24,427 |  | 23,943



Weighted average common shares outstanding, assuming dilution, include incremental shares that would be issued upon the assumed exercise of the stock options. For the years ended December 31,
2002 and 2001, Marimba has excluded all outstanding stock options from the calculation of diluted loss per share, because all such securities are antidilutive. Weighted-average options outstanding to purchase 378,000, 7,078,000 and 6,220,000 shares
of common stock for the years ended December 31, 2003, 2002 and 2001, respectively, were not included in the computation of diluted net income (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 income (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 income (loss) as adjusted by
changes in equity such as foreign currency translation adjustments and unrealized gains and losses. As of December 31, the components of accumulated other comprehensive income (loss) reflected in the Statement of Stockholders Equity were as
follows:



|                                                 |  |                |      |   |      |   |     |      |  |   |     |  
|------------------------------------------------ |  | -------------- | ---- | - | ---- | - | --- | ---- |  | - | --- | -
|                                                 |  | 2003           |      |   | 2002 |   |     | 2001 | 
|                                                 |  | (in thousands) |     
|Unrealized gain on available-for-sale securities |  | $              | 30   |   |      | $ | 287 |      |  | $ | 192 |  
|Foreign currency translation adjustment          |  |                | (117 | ) |      |   | (72 | )    |  |   | (51 | )
|                                                 |  |                |      |   |      |   |     |      |  |   |     |  
|Accumulated other comprehensive income (loss)    |  | $              | (87  | ) |      | $ | 215 |      |  | $ | 141 |  
|                                                 |  |                |      |   |      |   |     |      |  |   |     |  



Acquired Technology



On July 19, 2002, Marimba executed an agreement settling
patent litigation brought against Marimba. 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 the 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 patents. 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 January 2003, FASB issued FIN 46,
Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 and amended the Interpretation in December 2003. Generally, a variable interest entity (VIE) is a corporation, partnership, trust or any other legal
structure used for business purposes that either does not have equity investors with substantive voting rights or has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires that
a VIE be consolidated by a company if that company is subject to a majority of the VIEs risk of loss or entitled to receive a majority of the VIEs residual returns or both. A company that consolidates a VIE is referred to as the primary
beneficiary of that entity. The consolidation requirements of FIN 46 apply immediately to VIEs created after January 31, 2003. The adoption of this statement did not have any effect on our financial position, cash flows or results of operations.



In May 2003, FASB issued Statement No. 150, Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of this statement did not have any effect on our financial position, cash flows or results of operations.



Guarantees



We enter into standard indemnification agreements with our customers and technology partners. Pursuant to these agreements, we typically indemnify, hold
harmless, and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any U.S. patent, copyright or other intellectual property infringement claim by any third party with respect to our
products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments that Marimba could be required to make under these indemnification agreements is
unlimited. We have, in the past, incurred costs to defend intellectual property lawsuits.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



We generally warrant that our software products will perform in all material respects in accordance
with our standard published specifications for a specified period of time from the date of license. Additionally, we warrant that our maintenance and other services will be performed consistent with generally accepted industry standards through
completion of the agreed upon services. Historically, costs related to these warranties have not been significant. We maintain a warranty accrual in the event that we incur expenses associated with customer claims made under our warranty provisions.



We have agreements in place with our directors and officers
whereby we indemnify them for certain events or occurrences while the officer or director is, or was, serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification
agreements is unlimited; however, we have a director and officer insurance policy that may enable us to recover a portion of any future amounts paid.



2.    Property and Equipment



Property and equipment consist of the following:



|                            |  |                |        |   |      |   |        |  
|--------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                            |  | December 31,   |       
|                            |  | 2003           |        |   | 2002 |  
|                            |  | (in thousands) |       
|Furniture and equipment     |  | $              | 1,295  |   |      | $ | 1,598  |  
|Computer equipment          |  |                | 5,210  |   |      |   | 5,997  |  
|Purchased software          |  |                | 970    |   |      |   | 1,340  |  
|Leasehold improvements      |  |                | 1,204  |   |      |   | 1,191  |  
|                            |  |                |        |   |      |   |        |  
|                            |  |                | 8,679  |   |      |   | 10,126 |  
|Accumulated depreciation    |  |                | (7,168 | ) |      |   | (7,793 | )
|                            |  |                |        |   |      |   |        |  
|Property and equipment, net |  | $              | 1,511  |   |      | $ | 2,333  |  
|                            |  |                |        |   |      |   |        |  



3. Commitments



Marimbas contractual obligations consist of noncancellable operating
lease agreements. As of December 31, 2003, future minimum lease payments under noncancellable operating leases are as follows:



|                             |  |                 |      
|---------------------------- |  | --------------- | -----
|                             |  | OperatingLeases
|                             |  | (in thousands) 
|Year ending December 31:     |  |                 |      
|2004                         |  |                 | 1,237
|2005                         |  |                 | 1,186
|2006                         |  |                 | 1,082
|2007                         |  |                 | 541  
|                             |  |                 |      
|Total minimum lease payments |  | $               | 4,046
|                             |  |                 |      



Marimbas
headquarters facility lease expires in June 2007. Rent expense under operating leases totaled approximately $1.9 million, $2.5 million and $3.1 million for the years ended December 31, 2003, 2002 and 2001, respectively.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



4.    Deferred Revenues



Deferred revenues consist of the following:



|                                            |  |                        |       |      |   |      
|------------------------------------------- |  | ---------------------- | ----- | ---- | - | -----
|                                            |  | Year EndedDecember 31,
|                                            |  | 2003                   |       | 2002
|                                            |  | (in thousands)        
|Current portion                             |  |                        |       |      |   |      
|License                                     |  | $                      | 462   |      | $ | 1,021
|Maintenance                                 |  |                        | 7,292 |      |   | 6,285
|Consulting and training                     |  |                        | 688   |      |   | 993  
|                                            |  |                        |       |      |   |      
|Total deferred revenue, current portion     |  | $                      | 8,442 |      | $ | 8,299
|                                            |  |                        |       |      |   |      
|                                            |  |                       
|Non-Current portion                         |  |                        |       |      |   |      
|License                                     |  | $                      | 20    |      | $ | 80   
|Maintenance                                 |  |                        | 929   |      |   | 587  
|Consulting and training                     |  |                        |      |      |   |     
|                                            |  |                        |       |      |   |      
|Total deferred revenue, non-current portion |  | $                      | 949   |      | $ | 667  
|                                            |  |                        |       |      |   |      



5.    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 amortization 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:



|                             |  |                      |        |  
|---------------------------- |  | -------------------- | ------ | -
|                             |  | DeferredCompensation |       
|                             |  | (in thousands)       |       
|Balance at January 1, 2001   |  | $                    | 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    |  
|                             |  |                      |        |  
|                             | 
|Increase due to new grants   |  |                      |       |  
|Decrease due to terminations |  |                      | (128   | )
|Amortization                 |  |                      | (111   | )
|                             |  |                      |        |  
|Balance at December 31, 2003 |  | $                    |       |  
|                             |  |                      |        |  



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



6.    Stockholders Equity



As of December 31, 2003, 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.



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



|                                                                |  |                  
|--------------------------------------------------------------- |  | -----------------
|                                                                |  | December 31, 2003
|                                                                |  | (in thousands)   
|Exercise of options                                             |  | 11,470           
|Issuance of common stock under the employee stock purchase plan |  | 1,296            
|                                                                |  |                  
|Total                                                           |  | 12,766           
|                                                                |  |                  



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, 2003, 2002 and 2001, 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.



7.    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, and stockholders approved the 1996 plan in March 1997. A total of 6,474,603 shares of
common stock were originally reserved for issuance to eligible participants under the 1996 Plan. As of December 31, 2003, a total of 132,523 option shares were outstanding 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.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



1999 Omnibus Equity Incentive Plan



In February 1999, the Board of Directors adopted, and 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 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. As of December 31, 2003, a total of 7,196,870 shares of common stock had been reserved for issuance,
1,281,500 option shares were outstanding and 5,214,954 shares of common stock were available for future grant under the 1999 Omnibus Plan. An additional 1,050,057 shares of common stock were added to the reserve on January 1, 2004. 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 2003, Marimba repurchased 211,021 shares under this plan.



2000 Supplemental Stock 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, 2003, 2,773,008 option shares were outstanding and 243,528
shares were available for future grant under the 2000 Plan.



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.



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.



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 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 acquirer may either assume the outstanding awards or substitute equivalent awards. In the event the acquirer fails to assume or substitute awards issued under the plan, all
awards will become fully vested and exercisable.



The term of
the plan commenced on the date the plan was adopted in March 2000, and will end on September 5, 2011 unless terminated earlier by the Board of Directors. The plan may be amended or terminated without stockholder approval.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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. At December 31, 2003, a total of 360,000 shares of common stock had been reserved for issuance, 282,500 option shares were outstanding and 37,500 shares of common stock were available for future grant under the Directors
Plan. In January 2004, an additional 112,500 shares were reserved under this plan. 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 automatically will be 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 assumes the 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 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) also were required 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 exchange 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 result in any additional compensation charges or variable plan accounting.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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    |   |  | Weighted- Average Exercise Price
|Balance at January 1, 2001   |  | 2,768,518                  |   |  | 6,599,353           |   |  | $                                | 16.01 
|                             |  |                            |  
|Authorized                   |  | 1,380,879                  |   |  |                     |   |  |                                  |       
|Granted                      |  | (4,614,250                 | ) |  | 4,614,250           |   |  |                                  | 2.83  
|Exercised                    |  |                            |   |  | (322,574            | ) |  |                                  | 1.84  
|Repurchased                  |  | 103,693                    |   |  |                    |   |  |                                  |      
|Canceled                     |  | 4,599,805                  |   |  | (4,599,805          | ) |  |                                  | 17.42 
|                             |  |                            |   |  |                     |   |  |                                  |       
|Balance at December 31, 2001 |  | 4,238,645                  |   |  | 6,291,224           |   |  |                                  | 5.77  
|                             |  |                            |   |  |                     |   |  |                                  |       
|                             |  |                            |  
|Authorized                   |  | 1,050,658                  |   |  |                     |   |  |                                  |       
|Granted                      |  | (2,536,352                 | ) |  | 2,536,352           |   |  |                                  | 2.42  
|Exercised                    |  |                            |   |  | (297,916            | ) |  |                                  | 0.0001
|Repurchased                  |  | 1,438                      |   |  |                    |   |  |                                  | 6.51  
|Canceled                     |  | 2,504,869                  |   |  | (2,504,869          | ) |  |                                  | 7.68  
|                             |  |                            |   |  |                     |   |  |                                  |       
|Balance at December 31, 2002 |  | 5,259,258                  |   |  | 6,024,791           |   |  |                                  | 4.35  
|                             |  |                            |   |  |                     |   |  |                                  |       
|                             |  |                            |  
|Authorized                   |  | 1,080,550                  |   |  |                     |   |  |                                  |       
|Granted                      |  | (1,015,650                 | ) |  | 1,015,650           |   |  |                                  | 3.12  
|Exercised                    |  |                            |   |  | (894,339            | ) |  |                                  | 0.9321
|Canceled                     |  | 1,676,571                  |   |  | (1,676,571          | ) |  |                                  | 3.67  
|                             |  |                            |   |  |                     |   |  |                                  |       
|Balance at December 31, 2003 |  | 7,000,729                  |   |  | 4,469,531           |   |  | $                                | 4.44  
|                             |  |                            |   |  |                     |   |  |                                  |       



The following table
details outstanding and exercisable options as of December 31, 2003:



|                         |  |                  |  |                                           |  |                                 |       |                  |           |                                 |   |      
|------------------------ |  | ---------------- |  | ----------------------------------------- |  | ------------------------------- | ----- | ---------------- | --------- | ------------------------------- | - | -----
|                         |  | Outstanding      |  | Exercisable                              
|Range of Exercise Prices |  | Number of Shares |  | Weighted-AverageRemainingContractual Life |  | Weighted-Average Exercise Price |       | Number of Shares |           | Weighted-Average Exercise Price
|$1.25$1.50              |  | 535,903          |  | 8.56                                      |  | $                               | 1.38  |                  | 185,433   |                                 | $ | 1.39 
|1.58  2.45              |  | 626,203          |  | 8.03                                      |  |                                 | 2.27  |                  | 382,761   |                                 |   | 2.36 
|2.50  2.52              |  | 537,000          |  | 7.63                                      |  |                                 | 2.51  |                  | 304,382   |                                 |   | 2.50 
|2.58  3.00              |  | 177,500          |  | 8.70                                      |  |                                 | 2.71  |                  | 74,000    |                                 |   | 2.61 
|3.02  3.02              |  | 504,000          |  | 9.41                                      |  |                                 | 3.02  |                  | 0         |                                 |   | 0.00 
|3.03  3.10              |  | 453,817          |  | 8.07                                      |  |                                 | 3.10  |                  | 382,402   |                                 |   | 3.10 
|3.25  4.87              |  | 538,833          |  | 7.37                                      |  |                                 | 4.42  |                  | 316,118   |                                 |   | 4.62 
|5.12  5.25              |  | 718,400          |  | 7.30                                      |  |                                 | 5.21  |                  | 522,285   |                                 |   | 5.21 
|7.6239.62               |  | 375,875          |  | 6.03                                      |  |                                 | 17.87 |                  | 352,871   |                                 |   | 18.13
|46.0046.00              |  | 2,000            |  | 6.22                                      |  |                                 | 46.00 |                  | 1,875     |                                 |   | 46.00
|                         |  |                  |  |                                           |  |                                 |       |                  |           |                                 |   |      
|Total                    |  | 4,469,531        |  | 7.86                                      |  | $                               | 4.44  |                  | 2,522,127 |                                 | $ | 5.54 
|                         |  |                  |  |                                           |  |                                 |       |                  |           |                                 |   |      



As of December 31,
2003, 2002 and 2001, 2.5 million, 2.8 million, and 758,000 options were vested and exercisable with weighted average exercise prices of $5.54, $5.46 and $18.16 per share, respectively.



1999 Employee Stock Purchase Plan



In February 1999, the Board of Directors adopted, and in March 1999 the stockholders approved Marimbas 1999 Employee
Stock Purchase Plan (the 1999 Purchase Plan). The 1999 Purchase Plan initially provided for a total of 500,000 shares of common stock reserved for issuance. 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 2,417,424 shares of common stock were reserved for issuance under the 1999 Purchase Plan as of December 31, 2003, and an additional 500,000 shares of common stock were added to the reserve on January 1, 2004. The 1999 Purchase Plan
permits eligible employees to acquire shares of Marimbas common stock through periodic payroll deductions



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



of up to 10% of base cash compensation. No more than 4,000 shares may be purchased by each employee on any purchase date. Each offering period has 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. For the years ended December 31, 2003, 2002, and 2001a total of 366,662 shares at an average price of $1.36, 285,077 shares at an average price of $1.30 and 338,076 shares at an average price of $2.12, respectively, were issued under the
1999 Purchase Plan.



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, 2003 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 of its stock based awards. The fair value of Marimbas stock-based awards was estimated using the following assumptions:



|                        |  |                         |   |  |         |   |  |         |  
|----------------------- |  | ----------------------- | - |  | ------- | - |  | ------- | -
|                        |  | Year Ended December 31, |  
|                        |  | 2003                    |   |  | 2002    |   |  | 2001    |  
|Risk-free interest rate |  | 4                       | % |  | 4       | % |  | 4       | %
|Expected life           |  | 3 years                 |   |  | 3 years |   |  | 3 years |  
|Volatility              |  | 105                     | % |  | 114     | % |  | 126     | %
|Dividend yield          |  |                        |   |  |        |   |  |        |  



The weighted average
fair value of options granted was $3.14, $2.54, and $3.36 pre share for the years ended December 31, 2003, 2002 and 2001, respectively.



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



|                        |  |                         |   |  |         |   |  |         |  
|----------------------- |  | ----------------------- | - |  | ------- | - |  | ------- | -
|                        |  | Year Ended December 31, |  
|                        |  | 2003                    |   |  | 2002    |   |  | 2001    |  
|Risk-free interest rate |  | 4                       | % |  | 4       | % |  | 4       | %
|Expected life           |  | 2 years                 |   |  | 2 years |   |  | 2 years |  
|Volatility              |  | 105                     | % |  | 114     | % |  | 126     | %
|Dividend yield          |  |                        |   |  |        |   |  |        |  



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



8.    Income Taxes



Marimbas provision for income taxes for the year ended December 31, 2003 consists primarily of federal alternate minimum taxes, state income and
franchise taxes, and foreign taxes. For the years ended December 31 2002 and 2001, provision for income taxes consists primarily 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,   |        
|                                           |  | 2003           |         |   | 2002 |  
|                                           |  | (in thousands) |        
|Deferred tax assets:                       |  |                |         |   |      |   |         |  
|Net operating loss carryforwards           |  | $              | 16,588  |   |      | $ | 17,700  |  
|Research credit carryforwards              |  |                | 4,100   |   |      |   | 1,780   |  
|Tax basis over book basis                  |  |                | 2,480   |   |      |   |        |  
|Deferred revenue                           |  |                | 451     |   |      |   | 3,600   |  
|Capitalized research and development costs |  |                | 1,077   |   |      |   | 1,300   |  
|Other                                      |  |                | 597     |   |      |   | 1,960   |  
|                                           |  |                |         |   |      |   |         |  
|Total deferred tax assets                  |  |                | 25,293  |   |      |   | 26,340  |  
|Valuation allowance                        |  |                | (25,293 | ) |      |   | (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 decreased by $1.0 million
during 2003 as compared to an increase of $7.1 million during 2002.



As of December 31, 2003, Marimba had net operating loss carryforwards for federal income tax purposes of approximately $46.0 million, that expire in the years 2011 through 2023, and research and development tax credits of approximately $4.1
million, that expire in the years 2018 through 2023. 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.



Provision for Income Taxes



Income before taxes and the provision for taxes consisted of the following:



|                                 |  |                         |       |   |      |   |         |      |  |   |         |   
|-------------------------------- |  | ----------------------- | ----- | - | ---- | - | ------- | ---- |  | - | ------- | --
|                                 |  | Year Ended December 31, |      
|                                 |  | 2003                    |       |   | 2002 |   |         | 2001 | 
|Income (loss) before taxes:      |  |                         |       |   |      |   |         |      |  |   |         |   
|U.S.                             |  | $                       | 2,871 |   |      | $ | (10,974 | )    |  | $ | (11,443 | ) 
|NonU.S.                         |  |                         | 249   |   |      |   | 199     |      |  |   | 155     |   
|                                 |  |                         |       |   |      |   |         |      |  |   |         |   
|Total Income (loss) before taxes |  | $                       | 3,120 |   |      | $ | (10,775 | )    |  | $ | (11,288 | ) 
|                                 |  |                         |      
|Provision for taxes:             |  |                         |       |   |      |   |         |      |  |   |         |   
|Federal:                         |  |                         |       |   |      |   |         |      |  |   |         |   
|Current                          |  |                         | 10    |   |      |   |        |      |  |   |        |   
|Deferred                         |  |                         |      |   |      |   |        |      |  |   |        |   
|                                 |  |                         |       |   |      |   |         |      |  |   |         |   
|                                 |  |                         | 10    |   |      |   |        |      |  |   |        |   
|State:                           |  |                         |       |   |      |   |         |      |  |   |         |   
|Current                          |  |                         | 35    |   |      |   | 14      |      |  |   | 39      |   
|Deferred                         |  |                         |      |   |      |   |        |      |  |   |        |   
|Non U.S.:                        |  |                         |       |   |      |   |         |      |  |   |         |   
|Current                          |  |                         | 80    |   |      |   | 65      |      |  |   | 160     |   
|Deferred                         |  |                         |      |   |      |   |        |      |  |   |        |   
|                                 |  |                         |       |   |      |   |         |      |  |   |         |   
|Total State and Non-U.S.         |  |                         | 114   |   |      |   | 79      |      |  |   | 199     |   
|                                 |  |                         |       |   |      |   |         |      |  |   |         |   
|Total provision for taxes        |  |                         | 125   |   |      |   | 79      |      |  |   | 199     |   
|                                 |  |                         |       |   |      |   |         |      |  |   |         |   
|Effective tax rate               |  |                         | 4     | % |      |   | (0.7    | )%   |  |   | (1.8    | )%
|                                 |  |                         |       |   |      |   |         |      |  |   |         |   



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The difference between the tax provision at the statutory federal income tax rate and the tax
provision attributable to income before income taxes was as follows:



|                                                                                 |  |                         |   |  |       |    |  |       |   
|-------------------------------------------------------------------------------- |  | ----------------------- | - |  | ----- | -- |  | ----- | --
|                                                                                 |  | Year Ended December 31, |  
|                                                                                 |  | 2003                    |   |  | 2002  |    |  | 2001  |   
|Statutory federal income tax rate                                                |  | 34                      | % |  | 34    | %  |  | 34    | % 
|Increase (reduction) in rate resulting from state taxes, net of federal benefits |  | 0.7                     |   |  | (0.1  | )  |  | (0.2  | ) 
|Non-U.S. income taxed at different rates                                         |  | (0.1                    | ) |  |      |    |  | (1.0  | ) 
|Stock compensation deduction                                                     |  | (13.4                   | ) |  |      |    |  |      |   
|Other permanent differences                                                      |  | 2.4                     |   |  | (4.1  | )  |  | (7.1  | ) 
|Change in valuation allowance due to carry-over temporary differences            |  | (15.8                   | ) |  | 11.8  |    |  | 2.6   |   
|Current utilization of net operating loss                                        |  | (4.2                    | ) |  | (42.3 | )  |  | (30.1 | ) 
|Other (for federal alternate minimum taxes and prior year state taxes            |  | 0.4                     |   |  |      |    |  |      |   
|                                                                                 |  |                         |   |  |       |    |  |       |   
|Income tax rate                                                                  |  | 4                       | % |  | (0.7  | )% |  | (1.8  | )%
|                                                                                 |  |                         |   |  |       |    |  |       |   



9.    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 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. On June 30, 2003, a special committee of our Board of Directors
conditionally approved a proposed partial settlement with the plaintiffs in this matter. The settlement would provide, among other things, a release of Marimba and Marimbas individual defendants for the conduct alleged in the action to be
wrongful. Marimba would agree to undertake other responsibilities under the partial settlement, including agreeing to assign away, not assert and release certain potential claims Marimba may have against its underwriters. Any direct financial impact
of the proposed settlement is expected to be borne by Marimbas insurers. The special committee agreed to approve the settlement subject to a number of conditions, including the participation of a substantial number of other issuer defendants
in the proposed settlement, the consent of Marimbas insurers to the settlement, and the completion of acceptable final settlement documentation. Furthermore, the settlement is subject to a hearing on fairness and approval by the court
overseeing the litigation. In the event the settlement is not consummated, the defense of the litigation may increase our expenses and divert our managements attention and resources. Due to the inherent uncertainties of litigation, we cannot
accurately predict the ultimate outcome of the litigation, and any unfavorable outcome could have a material adverse impact on our business, financial condition and operating results.



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 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.



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MARIMBA, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



10.    Related Party Transaction



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.



11.    Restructuring



In April 2001, Marimba eliminated approximately 20% of its 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. 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 Marimba determined that all outstanding obligations had been settled.



In July 2002, Marimba approved a restructuring plan that 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. All
accrued expenses were paid out during 2002.



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|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|------- | ------------------------------------------------------------------------------------



None.



|ITEM 9A. | 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 as of December 31, 2003, concluded that our disclosure controls and procedures were effective for this purpose.



Changes in Internal Controls Over Financial Reporting



Internal control over financial reporting consists of control processes
designed to provide assurance regarding the reliability of financial reporting and the preparation of our financial statements in accordance with GAAP. To the extent that components of our internal control over financial reporting are included in
our disclosure controls, they are included in the scope of the evaluation by our chief executive officer and chief financial officer referenced above. There were no significant changes in our internal control over financial reporting during our last
fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART III



The information required
by this Part III will be provided in our definitive proxy statement for our 2004 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, 2003, 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 sections of the Proxy Statement entitled Proposal No. 1Election of Directors, Corporate Governance and
Section 16(a) beneficial Ownership Reporting Compliance.



Effective October 8, 2003, John R. Harding was appointed as a director of Marimba.



Effective January 1, 2004, Eric J. Keller was appointed as the Chairman of the Board of Marimba.



|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. | PRINCIPAL ACCOUNTING FEES AND SERVICES
|-------- | --------------------------------------



The information required by Item 14 is incorporated herein by reference from the section entitled Principal Accountant Fees and Services of the Proxy Statement.



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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 31 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, which is incorporated into Item 15 by reference, for the exhibits filed as part of or incorporated by reference
into this Form 10-K.



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



On October 28, 2003, we furnished a report on Form 8-K to report under Item 12 regarding our issuance of a press release announcing our financial results
for the quarter ended September 30, 2003 and the holding of a conference call regarding those financial results.



|
|



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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 15, 2004 |  | By:           |  | /s/ Andrew Chmyz                                                                                             
|                     |  |               |  | Andrew Chmyz Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting
Officer)



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 15, 2004
|                                            |  |                                                    
|PRINCIPAL FINANCIAL/ACCOUNTING OFFICER:     |  |                                                     |  |               
|                                            |  |                                                    
|/s/    ANDREW
CHMYZAndrew Chmyz             |  | Vice President, Finance and Chief Financial Officer |  | March 15, 2004



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|                                                |  |                                    |  |               
|----------------------------------------------- |  | ---------------------------------- |  | --------------
|                                                |  | Title                              |  | Date          
|ADDITIONAL DIRECTORS:                           |  |                                    |  |               
|                                                |  |                                   
|/s/    ERIC J.
KELLEREric J. Keller             |  | Chairman of the Board and Director |  | March 15, 2004
|                                                |  |                                   
|/s/    ANEEL
BHUSRIAneel Bhusri                 |  | Director                           |  | March 16, 2004
|                                                |  |                                   
|/s/    JOHN R.
HARDINGJohn R. Harding           |  | Director                           |  | March 15, 2004
|                                                |  |                                   
|/s/    RAYMOND J.
LANERaymond J. Lane           |  | Director                           |  | March 16, 2004
|                                                |  |                                   
|/s/    DOUGLAS J.
MACKENZIEDouglas J. Mackenzie |  | Director                           |  | March 15, 2004
|                                                |  |                                   
|/s/    KIM K.
POLESEKim K. Polese               |  | Director                           |  | March 15, 2004
|                                                |  |                                   
|/s/    STEPHEN E.
RECHTStephen E. Recht         |  | Director                           |  | March 15, 2004



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MARIMBA, INC.



EXHIBIT INDEX



|              |                     |                                                                                                                                          |      |                           |          |               |         |       |             |         |  |  
|------------- | ------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------- | -------- | ------------- | ------- | ----- | ----------- | ------- |  | -
|ExhibitNumber |                     |                                                                                                                                          |      | Incorporated by Reference |          | FiledHerewith
|              | Exhibit Description |                                                                                                                                          | Form |                           | File No. |               | Exhibit |       | Filing Date |        
|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     |         | 3.3   |             | 2/12/99 |  |  
|3.2           |                     | Amended and Restated Bylaws of the registrant, as adopted on September 10, 1999.                                                         |      | 10-K                      |          |               |         | 3.2   |             | 3/28/01 |  |  
|4.1           |                     | Form of certificate representing shares of the registrants common stock.                                                                |      | S-1                       |          | 333-72353     |         | 4.2   |             | 4/7/99  |  |  
|10.1+         |                     | Form of Indemnification Agreement entered into by the registrant with each of its directors and executive officers.                      |      | S-1                       |          | 333-72353     |         | 10.1  |             | 4/7/99  |  |  
|10.2+         |                     | 1999 Omnibus Equity Incentive Plan, as amended to date.                                                                                  |      |                           |          |               |         |       |             |         |  | x
|10.3+         |                     | Forms of agreements under the 1999 Omnibus Equity Incentive Plan.                                                                        |      | 10-Q                      |          |               |         | 10.1  |             | 11/1/01 |  |  
|10.4+         |                     | 1999 Employee Stock Purchase Plan, as amended to date.                                                                                   |      | 10-Q                      |          |               |         | 10.1  |             | 4/29/03 |  |  
|10.5+         |                     | International Employee Stock Purchase Plan, as amended to date.                                                                          |      | 10-Q                      |          |               |         | 10.2  |             | 4/29/03 |  |  
|10.6+         |                     | 1999 Non-Employee Directors Option Plan and form of agreement thereunder, as amended to date.                                            |      |                           |          |               |         |       |             |         |  | x
|10.7+         |                     | 2000 Supplemental Stock Plan and forms of agreements thereunder, as amended to date.                                                     |      | 10-K                      |          |               |         | 10.6  |             | 3/28/03 |  |  
|10.8+         |                     | Forms of Employee Incentive Agreement, entered into by the registrant with certain of its executive officers.                            |      | 10-K                      |          |               |         | 10.7  |             | 3/28/03 |  |  
|10.9+         |                     | 2003 Officers Incentive Plan.                                                                                                            |      | 10-Q                      |          |               |         | 10.1  |             | 7/29/03 |  |  
|10.10+        |                     | 2003 Officers Incentive PlanSales Vice Presidents.                                                                                      |      | 10-Q                      |          |               |         | 10.2  |             | 7/29/03 |  |  
|10.11+        |                     | Transition and Consulting Agreement between Kim Polese and the registrant dated November 14, 2003.                                       |      |                           |          |               |         |       |             |         |  | x
|10.12         |                     | Lease between ilicon, Inc. and the registrant dated February 27, 2000.                                                                   |      | 10-K                      |          |               |         | 10.17 |             | 3/27/00 |  |  
|10.13         |                     | Addendum 1 dated June 4, 2003 to Lease between ilicon, Inc. and the registrant dated February 27, 2000.                                  |      | 10-Q                      |          |               |         | 10.3  |             | 7/29/03 |  |  
|21.1          |                     | List of subsidiaries of the registrant.                                                                                                  |      |                           |          |               |         |       |             |         |  | x
|23.1          |                     | Consent of Ernst & Young LLP, Independent Auditors.                                                                                      |      |                           |          |               |         |       |             |         |  | x



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|              |                     |                                                                                   |      |                           |          |               |         |  |             |  |  |  
|------------- | ------------------- | --------------------------------------------------------------------------------- | ---- | ------------------------- | -------- | ------------- | ------- |  | ----------- |  |  | -
|ExhibitNumber |                     |                                                                                   |      | Incorporated by Reference |          | FiledHerewith
|              | Exhibit Description |                                                                                   | Form |                           | File No. |               | Exhibit |  | Filing Date | 
|24.1          |                     | Power of Attorney (see signature page).                                           |      |                           |          |               |         |  |             |  |  | x
|31.1          |                     | Section 302 Certification of Principal Executive Officer.                         |      |                           |          |               |         |  |             |  |  | x
|31.2          |                     | Section 302 Certification of Principal Financial Officer.                         |      |                           |          |               |         |  |             |  |  | x
|32.1          |                     | Section 906 Certification of Chief Executive Officer and President.               |      |                           |          |               |         |  |             |  |  | x
|32.2          |                     | Section 906 Certification of Vice President, Finance and Chief Financial Officer. |      |                           |          |               |         |  |             |  |  | x

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



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