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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



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FORM 10-K



FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.



(Mark One)

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



For the fiscal year ended January 31, 2003



OR



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



Commission File Number: 0-22369



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BEA SYSTEMS, INC.

(Exact Name of Registrant as
Specified in Its Charter)



|Delaware                                                       |  | 77-0394711                            
|-------------------------------------------------------------- |  | --------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I. R. S. Employer Identification No.)



2315
North First Street

San Jose, California 95131

(Address of Principal Executive Offices)



(408) 570-8000

(Registrants telephone
number, including area code)



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Securities registered under Section 12(b) of the Act:



None



Securities registered under Section 12(g) of the Act:

Common Stock

Preferred Stock Purchase Rights



---



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 Exchange Act Rule  12b-2). Yes x No ̈



The aggregate market value of the voting common stock held by non-affiliates of the registrant, computed by reference to the closing price
at which the common stock was sold on July 31, 2002, as reported on the Nasdaq National Market, was approximately $2,089,390,000. Shares of common stock held by each officer and director have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status does not reflect a determination that such persons are affiliates for any other purposes.



As of March 31, 2003, there were approximately 412,867,290 shares of the registrants common stock outstanding.



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DOCUMENTS INCORPORATED BY REFERENCE



Portions of the Proxy Statement for the Registrants 2003 Annual Meeting of Stockholders to be held July 23, 2003 are
incorporated by reference in Part III of this Form 10-K Report.



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BEA SYSTEMS, INC.



FORM
10-K



FOR THE FISCAL YEAR ENDED JANUARY 31,
2003



INDEX



|           |  |                                                                                        |  | Page
|---------- |  | -------------------------------------------------------------------------------------- |  | ----
|PART I     |  |                                                                                       
|          
|Item 1.    |  | Business                                                                               |  | 3   
|          
|Item 2.    |  | Properties                                                                             |  | 14  
|          
|Item 3.    |  | Legal Proceedings                                                                      |  | 14  
|          
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                    |  | 14  
|          
|PART II    |  |                                                                                       
|          
|Item 5.    |  | Market for Registrants Common Stock and Related Stockholder Matters                   |  | 15  
|          
|Item 6.    |  | Selected Financial Data                                                                |  | 15  
|          
|Item 7.    |  | Managements Discussion and Analysis of Financial Conditions and Results of Operations |  | 16  
|          
|Item 7A.   |  | Quantitative and Qualitative Disclosures about Market Risk                             |  | 44  
|          
|Item 8.    |  | Consolidated Financial Statements and Supplementary Data                               |  | 47  
|          
|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   |  | 84  
|          
|PART III   |  |                                                                                       
|          
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |  | 84  
|          
|Item 11.   |  | Executive Compensation                                                                 |  | 84  
|          
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                         |  | 84  
|          
|Item 13.   |  | Certain Relationships and Related Transactions                                         |  | 84  
|          
|Item 14.   |  | Controls and Procedures                                                                |  | 84  
|          
|PART IV    |  |                                                                                       
|          
|Item 15.   |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                       |  | 86  
|          
|Signatures |  | 89                                                                                    



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PART I



FORWARD-LOOKING INFORMATION



This Annual Report on Form 10-K includes
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the Securities Act) and Section 21E (this Annual Report) of the Securities and Exchange Act of 1934 (the Exchange
Act). All statements in this Annual Report other than statements of historical fact are forward-looking statements for purposes of these provisions, including any statements of the plans and objectives for future operations and any
statement of assumptions underlying any of the foregoing. Statements that include the use of terminology such as may, will, expects, plans, anticipates, estimates,
potential, or continue, or the negative thereof or other comparable terminology are forward-looking statements. Forward-looking statements include, without limitation:



| | (i) |  | in Item 1:  the statement regarding the future updates of WebLogic Workshop; the statement regarding the additions to direct sales and support
organizations and the building of an indirect distribution channel;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) |  | in Item 2:  the statement regarding the adequacy of existing facilities;
| | ---- |  | ------------------------------------------------------------------------



| | (iii) |  | in Item 5:  the statement regarding the investment of cash generated from operations and the payment of cash dividends;
| | ----- |  | -----------------------------------------------------------------------------------------------------------------------



| | (iv) |  | in Item 7:  statements regarding the impact of seasonality; statements regarding continuing to grow the business through acquisitions; the statement
regarding future costs associated with excess facilities; the statement regarding future amortization expenses; the statement regarding continuing to commit resources to product development and engineering; the statement regarding utilization of
accrued lease termination costs; the statement regarding the realizability of deferred tax assets; statements regarding the future of the land lease; the statement regarding satisfaction of cash requirements; statements regarding the effect of
certain accounting pronouncements; the statement regarding certain products and services continuing to account for majority of revenues; statement regarding continuing to recruit and train consultants and to seek distribution arrangements; the
statement regarding experiencing net losses; statements regarding the failure of certain markets to grow; the statement regarding increasing staff and improving financial reporting and controls; the statement regarding continuing to develop and
rollout information technology initiatives;
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (v) |  | in Item 8:  statements regarding effects of accounting pronouncements; the statement regarding utilization of accrued lease termination costs;
statements regarding adjustments in reserves; and statements regarding amortization.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These forward-looking statements involve risks and uncertainties, and it is important to note that BEAs actual results could
differ materially from those projected or assumed in such forward-looking statements. Among the factors that could cause actual results to differ materially are the factors detailed under the headings Managements Discussion and Analysis
of Financial Condition and Results of OperationsRisk Factors That May Impact Future Operating Results and Managements Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting Policies
and Estimates. All forward-looking statements and risk factors included in this document are made as of the filing date hereof, based on information available to BEA as of the filing date hereof, and BEA assumes no obligation to update any
forward-looking statement or risk factor. You should also consult the risk factors listed from time to time in the Companys Reports on Form 10-Q and 10-K.



ITEM 1.    BUSINESS.



See Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors That May Impact Future Operating Results for risk factors that may adversely affect the Company.



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Overview



BEA Systems, Inc. (BEA or the
Company) is the worlds leading application infrastructure software provider. Our WebLogic Enterprise Platformdelivers a highly reliable, scalable software infrastructure designed to bring new services to market quickly, to lower operational costs by automating processes, and to automate relationships with suppliers and distributors.
BEAs WebLogic Enterprise Platformincludes BEA WebLogic Server, a standards-based application server that serves as a platform for deployment and integration of enterprise-scale applications and Web services;
BEA WebLogic Integration, a standards-based platform for workflow, application integration, Web services and
business-to-business integration; BEA WebLogic Portal, a sophisticated rules-based infrastructure for rich
user interfaces to a wide variety of enterprise data; and BEA WebLogic Workshop, a rich, easy to use framework
for development and deployment of Web services and Java-based applications. Also included as integral parts of BEAs product line are BEA WebLogic JRockit, a highly flexible Java Virtual Machine (JVM), offering superior application
performance, reliability, and manageability for mission-critical Java applications running on Intel platforms; BEA Tuxedo, a proven, extremely reliable and scalable multi-language enterprise platform for enterprise applications; and BEA Liquid Data
for WebLogic, a tool for simplifying access and aggregation of distributed information, enabling real-time visibility from a variety of data sources. In addition, we offer associated customer support, training and consulting services. Our products
have a reputation for superior performance and high quality, evidenced by several awards and distinctions. For example, in its March 2002 annual Readers Choice Awards, Java Promagazine readers voted BEA WebLogic Server and BEA WebLogic
Portal as the number one product in their respective categories, BEA WebLogic Portal won a Codie award from the Software Industry Association in April 2002, and in April 2003, WebLogic Workshop 8.1 won the JOCT Product Excellence Award for Best Web
Services Tool presented by Software Development Magazine.



Our products have been adopted in a wide variety of industries, including telecommunications, commercial and investment banking, securities trading, government, manufacturing, retail, airlines, pharmaceuticals, package delivery, and
insurance. The BEA WebLogic Enterprise Platform provides an application infrastructure for building and deploying distributed, integrated information technology (IT) environments, allowing customers to integrate private client/server
networks, the Internet, intranets, extranets, virtual private networks, and mainframe and legacy systems as system components. Our products serve as a platform, integration tool or portal framework for applications such as billing, provisioning,
customer service, electronic funds transfers, ATM networks, securities trading and settlement, online banking, Internet sales, inventory management, supply chain management, enterprise resource planning, scheduling, logistics, and hotel, airline and
car rental reservations. BEA employs more than 3,000 people, is headquartered in San Jose, California, and has 81 offices in 34 countries. Licenses for our products are typically priced on a per-central processing unit basis, but we also offer
licenses priced on other bases.



Our products are
marketed and sold worldwide through a network of sales offices, the Companys Web site at (www.bea.com), as well as indirectly through distributors, value added resellers (VARs) and partnerships with independent software vendors
(ISVs), application service providers (ASPs), hardware original equipment manufacturers (OEMs) and systems integrators (SIs).



Industry Background



Over the past decade, the information systems of many large organizations have evolved from traditional mainframe-based systems to include
distributed computing environments. This evolution has been driven by the benefits offered by distributed computing, including lower incremental technology costs, faster application development and deployment, increased flexibility, and improved
access to business information. Despite these benefits, large-scale mission-critical applications that enable and support fundamental business processes, such as airline reservations, credit card processing, and customer billing and support systems,
have largely remained in mainframe environments. For several decades, the high levels of reliability, scalability, security, manageability and control required for these complex, transaction-intensive systems have been provided by application server



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functionality included in the mainframe operating system. Mainframe environments, however, suffer from several shortcomings, including
inflexibility, lengthy development and maintenance cycles, and limited, character-based user interfaces. Increasingly, these shortcomings are forcing many organizations to seek solutions, such as those offered by us, that will enable them to
overcome the limitations of distributed computing for mission-critical applications, while providing the robust computing infrastructure previously unavailable outside the mainframe environment.



In addition, many businesses are using the Internet as an
element of these infrastructures. Businesses use the Internet as a means of selling products to consumers and distributors, buying components or whole products from suppliers, opening new customer accounts, scheduling service installation, providing
account information and customer care, enabling reservations, funds transfers, bill payments and securities trading, and gathering information about customers and their buying habits. Many businesses also use intranets, extranets or virtual private
networks for functions such as inventory control, decision support, logistics, reservations, customer care and provisioning, both to support internal users and to make information and applications available to their suppliers or distributors.



As a result of investment in several different
technologies, enterprise IT organizations are characterized by complexity, heterogeneous environments, incompatible technologies and high cost of integration. Todays enterprises must manage the effects of these realities. The recent massive
investment in technology has significantly increased IT complexity. The Internet has altered users expectations of availability, cost, service and functionality. The current economic and IT spending climate highlights the need to leverage
existing assets and improve the return on investment for new initiatives.



Achieving the full benefits of distributed computing and Web services requires fully integrating external facing Web-based applications with existing enterprise applications, such as shipping, financial systems, inventory
control, billing, payroll, and general ledger, as well as placing new, internal facing applications onto Web-based systems. In order to fully integrate internal applications with Web-based systems, the internal applications must be electronically
linked to each other and must be built on a flexible, reliable, scalable, secure infrastructure that can run on, or connect to, the Web and support the demanding loads that result from heavy Internet traffic. The development of standards, such as
the Java 2 Enterprise Edition (J2EE), enabled the application development and deployment market to flourish, since individual developers, application companies and infrastructure companies could build compatible systems. Standards-based
approaches, such as those supported by BEA, have been more widely adopted than proprietary approaches in Web application development and deployment. Standards are emerging in the market for integrating existing applications, including the J2EE
Connector Architecture (JCA) and Java Messaging Services (JMS) and for providing Web services, through organizations such as the Web Services Interoperability Organization (WS-I), of which we are a co-founder. We
have adopted the standards-based approach to integration, and believe that the standards-based approaches to integration have substantial advantages over proprietary approaches.



Our primary product category has been application servers, represented by both our Tuxedo and WebLogic Server
products, which provide an important part of the infrastructure necessary for enterprise applications. BEA has leveraged its success in the application server market by expanding into complementary product categories, to meet a broader set of
customers application infrastructure needs. The application infrastructure market consists of the application server and related integration, portal, security, development and deployment, and operations, administration and management product
categories. BEA has developed significant features or product lines to address these markets and is in the process of developing additional features and products. BEAs product market focus today is selling a broad platform encompassing all
areas of application infrastructure tightly integrated into a single product, but also available for purchase as individual units. This allows us to service the application infrastructure market by enabling customers to buy just the modules needed
for a specific project but to easily unify and extend those modules into a platform as they deploy subsequent projects, or to buy the entire platform at once.



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Products



The BEA WebLogic Platform includes application infrastructure
technology from proven BEA products. WebLogic Platform 7.0 consists of several products: WebLogic Server, Tuxedo, WebLogic Integration, WebLogic Portal and WebLogic Workshop. These technologies are combined into a single installation, with a single
set of application programming interfaces (APIs), and other common features such as a single security framework and administration console. By combining these technologies and features, WebLogic Platform offers a single, unified,
easy-to-use infrastructure platform for development, deployment and integration of applications and Web services. WebLogic Platform also provides a natural migration path for current WebLogic Server, Integration or Portal users seeking to deploy
solutions that enhance and extend their existing environments via a single, integrated architecture.



BEA WebLogic Server:  BEA WebLogic Server 8.1, our current full production version of BEA WebLogic Server which became
generally available in March 2003, provides a platform for application development and deployment. WebLogic Server provides the presentation, business and information-access logic, security and management services required for high scalability,
high-availability mission-critical applications. WebLogic Server delivers key infrastructure functionality in several categories:



Broad Client Support.    WebLogic Server supports a wide variety of Web browsers, wireless
devices, ATMs, point of sale devices and others.



High Performance and Scalability.    WebLogic Server is built on a highly scalable, clustered architecture, delivering load balancing, connection pooling, caching and optimized Web server,
operating system, virtual machine and database connections.



High Availability.    WebLogic Server delivers high system availability to mission-critical business applications. WebLogic Server delivers automatic fail over at the Web,
business logic, and database tiers, allowing continued system availability despite failures of system components or disconnections of Web sessions. WebLogic Server uses clustering to take advantage of the redundancy of multiple servers to protect
against system failures. The same service can be deployed across multiple servers in the cluster, so that if one server fails, another can take over, increasing the availability of the application to users. A WebLogic Cluster consists of a number of
WebLogic Servers deployed on a network, coordinated with a combination of domain name service, Java naming and directory interface tree replication, in-memory session data replication, and WebLogic remote method invocation clustering enhancements.



Broad Deployment
Options.    WebLogic Server features tight integration with the leading databases, enterprise operating systems, Web servers, Web browsers, mobile devices and Java virtual machines (JVM). WebLogic Server supports
several operating systems, such as Sun Solaris, HP Unix, Aix, Windows, Red Hat Linux, IBM O/S 390 and IBM Linux/390. WebLogic Server is designed so that the underlying hardware, operating system and database are transparent to the application
the application is written to WebLogic Server and does not need to be modified based on the underlying hardware, operating system or database. As a result, it is easy to migrate applications built on WebLogic Server from one underlying technology to
another, or to deploy in a heterogeneous environment. For example, most WebLogic Server customers develop on Windows machines and deploy on Unix; some WebLogic Server customers deploy on several Unix servers, and use a mainframe as a system
component to provide extra capacity for peak loads or as a backup site.



J2EE Services.    WebLogic Server provides a robust implementation of the J2EE specification, including servlets, java server pages, enterprise java beans, java messaging
services, java database connection, java transaction API and others. J2EE services provide access to standard network protocols, database and messaging systems.



Web Services.    WebLogic Server seamlessly bridges J2EE and Web
services by enabling developers to automatically deploy Enterprise JavaBeans (EJBs) as Web services with virtually no additional programming. WebLogic Server supports key Web services standards, including Simple Object Access



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| | Protocol (SOAP), Web Services Description Language (WSDL) and Universal Description, Discovery and Integration
(UDDI).
| | ----------------------------------------------------------------------------------------------------------------------------



Application Management and Monitoring.    WebLogic Server provides a powerful, Web-based administration console that provides systems administrators with tools needed to deploy, configure and monitor
applications. Through the administration console, administrators can configure attributes of resources, deploy applications or components, monitor resource usage (such as server load, JVM memory usage, or database connection pool load), view log
messages, shut down servers, and other management actions. WebLogic Servers system management and monitoring capabilities are enhanced by complementary offerings from ISVs, such as BMC Software, Computer Associates, Hewlett-Packard, Mercury
Interactive, NEON Systems, TeaLeaf Technology, Tivoli Software and Wily Technology.



Security.    WebLogic Server provides a comprehensive security architecture encompassing access
control cryptography-based privacy and user authentication and authorization. WebLogic Server also utilizes user and group-level access control lists, realms, secure socket layer, digital certificates and other standards-based security measures.
Using these features, a developer can restrict access to WebLogic services through application logic when an application is being designed, or the system administrator can define how services are accessed after deployment. WebLogic Server can be
incorporated into a single-sign-on solution by accessing existing security information stores, or it can operate independently. WebLogic Servers security framework is enhanced by complementary offerings from ISVs such as Entegrity Solutions,
Entrust Technology, Netegrity, Oblix, NetIQ and RSA Security.



BEA Tuxedo.    Tuxedo is a platform for enterprise-scale applications built using the C, C++ or COBOL programming languages, and also supports CORBA and XML. The current version of Tuxedo, released in
February 2003, also supports Web services. Tuxedo handles the underlying complexities of distributed, cross-platform application development, such as distributed transaction management, high availability, load balancing, transaction queuing, message
queuing, event brokering and security. Tuxedo allows clients and servers to participate in a distributed transaction that involves coordinated updating of multiple databases. Tuxedos sophisticated transaction management helps ensure that all
databases are updated properly, or will roll-back the databases to their prior state, assuring that data integrity is maintained despite component failures within complex computer systems. Tuxedo constantly monitors system components for
application, transaction, network, and hardware failures. When a failure occurs, Tuxedo excludes the failed component from the system, manages any necessary recovery procedures, and re-routes messages and transactions to available systemsall
transparent to the end-user and without disruption in service. Tuxedo manages unexpected high demand by automatically spawning and terminating application services as the system load dictates. Tuxedo balances the workload among all the available
systems to minimize bottlenecks, whether the services are on the same component or spread across components. With data dependent routing, Tuxedo can route messages based on their context. This enables efficient transaction processing and higher
levels of performance. Tuxedo enables connection of Internet clients to Tuxedo resources and to mainframes, as well as connection to applications built on WebLogic Server. Tuxedo supports a wide variety of platforms, such as Sun Solaris, HP-UX, IBM
AIX, IBM OS/390, Microsoft Windows, Compaq Tru64, Red Hat Linux and Unisys SVR 4.



BEA WebLogic Workshop.    BEA WebLogic Workshop is an integrated development framework for business application developers on the BEA WebLogic Platform. This framework is
designed to accelerate software development by providing simplified abstractions to enable developers to build applications quickly and easily. WebLogic Workshop uses the concept of controls to simplify access to complex resources. For
each control, developers simply set properties, call methods and handle events, rather than programming to an API. This enables developers to build Java applications and Web services without requiring the developer to learn all the complexities of
those environments. WebLogic Workshop automates the complex coding required for Java and Web services, so the developer can focus on business logic and application features. WebLogic Workshop is designed to make J2EE easier to adopt for an estimated
9 million application developers worldwide who currently do not use Java, as well as simplifying tasks for an estimated 2 million professional developers. Future updates of BEA WebLogic Workshop are planned to extend this framework to BEA WebLogic
Portal and BEA



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WebLogic Integration, allowing developers to use the framework to build and deploy integration, business process management and portal
solutions.



BEA WebLogic
Integration.    WebLogic Integration offers a single solution that delivers application server, enterprise application integration (EAI), business process management, data integration and business-to business
integration functionality. WebLogic Integration supports the JCA, cXML, RosettaNet, EDI, XOCP and JMS standards, bringing a standards-based approach to the integration market. Based on WebLogic Server, WebLogic Integration allows EAI solutions that
support complex transactions, bi-directional communication between applications, synchronous or asynchronous communication between applications, high reliability, high availability, caching and the other features of WebLogic Server. These features
offer customers the ability to link separate enterprise systems, not only with each other but also with Web and wireless applications. Business process management, supported by WebLogic Integration, is the process of building rules that instruct a
computer system in the series of actions to take, or applications to update, when an event occurs. As business processes change, or new applications are integrated into the system, the system can be modified relatively easily by simply modifying the
business process rules, rather than modifying the applications themselves or the connections between applications. This allows customers to build broad, robust systems that are very flexible and easy to modify. Data integration features of WebLogic
Integration include data translation and data transformation, enabling customers to make broader use of data across the company and across multiple computing environments. WebLogic Integration also provides the infrastructure for business Web
Services, which are multi-party, transactional, highly automated, Web-based interactions between applications. WebLogic Integration supports business-to-business integration, so that all of its features are available for systems that are integrated
solely within a single organization, or between an organization and its suppliers, distributors or customers.



BEA WebLogic Portal.    Enterprise portals enable a user to aggregate data and application functionality from
several sources into a single screen or user interface. WebLogic Portal provides a framework for building enterprise portals, for internal, customer-facing or business-to-business purposes. Based on WebLogic Server for availability, transactions,
security and other features, WebLogic Portal also makes it possible for an enterprise to deploy all applications with a common, personalized interface for customers, partners and employees, simplifying and improving their experience while lowering
administrative costs and centralizing customer utilization information. WebLogic Portal includes an extensive set of features and enabling technologies, including portal configuration and administration tools, a unique rules-based entitlement
engine, role-based personalization, reusable presentation software components, and a standards-based framework that supports JCA and Web Services.



BEA Liquid Data for WebLogic.    BEA Liquid Data for WebLogic is a virtual data access and aggregation product
for information visibility that supports a real-time unified view of disparate enterprise data. It provides a cost-effective, standard way to rapidly aggregate and expose logical views from any number of heterogeneous sources, including Web
services, databases, flat files, XML files, applications and Web sites. This enables developers to re-use information across applications with moving or dealing with the complexity of the underlying data. It provides highly optimized, real-time data
access and data processing inside and outside firewalls, regardless of source location, format, or type. Unlike alternative solutions that require the developer to change the datas format or location, BEA WebLogic for Liquid Data allows
developers to access the data in its existing state, reducing the complexity of the project and reducing the risk of accessing inconsistent or old data. Once accessed and aggregated, the data can be simply viewed by an end user, either internally
(such as a sales representative or marketing executive) or externally (such as a supplier of component parts or an online banking customer), or the data can be manipulated by an application or analytics system.



BEA WebLogic JRockit.    BEA
WebLogic JRockit is a Java virtual machine (JVM) designed for use in enterprise, server-based applications. A JVM is a layer of software whose primary role is to translate software code such as application and application server code
into bytecode that is usable by the servers chip and input/output systems. Traditional JVMs on the market today originated with desktop computer environments,



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supporting a single user. These JVMs have been modified over time to address server environments, which support multiple users and
applications running on multiple networked machines. BEA WebLogic JRockit was designed from scratch to address server-based applications, which have very different requirements than desktop computer based applications. BEA WebLogic JRockit is
designed to provide high reliability, scalability, and high performance for server-based applications. In contrast to desktop applications, server-based applications tend to communicate via a network, maintain a large number of active threads
representing a large number of concurrent user sessions, and have long running times. BEA WebLogic JRockit combines code generation, memory management, thread management and native methods, combining the best optimization techniques in these four
different areas for efficient operation. BEA WebLogic JRockit also provides a framework through which the Java programmer can easily profile and tune the JVM to improve application performance. BEA WebLogic JRockit is designed to be as platform
independent as possible, making it easier to move applications to different operating systems and computer chips.



Customers



The total number of customers and end users of our products and solutions is greater than 13,500 worldwide. Our target end-user customers
are organizations with sophisticated, high-end information systems with numerous, often geographically-dispersed users and diverse, heterogeneous computing environments. Typical customers are mainframe-reliant, have large-scale client/server
implementations that handle very high volumes of business transactions, or have Web-based applications with large and unpredictable usage volumes. No customer accounted for more than 10 percent of total revenues in any of the fiscal years 2003, 2002
or 2001.



A representative list of BEA customers
includes:



Financial Services and
Insurance:  Abbey National, AGF Asset Management, AXA, BACS, Bank of New York, BankOne, Barclays Global Investors, Bayerische Hypo-und Vereinsbank, Bear Stearns, BNP Paribas, Capital One, Central Depositary Bangladesh, Charles Schwab,
China Construction Bank, CIBC, Citibank, CitiStreet, Cortal Bank, Credit Suisse Group, Daiwa Securities America, Delta Dental, Depository Trust Company, Deutsche Bank, Deutsche Leasing, Discovery Europe, E*Trade, Fannie Mae, Ford Motor Credit,
Franklin Templeton, German Stock Exchange, Huntington National Bank, JP Morgan Chase, Kookmin Bank, Lehman Brothers, Marsh & McLennan, MasterCard International, Merrill Lynch, Mizuho Securities, Morgan Stanley Online, Nasdaq, National Stock
Exchange of India Ltd, Nordea, Northern Trust Bank, Oppenheimer Funds, ORIX Capital Markets, Pacific Health Care Systems, Prudential Group, Sallie Mae, Samsung Securities, Sanpaolo Wealth Management, Shanghai Finance Bureau, Societe Generale, SSP
Financier Group, SunGard Brokerage Systems, SWIFT, The Hartford, Thomson Financial Services, TIAA-CREF, Trust Company of the West, Union des Societes du Credit Cooperatif, United Overseas Bank (Singapore), Wells Fargo, and Zions Bank.



Telecommunications:  Alltel,
AT&T, AT&T Wireless, BellSouth, British Telecommunications, Cesky Telecom, China Railway Communication, China Telecom, ChungHwa Telecom, Cingular Wireless, Hutchinson Whampoa 3G, Intec Telecom Systems, Netia Telekom SA, Nextel, NTT DoCoMo,
Orange PCS Ltd., SK Telecom, Sprint, Sprint PCS, Telecom Italia Mobile, Telia Mobile, Telstra, United States Cellular, Verizon, Virgin Mobile USA, and Vodafone.



Services:  American Airlines, American President Lines, AOL/Time Warner, Bertelsmann,
British Airways, Budget Rent a Car, Cendant Corporation, China Post, CoxInteractive Media, Delta Airlines, DHL, DirecTV, Edmunds.com, FedEx, Financial Times, Finnish Rail, GSI Commerce Solutions, Hotwire, Hyatt Corporation, Infosys Technologies,
Instinet, Integradora de Services Operativos, Intercall, JB Hunt Transport Services, Knight Ridder, La Mondiale, Marsh Corporate Services, NCS Pearson, Nielsen Media Research, Northwest Airlines, Qantas Airways, Reuters, Sabre, Singapore Airlines,
Sony, Starwood Hotels, United Airlines, Universal Music Group, Virgin Atlantic Airways, Vivendi Universal Publishing Services, and Westech Information.



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Manufacturing:  Applied Materials, BAE Systems, BMW, BP Amoco, Dell, DuPont, GE Power Systems, Harley-Davidson Motor, Honeywell International, Johnson & Johnson, KLA-Tencor, Lenscrafters, Lockheed Martin,
McKesson HBOC, Medtronics, Moet et Chandon, Motorola, NEC, Network Appliance, Northrup Grumman, Pentax, PepsiAmericas, Siemens AG, Texas Instruments, Toshiba American Business Solutions, Toyota Motor Sales, TRW, and Vattenfall.



Retail/Wholesale:  Abt Electronics,
Albertsons, Amazon.com, Best Buy, Circuit City Stores, Columbia House, JM Family Enterprises, Longs Drug Stores, New York Mercantile Exchange, NuSkin Enterprises, Victorias Secret, and Wendys International.



Government:  EUCARIS, Federal Portal Belgium,
Italian Ministry of Finance, Musee du Louvre, NASA Peer Review, National Education Association, Republic of Ireland, Smithsonian Institution, UK Companies House, UK Employment Service, UK HM Customs and Excise, UK Inland Revenue, US Air Force, US
Bureau of Labor and Statistics, US Central Intelligence Agency, US Defense Information Systems Agency, US Defense Logistics Agency, US Federal Bureau of Investigation, US General Services Administration, and US National Security Agency.



Chemicals and
Pharmaceuticals:  3M Health Information Systems, Abbott Laboratories, Astrazeneca Pharmaceutical, Blue Cross/Blue Shield, Boehringer Ingelheim Pharma, Fujitsu Social Science Laboratory, Genentech, GlaxoSmithKline, Incyte Genomics,
Ortho-McNeil Pharmaceutical, Pfizer, PSS World Medical, Sapient Health Network, and Shell Trading.



Sales and Marketing



Our sales strategy is to pursue opportunities worldwide within large organizations and organizations that are establishing e-businesses, through our direct sales, services and technical support
organizations, complemented by indirect sales channels such as hardware OEMs, ISVs, ASPs and SIs. We currently intend to continue to add to our direct sales and support organizations in major worldwide markets, as well as to invest in building our
indirect distribution channel through relationships with SIs, packaged application developers and others.



Direct Sales Organization.    We market our software and services primarily through our direct sales
organization. As of January 31, 2003, we had approximately 2,017 employees in consulting, training, sales, support and marketing, including over 530 quota-bearing sales representatives, located in 81 offices in 34 countries. We are currently
investing in building our direct sales capacity by hiring experienced enterprise sales and technical sales support personnel. The Company typically uses a consultative, solution-oriented sales model that entails the collaboration of technical and
sales personnel to formulate proposals to address specific customer requirements, often in conjunction with hardware, software and services providers. Because the Companys solutions are typically used as a platform or integration tool for
initiatives and applications that are critical to a customers business, the Company focuses its initial sales efforts on senior executives and information technology department personnel who are responsible for such initiatives and
applications.



Targeting
Developers.    We also market our software directly to system and application developers. We make available trial developer copies of many of our products available for free download over our Web site. In addition, we
periodically provide developer training and trial licenses through technical seminars in various locations worldwide. We also maintain a developers Web site, with more than 500,000 registered developers as of the end of February 2003. The
developers Web site is designed to create a community among developers who use our products, providing a forum to exchange technical information and sample code, as well as feedback to us on our products and industry directions that we should
pursue. With the introduction of BEA WebLogic Workshop, we believe that the addressable developer market for our products is now approximately 11 million developers, compared to an addressable market of approximately 2 million developers prior to
WebLogic Workshop.



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Strategic
Relations.    An important element of our sales and marketing strategy is to expand our relationships with third parties and strategic partners to increase the market awareness, demand and acceptance of BEA and our solutions.
Partners have often generated and qualified sales leads, made initial customer contacts, assessed needs, recommended use of BEA solutions prior to our introduction to the customer, and introduced BEA at high levels within the customer organization.
A strategic partner can provide customers with additional resources and expertise, especially in vertical or geographic markets in which the partner has expertise, to help meet customers system definition and application development
requirements. Types of strategic partnerships include:



System platform companies.    Our partners often act as resellers of BEA solutions, either under the BEA product name or integrated with the platform vendors own software products, or
recommend BEA products to their customers and prospects. In July 2001, we announced a significant relationship with Intel, under which BEA and Intel are jointly working to optimize BEA technology on Intel chip sets.



Packaged application software
developers.    We license our software to packaged application software vendors. These vendors build on BEA software as an infrastructure for the applications they supply, giving these applications improved reliability,
increased scalability and portability across all hardware, operating systems and databases on which the BEA platform runs. Customers can also easily integrate other applications built using our solutions with these packaged applications.



Application service
providers.    ASPs buy and maintain the hardware, infrastructure software and application software necessary for Web sites and e-businesses, and rent access to these systems to their customers, primarily small and
medium-sized businesses, who do not have the resources or the desire to buy and maintain these systems themselves. We license our software to ASPs who use it as an exclusive or optional feature in their systems.



Systems integrators and independent
consultants.    SIs often refer their customers to BEA, utilize us as a subcontractor in some situations, and build custom solutions on our products. We also work cooperatively with independent consulting organizations, often
being referred to prospective customers by services organizations with expertise in high-end transactional applications.



Distributors.    To supplement the efforts of our direct sales force, BEA uses software
distributors to sell our products in Europe, Asia, Latin America and, to a lesser degree, North America.



Channel partners include leading SIs, hardware OEMs, application ISVs, tools and technology ISVs, independent business
consultants and others.



Services.    We believe that our services organization plays an important role in facilitating initial license sales and enabling customers to successfully architect, design, develop, deploy and manage
systems and applications. Our services revenue comes from customer support or maintenance fees, as well as fees for consulting and training services.



Customer Support.    Fees for customer support are generally charged on an annual subscription
basis, and vary by the level of support the customer chooses. BEA offers support via telephone, Web, e-mail and fax. In addition, customer support fees entitle the customer to certain product upgrades and maintenance updates. BEA support is
available 24 hours per day, with support centers located around the world. BEA offers enhanced, mission-critical support, which features priority call response, personalized case monitoring and escalation management, release/patch management
planning and migration assessment planning. In addition, BEA offers customized support options, allowing the customer to tailor BEAs support offerings to their specific needs.



Consulting Services.    Fees for consulting services are generally
charged on a time and materials basis and vary depending upon the nature and extent of services to be performed. Our services organization works directly with end user customers and also with SIs, to provide a variety of consulting services.
Consulting services we offer include application development, application migration, integration validation, architectural assessment and architectural validation.



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Education Services.    We offer introductory and advanced classes and training programs. We also offer a certification program, and we are a sponsor member of jCert. The jCert initiative was created to
establish and promote industry standards for certification of enterprise developers using Java technology. Our training and certification programs are offered at our offices, customer sites and training centers worldwide, as well as over the
Internet. These programs cover the use of BEA products and are designed for end user customers, SIs and packaged application developers. In addition, we offer a mentoring program as a follow on to our training programs or as an approach to
customized training. Fees for education services are generally charged on a per-class or per-engagement basis.



Marketing.    Our marketing efforts are directed at broadening the demand for BEA products and solutions by
increasing awareness of the benefits of using our products to build mission-critical distributed and Web-based applications. Marketing efforts are also aimed at supporting our worldwide direct and indirect sales channels. Marketing personnel engage
in a variety of activities including conducting public relations and product seminars, issuing newsletters, sending direct mailings, preparing sales collateral and other marketing materials, coordinating the Companys participation in industry
trade shows, programs and forums, and establishing and maintaining relationships with recognized industry analysts and press. Our senior executives are frequent speakers at industry forums in many of the major markets we serve.



Competition



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



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



Microsoft has announced that it intends to include certain application server and integration functionality in its .NET initiative. Microsofts .NET initiative is a proprietary programming environment that competes with
the



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



In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of
their current and prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could materially adversely affect our
ability to sell additional software licenses and maintenance, consulting and support services on terms favorable to us. Further, competitive pressures could require us to reduce the price of our products and related services, which could materially
adversely affect our business, operating results and financial condition. We may not be able to compete successfully against current and future competitors and any failure to do so would have a material adverse effect upon our business, operating
results and financial condition.



Product Development



Our total research and development expenses
were approximately $132.8 million, $120.9 million and $89.2 million in fiscal 2003, 2002 and 2001, respectively. Research and development expenses consist primarily of salaries and benefits for software engineers, contract development fees,
costs of computer equipment used in software development, information technology and facilities expenses. The fiscal 2002 and 2003 year-over-year increases in research and development expenses were due to increases in product development personnel
and expenses associated with the development and release of several new products and product versions, as well as the acquisition of several small companies engaged in research and development activities during fiscal 2002 and fiscal 2003. We
believe that a significant level of research and development is required to remain competitive and we expect to continue to commit substantial resources to product development and engineering in future periods.



Intellectual Property and Licenses



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



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protection of our proprietary rights may not be adequate and our competitors could independently develop similar technology, duplicate our
products, or design around patents and other intellectual property rights that we hold.



Employees



As of
January 31, 2003, we had approximately 3,063 full-time employees, including 657 in research and development, 2,017 in consulting, training, sales, support and marketing and 389 in administration. None of our employees are represented by a collective
bargaining agreement, and we have never experienced any work stoppage. We consider our relations with our employees to be good.



Availability of this Report



Our Internet address is www.bea.com. On our Investor Information page on this web site we post the following filings as soon as
reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission: our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings on our Investor Information web page are available to be viewed on this page free of charge. Information contained on our web site
is not part of this annual report on Form 10-K or our other filings with the Securities and Exchange Commission. We assume no obligation to update or revise any forward-looking statements in this annual report on Form 10-K, whether as a result of
new information, future events or otherwise, unless we are required to do so by law. A copy of this annual report on Form 10-K is available without charge upon written request to: Investor Relations, Renee Sarrail, BEA Systems, Inc., 2315 North
First Street, San Jose, California, 95131.



ITEM 2.    PROPERTIES.



Our corporate offices and those related to product development, corporate marketing and administrative functions, totaling approximately 224,000 square feet, are located in San Jose, California under leases expiring in 2008.
We also lease office space in various locations throughout the United States for sales, support and development personnel, and BEAs foreign subsidiaries lease space for their operations. We own substantially all of the equipment used in our
facilities. In the first quarter of fiscal 2002, we entered into a lease agreement for the lease of approximately 40 acres of land adjacent to our San Jose, California offices upon which we plan to have constructed additional corporate offices and
research and development facilities that we would lease under operating leases. We believe our existing facilities together with those we plan to lease upon completion of construction of the San Jose facility will be adequate to meet our anticipated
needs for the foreseeable future. See Note 16 of the Notes to our Consolidated Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of OperationsRisk Factors that May Impact Future
Operating ResultsWe have a real estate leasing structure, which could result in substantial charges to our consolidated statement of operations, a substantial increase in liabilities on our consolidated balance sheet and substantial cash
payments, for information regarding and risks related to the Companys lease agreements and obligations.



ITEM 3.    LEGAL PROCEEDINGS.



We are not currently party to any material legal proceedings, however we are periodically subject to legal proceedings and claims that arise in the ordinary course of our business. While management
currently believes the amount of ultimate liability, if any, with respect to these actions will not materially affect the financial position, results of operations, or liquidity of the Company, the ultimate outcome of any litigation is uncertain.
Were an unfavorable outcome to occur, or if protracted litigation were to ensue, the impact could be material to the Company.



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



No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2003.



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PART II



ITEM 5.    MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS.



Since our initial public offering on April 11, 1997, the Companys common stock has traded on the Nasdaq National Market under the
symbol BEAS. According to the Companys transfer agent, the Company had approximately 964 stockholders of record as of March 31, 2003.



The following table sets forth the high and low sales prices reported on the Nasdaq National Market for BEA common stock for the periods
indicated:



|                                    |  | Low |       | High
|----------------------------------- |  | --- | ----- | ----
|Fiscal year ended January 31, 2003: |  |     |       |     
|                                   
|Fourth Quarter                      |  | $   | 7.80  |     
|Third Quarter                       |  |     | 4.59  |     
|Second Quarter                      |  |     | 5.48  |     
|First Quarter                       |  |     | 10.04 |     
|                                   
|Fiscal year ended January 31, 2002: |  |     |       |     
|                                   
|Fourth Quarter                      |  | $   | 11.38 |     
|Third Quarter                       |  |     | 8.94  |     
|Second Quarter                      |  |     | 19.01 |     
|First Quarter                       |  |     | 20.19 |     



The
Company has never declared or paid any cash dividends on its common stock. The Company currently intends to invest cash generated from operations, if any, to support the development of its business and does not anticipate paying cash dividends for
the foreseeable future. Payment of future dividends, if any, will be at the discretion of the Companys Board of Directors.



On each of December 19, 1999 and April 24, 2000, the Company effected a two-for-one common stock split in the form of a stock dividend.
All common stock share information and per share amounts in this Annual Report on Form 10-K have been retroactively adjusted to reflect the effects of the stock splits.



ITEM 6.    SELECTED FINANCIAL DATA.



The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations appearing elsewhere in this Annual Report on Form 10-K.



|                                                        |  | As of or for the fiscal year ended January 31, |          
|------------------------------------------------------- |  | ---------------------------------------------- | ---------
|                                                        |  | 2003(5)                                        |          
|                                                        |  | (in thousands, except per share data)          |          
|Total revenues                                          |  | $                                              | 934,058  
|Total asset impairment charges(2)                       |  |                                                |         
|Total facilities consolidation and severance charges(3) |  |                                                |         
|Net income (loss)                                       |  |                                                | 83,876   
|Net income (loss) per share:                            |  |                                                |          
|Basic                                                   |  |                                                | 0.21     
|Diluted                                                 |  |                                                | 0.20     
|Total assets                                            |  |                                                | 1,809,959
|Long-term obligations(4)                                |  |                                                | 554,215  

---

|(1) |  | Restated to include the results of Leader Group, Inc. and WebLogic, Inc., which were acquired and recorded as pooling-of-interests transactions.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) |  | Total asset impairment charges of $80,150 recorded in fiscal 2002 were related to the impairment of certain acquired intangible assets and goodwill, $7,082 of which
was recorded as a cost of revenues and $73,068 of which was recorded as operating expenses.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Of the total facilities consolidation and severance charges of $40,453 recorded in fiscal 2002, $2,461 was recorded as cost of revenues and $37,992 was recorded as
operating expenses.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Excludes any long-term deferred tax liabilities.
|--- |  | ------------------------------------------------

|(5) |  | The Company ceased the amortization of goodwill at the start of the year ended January 31, 2003. See Note 5 of the Notes to Consolidated Financial Statements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



No cash dividends have been
declared or paid and no redeemable preferred stock was outstanding in any period presented.



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



Overview



BEA is the worlds leading application infrastructure software provider. Our WebLogic Enterprise Platformdelivers a highly reliable, scalable software infrastructure for customers to bring new services to market quickly, to lower operational
costs by automating processes, and to automate relationships with suppliers and distributors. The BEA WebLogic Enterprise Platformconsists of BEA WebLogic Server, the worlds leading J2EE application server, which includes security, management, development and deployment features, as well as support for Web services protocols; BEA WebLogic
Integration, a standards-based solution for application integration, business process management,
business-to-business integration and Web services; BEA WebLogic Portal, an infrastructure for building and
deploying robust personalized enterprise portals; BEA WebLogic Workshop, an integrated development framework
for J2EE applications and Web services; BEA JRockitJVM, a server-centric Java Virtual Machine (JVM); and BEA
Liquid Data for WebLogic, a solution for providing information integration and data aggregation from various sources in distributed computer systems. Our products are marketed and sold worldwide primarily through our direct sales force, and also
through systems integrators (SIs), independent software vendors (ISVs) and hardware vendors that are our partners and distributors. Our products have been adopted in a wide variety of industries, including telecommunications,
commercial and investment banking, securities trading, government, manufacturing, retail, airlines, package delivery, pharmaceuticals and insurance. The BEA WebLogic Enterprise Platform provides application infrastructure for building and deploying
distributed, integrated information technology (IT) environments, allowing customers to integrate private client/server networks, the Internet, intranets, extranets, virtual private networks, and mainframe and legacy systems as system
components. Our products serve as a platform, integration tool or portal framework for applications such as billing, provisioning, customer service, electronic funds transfers, ATM networks, securities trading and settlement, online banking,
Internet sales, inventory management, supply chain management, enterprise resource planning, scheduling and logistics, and hotel, airline and rental car reservations. Licenses for our products are typically priced on a per-central processing unit
basis, but we also offer licenses priced on other bases.



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



Investment in Integration Technologies.    In the spring of 2001, we announced a new focus on developing products to address the integration market. To address this market,
we introduced BEA WebLogic Integration in July 2001, and a series of BEA branded, sold and supported adapters in August 2002. BEA also partners with complementary technology providers to supplement its integration solutions. In addition, we continue
to develop



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further integration technologies and features, both inside the WebLogic Integration product and in the other elements of the WebLogic
Enterprise Platform. New versions of various BEA products are in beta from time to time. Our strategy for the integration market is characterized by three approaches that we believe are different than how the market was previously being addressed:
(i) a standards-based approach, built on the J2EE messaging and connectivity standards, in contrast to other vendors proprietary approaches; (ii) using the application server to provide essential capabilities and underlying services, such as
scalability and transaction processing, in contrast to the messaging approaches offered by most other integration vendors; and (iii) providing Web services support, business process management, business to business integration, application
integration, information integration, development tools and a run-time framework all in a single tightly integrated platform product, rather than providing them as separate products with separate tools and separate deployment frameworks. Some of our
competitors in the integration market have recently announced a variety of initiatives similar to one or more of these approaches.



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



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



Critical Accounting Policies and Estimates



Our financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, which require us to make estimates and judgments that significantly affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. We regularly evaluate these estimates, and believe that the following accounting policies are critical to understanding the Companys historical and future performance, as these policies relate to the more significant
areas involving our judgments and estimates: revenue recognition, allowance for doubtful accounts, income taxes, facilities consolidation charges, intangible assets and considerations regarding our land lease. We base these estimates and judgments
on historical experience and on assumptions that are believed by management to be reasonable under the circumstances. Actual results may differ from these estimates, which may impact the carrying values of assets and liabilities.



Our management has reviewed our critical accounting policies,
our critical accounting estimates, and the related disclosures with our Audit Committee. These policies, and our procedures related to these policies, are described in detail below. In addition, please refer to Note 1 of the Notes to Consolidated
Financial Statements for a further description of our accounting policies.



Revenue Recognition.    Our revenue recognition policy is significant because our revenue is a key component of our results of operations. We follow detailed guidelines
discussed below and in Note 1 of the Notes to our Consolidated Financial Statements. We recognize revenue in accordance with generally accepted accounting principles, which have been prescribed for the software industry. The accounting rules related
to revenue recognition are complex and are affected by interpretations of the rules and an understanding of industry practices, both of which are subject to change. Consequently, the revenue recognition accounting rules require management to make
significant judgments.



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For software
license sales that do not require significant modification or customization of the underlying software, we recognize revenue when (i) there is evidence of an arrangement, (ii) we have delivered the products or performed the services, (iii) the
payment is considered to be fixed or determinable and not subject to refund or adjustment and (iv) collection is probable. The majority of our license revenues are recognized in this manner.



We do not record revenue on sales to customers whose ability
to pay is in doubt at the time of sale. Rather, revenue is recognized from these customers as cash is collected. The determination of a customers ability to pay requires significant judgment, including an assessment of their financial
condition, past payment history, business and industry outlook and other factors. In addition, revenues in certain countries or regions where the collection risk is generally considered to be high, such as Latin America, Korea and China, are
recognized on a cash basis. The judgments that we make regarding collection risk for specific customers, countries or regions can materially impact the timing of recognition of revenues. Revenue arrangements with extended payment terms are generally
considered not to be fixed or determinable and, accordingly, we do not generally recognize revenue on these arrangements until the customer payment becomes due. The determination of whether extended payment terms are fixed or determinable requires
significant judgment by management, including assessing such factors as the past payment history with the individual customer and evaluating the risk of concessions over an extended payment period. The determinations that we make can materially
impact the timing of recognition of revenues.



Allowance for Doubtful Accounts.    We record allowances for estimated losses resulting from the inability of our customers to make required payments. We assess the credit worthiness of our customers based
on multiple sources of information and analyze such factors as our historical bad debt experiences, industry and geographic concentrations of credit risk, current economic trends and changes in customer payment terms. This assessment requires
significant judgment. If the financial condition of our customers were to worsen, additional allowances may be required, resulting in future operating losses that are not included in the allowance for doubtful accounts at January 31, 2003. To date,
our actual credit losses have been within our expectations.



Income Taxes.    Realization of our deferred tax assets is primarily dependent on future taxable income, the timing and amount of which are uncertain in part due to the potential impact of future stock
option deductions. Accordingly, a valuation allowance, in an amount equal to the net deferred tax assets dependent upon future taxable income at January 31, 2003 and 2002 has been established to reflect these uncertainties. As of January 31,
2003, the unrecognized deferred tax assets are primarily attributable to accumulated stock option tax deduction benefits. Accordingly, in the event that we were to determine that we would be able to realize our deferred tax assets in the future in
excess of the recorded amount, an adjustment to the net deferred tax asset would be credited to additional paid-in-capital when realized, rather than taken as a reduction of income tax expense.



Facilities Consolidation
Charges.    In fiscal 2002, we recorded a charge of $20.0 million for our estimated future lease commitments on excess facilities, net of estimated future sublease income. In determining the amount of the facilities
consolidation charge, we estimated such factors as future vacancy rates, the time required to sublet properties, sublease rates and the willingness of landlords to negotiate termination fees. These estimates are reviewed on a quarterly basis and
would be revised if estimated future vacancy rates and sublease rates vary from our original estimates. The remaining balance of accrued future lease commitments on excess facilities, net of estimated future sublease income, is approximately $12.6
million as of January 31, 2003. To the extent that our new estimates vary adversely from our original estimates, we may incur additional losses that are not included in the accrued balance at January 31, 2003. Conversely, unanticipated improvements
in vacancy rates or sublease rates, or termination settlements for less than our accrued amounts, may result in a reversal of a portion of the accrued balance and a benefit on our statement of operations in a future period. Such reversals would be
reflected as a credit to facilities consolidation charges. The maximum future cost associated with these excess facilities, assuming that no future sublease income is realized on these properties, other than for subleases that have been executed
prior to January 31, 2003, and assuming that the landlords are unwilling to negotiate early lease termination arrangements, is estimated to be approximately $23.0 million, which exceeds the accrued balance at January 31, 2003 by $10.4 million.



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Intangible
Assets and Goodwill.    We record intangible assets when we acquire other companies. The cost of an acquisition is allocated to the assets and liabilities acquired, including identified intangible assets, with the remaining
amount being classified as goodwill. Certain intangible assets such as purchased technology and non-compete agreements are amortized over time, while in-process research and development is recorded as a one-time charge on the acquisition date.
Goodwill is not amortized but rather it is periodically assessed for impairment. The allocation of the acquisition cost to intangible assets and goodwill therefore has a significant impact on our future operating results. The allocation process
requires the extensive use of estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets. Further, when impairment indicators are identified with respect to previously recorded intangible
assets, the values of the assets are determined using discounted future cash flow techniques, which are based on estimated future cash flows. Significant management judgment is required in the forecasting of future operating results which are used
in the preparation of projected discounted cash flows and should different conditions prevail, material write downs of net intangible assets and of other long-lived assets could occur. We periodically review the estimated remaining useful lives of
these assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.



We test goodwill for impairment at the reporting unit level (Reporting Unit) at least annually on November 1 of
each year and more frequently if events merit. We perform this test in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS 142).We have determined that we
have only one reporting segment and one Reporting Unit. Accordingly, goodwill is tested for impairment in a two-step process. Firstly, we determine if the carrying amount of our Reporting Unit exceeds the fair value of the Reporting Unit
based on quoted market prices of our common stock, which may initially indicate that goodwill could be impaired. If we determine that such impairment could have occurred, we would compare the implied fair value of the goodwill as defined
by FAS 142 to its carrying amount to determine the impairment loss, if any.



Land Lease.    We lease a parcel of land adjacent to our corporate headquarters in San Jose, California under an operating lease arrangement that is commonly referred to as
an off-balance sheet or synthetic lease. We plan to have corporate offices and research and development facilities constructed for us on the property. The terms of the lease and the methods of accounting for the lease are
described in detail below under Liquidity and Capital Resources and in Note 16 of the Notes to Consolidated Financial Statements. Under the land lease, we are obligated for a residual value guarantee of approximately $330 million at the end
of the lease term. If the fair value of the property at the end of the lease term is less than the residual value guarantee, we are obligated to pay any shortfall to the lessor. We are required to periodically assess whether it is probable that a
deficiency exists between the estimated fair value of the property at the end of the lease term and the residual value guarantee. To the extent such a probable deficiency is determined to exist, we would expense the estimated deficiency over the
remaining term of the lease. The determination of whether such a probable deficiency exists is highly subjective and requires significant management judgment. We estimate the fair value of the property at the end of the lease term by consulting with
real estate industry sources and developing valuation models that incorporate numerous assumptions, including projected future office lease rates and occupancy rates in the San Jose area, BEAs future requirements for facilities in San Jose,
how the property will be developed, future economic conditions and growth rates, and historical trends in local property values. Our current assessment is that it is not probable that a deficiency under the residual value guarantee will exist at the
end of the lease term. This assessment is based on significant assumptions that could change adversely over time, resulting in material charges to future earnings of an amount up to the residual value guarantee of approximately $330 million.



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Results of Operations



The following table sets forth certain line
items in BEAs consolidated statements of operations as a percentage of total revenues for the fiscal years ended January 31, 2003, 2002, and 2001.



|                                                 |  | Fiscal year ended January 31, |  
|------------------------------------------------ |  | ----------------------------- | -
|                                                 |  | 2003                          |  
|Revenues:                                        |  |                               |  
|License fees                                     |  | 55.2                          | %
|Services                                         |  | 44.8                          |  
|                                                 |  |                               |  
|Total revenues                                   |  | 100.0                         |  
|Cost of revenues:                                |  |                               |  
|Cost of license fees(1)                          |  | 3.6                           |  
|Cost of services(1)                              |  | 42.6                          |  
|Amortization of acquired intangible assets       |  | 2.7                           |  
|Impairment of certain acquired intangible assets |  |                              |  
|Severance charges                                |  |                              |  
|                                                 |  |                               |  
|Total cost of revenues                           |  | 23.8                          |  
|                                                 |  |                               |  
|Gross margin                                     |  | 76.2                          |  
|Operating expenses:                              |  |                               |  
|Sales and marketing                              |  | 39.5                          |  
|Research and development                         |  | 14.2                          |  
|General and administrative                       |  | 8.2                           |  
|Amortization of goodwill                         |  |                              |  
|Facilities consolidation and severance charges   |  |                              |  
|Impairment of goodwill                           |  |                              |  
|Acquisition-related charges                      |  |                              |  
|                                                 |  |                               |  
|Total operating expenses                         |  | 61.9                          |  
|                                                 |  |                               |  
|Income (loss) from operations                    |  | 14.3                          |  
|Interest and other, net                          |  | (1.5                          | )
|                                                 |  |                               |  
|Income (loss) before provision for income taxes  |  | 12.8                          |  
|Provision for income taxes                       |  | 3.8                           |  
|                                                 |  |                               |  
|Net income (loss)                                |  | 9.0                           | %
|                                                 |  |                               |  

---

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



Revenues (in thousands):



|               |  | Year Ended January 31 |         | Percentage Change Fiscal 2003 vs. Fiscal 2002 |   |                      | Percentage Change Fiscal 2002 vs. Fiscal 2001 |  
|-------------- |  | --------------------- | ------- | --------------------------------------------- | - | -------------------- | --------------------------------------------- | -
|               |  | 2003 (Fiscal 2003)  |         | 2002 (Fiscal 2002)                          |   | 2001 (Fiscal 2001) |                                               |  
|Total revenues |  | $                     | 934,058 |                                               | $ | 975,893              |                                               | $



Our
revenues are derived from fees for software licenses, and services, which include customer support, education and consulting. The revenue growth from fiscal 2001 to fiscal 2002 of 19.0 percent reflects significant increases in sales of our software
products and growth in our customer support revenues, offset partially by a decrease in consulting and education revenues. The reduction in total revenues from fiscal 2002 to fiscal 2003 was driven by decreases in sales of software licenses and
consulting and education revenues, offset partially by an increase in customer support revenues. Our revenue growth rate has been affected by multiple factors during



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fiscal 2001, 2002 and 2003, including growth in the application server market, introduction of new products, level of acceptance of our
products in the market, competition, general economic conditions and changes in overall information technology (IT) spending on a world-wide basis. While many factors have impacted our growth, the economic downturn during fiscal 2002 and
reductions in IT spending contributed significantly to the reductions in our year-over-year revenue growth rates, which decreased from 76.5 percent for fiscal 2001 to 19.0 percent in fiscal 2002 to (4.3) percent in fiscal 2003. Many factors
that impact our growth are beyond our control and there can be no assurance that our revenues will grow in the future.



License Revenues (in thousands):



|                 |  | Fiscal 2003 |         | Fiscal 2002 |   | Fiscal 2001 |  | Percentage Change Fiscal 2003 vs. Fiscal 2002 |         |  | Percentage Change Fiscal 2002 vs. Fiscal 2001 |   
|---------------- |  | ----------- | ------- | ----------- | - | ----------- |  | --------------------------------------------- | ------- |  | --------------------------------------------- | --
|License revenues |  | $           | 515,883 |             | $ | 597,909     |  | $                                             | 476,573 |  | (13.7                                         | )%



The
increase in license revenues from fiscal 2001 to fiscal 2002 was mainly due to the increases in sales of our BEA WebLogic Server as well as the adoption of other products in our WebLogic Platform, introduction of new products and new versions of
existing products, and expansion of our partner programs. The number of product transactions increased to approximately 11,100 in fiscal 2002 compared to 10,100 in fiscal 2001, an increase in transaction volume of approximately 10 percent. The
decrease in license revenues from fiscal 2002 to fiscal 2003 was primarily due to further reductions in IT spending on a worldwide basis and the continued economic downturn. Many large enterprises implemented aggressive cost cutting measures,
including reductions in IT spending, in the second half of calendar 2001, especially after the terrorist events of September 11, 2001. In the current economic and IT spending environment, customer spending continues to be extremely cautious and IT
purchases are subject to rigorous internal review and approvals, resulting in some customers canceling or postponing IT projects, postponing IT purchases or placing smaller orders. The number of product transactions decreased to approximately 10,000
in fiscal 2003 compared to 11,100 in fiscal 2002, a decrease in transaction volume of approximately 10 percent.



Service Revenues



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



|                                  |  | Fiscal 2003 |         | Fiscal 2002 |   | Fiscal 2001 |  | Percentage Change Fiscal 2003 vs. Fiscal 2002 |         |  | Percentage Change Fiscal 2002 vs. Fiscal 2001 |   
|--------------------------------- |  | ----------- | ------- | ----------- | - | ----------- |  | --------------------------------------------- | ------- |  | --------------------------------------------- | --
|Consulting and Education revenues |  | $           | 113,031 |             | $ | 140,587     |  | $                                             | 208,026 |  | (19.6                                         | )%
|Customer Support revenues         |  |             | 305,144 |             |   | 237,397     |  |                                               | 135,161 |  | 28.5                                          |   
|                                  |  |             |         |             |   |             |  |                                               |         |  |                                               |   
|Total Service revenues            |  | $           | 418,175 |             | $ | 377,984     |  | $                                             | 343,187 |  | 10.6                                          | % 
|                                  |  |             |         |             |   |             |  |                                               |         |  |                                               |   



Consulting and education revenues consist of professional services related to the deployment and use of our software products, and are typically recognized on a time and materials basis. Customer support revenues consist of fees for
annual maintenance contracts, which are recognized ratably over the term of the agreement (generally one year). Customer support is typically priced as a percentage of license fees. The significant increases in customer support revenues from fiscal
2001 to fiscal 2002 and from fiscal 2002 to fiscal 2003 were driven by maintenance renewals on our existing installed base of software licenses as well as new maintenance contracts sold together with new sales of software licenses. Consulting and
education revenues decreased significantly from fiscal 2001 to fiscal 2002 and from fiscal 2002 to fiscal 2003, as the economic slowdown and general reductions in IT spending on a worldwide basis impacted our business. In addition, we executed our
strategy of having strategic partners provide consulting services related to the deployment and use of our software products, which began to impact our consulting and education revenues in late fiscal 2001.



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On February 1,
2003, the Company adopted Emerging Issues Task Force (EITF) Issue No. 01-14 Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred (EITF 01-14). EITF 01-14 requires
that certain out-of-pocket expenses that are charged to customers be recorded as service revenues, rather than as an offset to cost of services, which had been the Companys prior practice. The adoption of EITF 01-14 had no impact on our gross
margin, but it did cause both service revenues and cost of services to increase by approximately $3.1 million for fiscal 2003. The adoption did not have a material impact on our financial position, results of operations or cash flows and,
accordingly, we did not reclassify prior period results. The reclassification of prior period results would have resulted in an immaterial increase in both service revenues and cost of service revenues.



Revenues by Geographic Region



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



|                                                 |  | Fiscal 2003 |         | Fiscal 2003 (percentage of consolidated total revenues) |       |   | Fiscal 2002 |   | Fiscal 2002 (percentage of consolidated total revenues) |  |       | Fiscal 2001 |  | Fiscal 2001 (percentage of consolidated total revenues) |        
|------------------------------------------------ |  | ----------- | ------- | ------------------------------------------------------- | ----- | - | ----------- | - | ------------------------------------------------------- |  | ----- | ----------- |  | ------------------------------------------------------- | -------
|Americas                                         |  | $           | 509,283 |                                                         | 54.5  | % |             | $ | 554,853                                                 |  | 56.8  | %           |  | $                                                       | 486,696
|European, Middle East and Africa region (EMEA) |  |             | 275,380 |                                                         | 29.5  |   |             |   | 290,366                                                 |  | 29.8  |             |  |                                                         | 240,136
|Asia/Pacific region (APAC)                     |  |             | 149,395 |                                                         | 16.0  |   |             |   | 130,674                                                 |  | 13.4  |             |  |                                                         | 92,928 
|                                                 |  |             |         |                                                         |       |   |             |   |                                                         |  |       |             |  |                                                         |        
|Total revenues                                   |  | $           | 934,058 |                                                         | 100.0 | % |             | $ | 975,893                                                 |  | 100.0 | %           |  | $                                                       | 819,760
|                                                 |  |             |         |                                                         |       |   |             |   |                                                         |  |       |             |  |                                                         |        



For each
of the twelve fiscal quarters included in the three fiscal years ended January 31, 2003, EMEA and APAC revenues as a percentage of total revenues have ranged between 27 percent to 32 percent for EMEA and 10 percent to 17 percent for APAC. These
ranges may fluctuate in the future depending upon local economic conditions in EMEA and APAC, foreign currency exchange rates, and if a large sale is made in a particular region. Our revenues in APAC have increased both as a percentage of total
revenues and in absolute dollars over the three year period due primarily to our entry into the Chinese market in the second quarter of fiscal 2002.



Cost of Revenues



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



|                                                 |  | Fiscal 2003 |         | Fiscal 2002 |   | Fiscal 2001 |  | Percentage Change Fiscal 2003 vs. Fiscal 2002 |         |  | Percentage Change Fiscal 2002 vs. Fiscal 2001 |   
|------------------------------------------------ |  | ----------- | ------- | ----------- | - | ----------- |  | --------------------------------------------- | ------- |  | --------------------------------------------- | --
|Cost of licenses                                 |  | $           | 18,797  |             | $ | 21,087      |  | $                                             | 19,724  |  | (10.9                                         | )%
|Cost of services                                 |  |             | 178,105 |             |   | 182,678     |  |                                               | 197,567 |  | (2.5                                          | )%
|Amortization of acquired intangible assets       |  |             | 25,388  |             |   | 26,324      |  |                                               | 38,466  |  | (3.6                                          | )%
|Impairment of certain acquired intangible assets |  |             |        |             |   | 7,082       |  |                                               |        |  | (100.0                                        | )%
|Severance charges                                |  |             |        |             |   | 2,461       |  |                                               |        |  | (100.0                                        | )%
|                                                 |  |             |         |             |   |             |  |                                               |         |  |                                               |   
|Total cost of revenues                           |  | $           | 222,290 |             | $ | 239,632     |  | $                                             | 255,757 |  | (7.2                                          | )%
|                                                 |  |             |         |             |   |             |  |                                               |         |  |                                               |   



Cost of
revenues represented 23.8 percent, 24.6 percent and 31.2 percent of total revenues in fiscal 2003, 2002 and 2001, respectively. The decrease from fiscal 2001 to fiscal 2002 in cost of revenues as a percentage of total revenues was primarily due to
decreases in our lower-margin consulting and education revenues. A decrease in amortization charges included in cost of revenues also contributed to the decrease in total cost of revenues as a percentage of total revenues in fiscal 2002. These
decreases were offset by additional expenses from the



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impairment of certain acquired intangible assets and severance costs in fiscal 2002. The decrease in total cost of revenues as a percentage
of total revenues from fiscal 2002 to fiscal 2003 was primarily due to the impairment and severance charges recorded in fiscal 2002.



Cost of Licenses.    Cost of licenses, as referenced in the table above, includes fees paid to third-party
contractors in connection with our revenue compliance audit program, royalties and license fees paid to third parties, expenses related to the purchase of compact discs, costs associated with transferring our software to electronic media, the
printing of user manuals, packaging and distribution costs and localization costs. Cost of licenses were 3.6 percent, 3.5 percent and 4.1 percent of license revenues for fiscal 2003, 2002 and 2001, respectively. The decrease in cost of licenses as a
percentage of license revenues from fiscal 2001 to fiscal 2002 is primarily due to a decline in third party royalties and license fees. The increase in cost of licenses as a percentage of license revenues from fiscal 2002 to fiscal 2003 was
primarily due to the expansion of our revenue compliance audit program during fiscal 2003 and associated payments made to third-party contractors.



Cost of Services.    Cost of services, as referenced in the table above, consists primarily of salaries and
benefits for consulting, education and product support personnel. Cost of services represented 42.6 percent, 48.3 percent and 57.6 percent of service revenues in fiscal 2003, 2002 and 2001, respectively. Cost of services in absolute dollars and
as a percentage of service revenues decreased from fiscal 2001 to fiscal 2002 due to a higher mix of higher-margin customer support revenues versus lower-margin consulting and education revenues. Consulting and education revenues were 37.2 percent
of total service revenues in fiscal 2002 compared to 60.6 in fiscal 2001. Cost of services further decreased in fiscal 2003 from fiscal 2002 both in absolute dollars and as a percentage of total service revenues as lower-margin consulting and
education revenues continued to decrease as a percentage of total service revenues. Consulting and education revenues represented 27.0 percent of total service revenues in fiscal 2003.



Amortization of Acquired Intangible Assets included in Cost of Revenues.    The
amortization of acquired intangible assets consists of amortization of purchased technology, non-compete agreements, customer base, patents and trademarks and distribution rights. The decrease in amortization from fiscal 2001 to fiscal 2002 was
primarily due to a portion of our acquired intangible assets becoming fully amortized in fiscal 2001. The decrease from fiscal 2002 to fiscal 2003 was primarily due a portion of our acquired intangible assets being written-off in fiscal 2002, offset
by the amortization of acquired intangible assets that arose from a number of small acquisitions in the latter half of fiscal 2002 and during fiscal 2003. In the future, amortization expense associated with intangible assets recorded prior to
January 31, 2003 is currently expected to total approximately $14.6 million and $1.6 million for the fiscal years ending January 31, 2004 and 2005, respectively. We periodically review the estimated remaining useful lives of our intangible
assets. A reduction in our estimate of remaining useful lives, if any, could result in increased amortization expense in future periods.



Impairment of Certain Acquired Intangible Assets included in Cost of Revenues.    See discussion of
Impairment of Certain Acquired Intangible Assets and Goodwill below.



Severance Charges.    See discussion of Facilities Consolidation and Severance Charges below.



Operating Expenses



Sales and Marketing (in thousands):



|                             |  | Fiscal 2003 |         | Fiscal 2002 |   | Fiscal 2001 |  | Percentage Change Fiscal 2003 vs. Fiscal 2002 |         |  | Percentage Change Fiscal 2002 vs. Fiscal 2001 |   
|---------------------------- |  | ----------- | ------- | ----------- | - | ----------- |  | --------------------------------------------- | ------- |  | --------------------------------------------- | --
|Sales and Marketing expenses |  | $           | 368,874 |             | $ | 400,860     |  | $                                             | 335,501 |  | (8.0                                          | )%



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Sales and
marketing expenses include salaries, benefits, sales commissions, travel, information technology and facility costs for our sales and marketing personnel. These expenses also include programs aimed at increasing revenues, such as advertising, public
relations, trade shows and user conferences. The increase in sales and marketing expenses from fiscal 2001 to fiscal 2002 was due to increased commissions paid to our sales force on our increased revenues, increases in marketing personnel and
marketing programs to build brand awareness. Sales and marketing expenses decreased in fiscal 2003 from fiscal 2002 due to headcount reductions and other cost-cutting initiatives implemented during the fourth quarter of fiscal 2002, which reflects a
shift in resources and headcount from sales and marketing to research and development activities.



Research and Development (in thousands):



|                                  |  | Fiscal 2003 |         | Fiscal 2002 |   | Fiscal 2001 |  | Percentage Change Fiscal 2003 vs. Fiscal 2002 |        |  | Percentage Change Fiscal 2002 vs. Fiscal 2001 |  
|--------------------------------- |  | ----------- | ------- | ----------- | - | ----------- |  | --------------------------------------------- | ------ |  | --------------------------------------------- | -
|Research and Development expenses |  | $           | 132,771 |             | $ | 120,875     |  | $                                             | 89,247 |  | 9.8                                           | %



Research
and development expenses consist primarily of salaries and benefits for software engineers, contract development fees, costs of computer equipment used in software development, information technology and facilities expenses. The fiscal 2002 and 2003
year-over-year increases in research and development expenses were due to increases in product development personnel and expenses associated with the development and release of several new products and product versions, as well as the acquisition of
several small companies engaged in research and development activities during fiscal 2002 and fiscal 2003. Research and development as a percentage of total revenues has increased from 10.9 percent in fiscal 2001 to 12.4 percent in 2002 to
14.2 percent in fiscal 2003, which represents a shift in resources and headcount from sales and marketing to research and development activities. We believe that a significant level of research and development is required to remain competitive
and we expect to continue to commit substantial resources to product development and engineering in future periods.



General and Administrative (in thousands):



|                                    |  | Fiscal 2003 |        | Fiscal 2002 |   | Fiscal 2001 |  | Percentage Change Fiscal 2003 vs. Fiscal 2002 |        |  | Percentage Change Fiscal 2002 vs. Fiscal 2001 |  
|----------------------------------- |  | ----------- | ------ | ----------- | - | ----------- |  | --------------------------------------------- | ------ |  | --------------------------------------------- | -
|General and Administrative expenses |  | $           | 76,390 |             | $ | 75,671      |  | $                                             | 57,611 |  | 1.0                                           | %



General
and administrative expenses include costs for our human resources, finance, legal, information technology, facilities and general management functions, as well as bad debt expense. The increase in general and administrative expenses from fiscal 2001
to fiscal 2002 was due to the expansion of our infrastructure, including information systems, facilities and associated expenses necessary to manage our growth. The increase from fiscal 2002 to fiscal 2003 was due to increases in information
technology and facilities costs, offset partially by a decrease in bad debt expense, which decreased by approximately $5.2 million from $8.7 million in fiscal 2002 to $3.5 million in fiscal 2003.



Amortization of
Goodwill.    Amortization of goodwill totaled $0, $46.4 million and $59.2 million in fiscal 2003, 2002 and 2001, respectively. Amortization of goodwill decreased in fiscal 2002 from fiscal 2001 due primarily to the $73.0
million write-off of goodwill in the third quarter of fiscal 2002. Commencing February 1, 2002, amortization of goodwill ceased in accordance with new accounting guidelines.



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



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Other
Charges



Facilities Consolidation and
Severance Charges.    During the third quarter of fiscal 2002, we approved a plan to consolidate certain facilities in regions including the United States, Canada, and Germany. A facilities consolidation charge of $20.0
million was calculated using managements best estimates and was based upon the remaining future lease commitments and brokerage fees for vacant facilities from the date of facility consolidation, net of estimated future sublease income. The
facilities consolidation charge also included the write-off of $2.2 million of leasehold improvements. The estimated costs of abandoning these leased facilities, including estimated costs to sublease, were based on market information and trend
analyses, including information obtained from third party real estate industry sources. As of January 31, 2003, $12.6 million of lease termination costs, net of anticipated sublease income, remains accrued and is expected to be fully utilized by
fiscal 2012. In calculating this charge, certain assumptions were made relating to such factors as the estimated time periods of vacancy and sublease rates and opportunities. If actual circumstances prove to be materially worse than management has
estimated, our total charges for these vacant facilities could be significantly higher. Additionally, during the fourth quarter of fiscal 2002, we reduced the scope and re-evaluated the timing of the planned construction of facilities at our San
Jose, California headquarters, resulting in an additional facilities-related charge of $5.0 million. Adjustments to the accrued facilities consolidation charge will be made in future periods, if necessary, based upon then current actual events and
circumstances.



During the third and fourth
quarters of fiscal 2002, we reduced our workforce by approximately 10 percent and, accordingly, we recorded total severance charges of $15.5 million, of which $10.3 million was paid in fiscal 2002 and $5.2 million was paid in fiscal 2003. The
employee reductions were across all business functions, operating units and major geographic regions. Severance charges included severance benefits, notice pay and out-placement counseling services.



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



|                                                                  |  | Facilities Consolidation |        |   | Severance |   |         | Total | 
|----------------------------------------------------------------- |  | ------------------------ | ------ | - | --------- | - | ------- | ----- | 
|Charges accrued during fiscal 2002 included in cost of revenues   |  | $                        |       |   |           | $ | 2,461   |       | 
|Charges accrued during fiscal 2002 included in operating expenses |  |                          | 25,000 |   |           |   | 12,992  |       | 
|Write-off of leasehold improvements                               |  |                          | (2,152 | ) |           |   |        |       | 
|Cash payments during fiscal 2002                                  |  |                          | (1,447 | ) |           |   | (10,302 | )     | 
|                                                                  |  |                          |        |   |           |   |         |       | 
|Accrued at January 31, 2002                                       |  |                          | 21,401 |   |           |   | 5,151   |       | 
|                                                                  |  |                          |        |   |           |   |         |       | 
|Cash payments during fiscal 2003                                  |  |                          | (3,784 | ) |           |   | (5,151  | )     | 
|                                                                  |  |                          |        |   |           |   |         |       | 
|Accrued at January 31, 2003                                       |  | $                        | 17,617 |   |           | $ |        |       | 
|                                                                  |  |                          |        |   |           |   |         |       | 



Impairment of Certain Acquired Intangible Assets and Goodwill.    In the third quarter of fiscal 2002, we recorded asset impairment charges totaling $80.1 million against certain acquired intangible assets
and goodwill, $7.1 million of which was a write-down of certain acquired intangible assets that is included in cost of revenues and $73.0 million of which was a write-down of goodwill that is included in operating expenses. The acquired intangible
assets and goodwill that were impaired primarily originated from the acquisitions of The Theory Center, Inc. (Theory Center) acquired in November 1999 and Bauhaus Technologies, Inc. (Bauhaus) acquired in October 2000.



During the third quarter of fiscal 2002, we
observed indicators that the acquired intangible assets and goodwill from the Theory Center and Bauhaus were possibly impaired and, accordingly, performed an assessment for impairment under Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. With respect to the Theory Center, we made product and strategic changes during the third quarter that significantly decreased the



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importance and value of the technology acquired from the Theory Center, including the decision to discontinue the use of certain technology
acquired from the Theory Center. With respect to Bauhaus, we observed a significant downturn in our consulting business during the third quarter of fiscal 2002, and in particular the consulting business of Bauhaus, which indicated possible
impairment.



With the assistance of third party
valuation experts, we performed asset impairment tests at the lowest operational level that had separately identifiable cash flows related to the Theory Center and Bauhaus intangible assets and goodwill. The tests were performed by comparing the
expected undiscounted cash flows over a 39 month period for the Theory Center and a 51 month period for Bauhaus to the carrying amounts of the long-lived assets resulting from the acquisitions. The conclusion of these tests was that the decline
in value of the Theory Center and Bauhaus intangible assets and goodwill was significant and other than temporary. The impairment loss was measured as the amount by which the carrying values of such assets exceeded their fair values. Measurement of
fair value was based on analyses of the discounted future cash flows at the Theory Center and Bauhaus level. In performing these analyses, we used the best information available under the circumstances, including assumptions and projections of
future operating results that we consider to be both reasonable and supportable. The discount rates used in the analyses were 30 percent for the Theory Center and 20 percent for Bauhaus, which were based on historical risk premiums required by
investors for companies of our size, industry and capital structure and included risk factors specific to the sectors in which the Theory Center and Bauhaus operated. The analyses indicated that the intangible assets and goodwill for the Theory
Center were impaired by an amount totaling $64.5 million and for Bauhaus by an amount totaling $10.0 million. In addition, an impairment charge of $5.6 million was recorded during the third quarter of fiscal 2002, which related to the write-off of
goodwill associated with a small foreign sales operation that was disposed.



The total impairment charge recorded during the third quarter of fiscal 2002 is summarized as follows (in millions):



|The Theory Center |  | $ | 64.5
|----------------- |  | - | ----
|Bauhaus           |  |   | 10.0
|Other             |  |   | 5.6 
|                  |  |   |     
|                  |  | $ | 80.1
|                  |  |   |     



We did
not record any write-downs of acquired intangible assets or goodwill in fiscal 2001 or 2003.



Interest and Other, Net



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



|                                        |  | Fiscal 2003 |         |   | Fiscal 2002 |   |         | Fiscal 2001 |  |   | Percentage Change Fiscal 2003 vs. Fiscal 2002 |   |  | Percentage Change Fiscal 2002 vs. Fiscal 2001 |   
|--------------------------------------- |  | ----------- | ------- | - | ----------- | - | ------- | ----------- |  | - | --------------------------------------------- | - |  | --------------------------------------------- | --
|Interest expense                        |  | $           | (22,086 | ) |             | $ | (22,259 | )           |  | $ | (22,910                                       | ) |  | (0.8                                          | )%
|Write-down of equity investments        |  |             | (24,174 | ) |             |   | (22,922 | )           |  |   | (16,211                                       | ) |  | 5.5                                           |   
|Net gains on sale of equity investments |  |             | 3,659   |   |             |   | 19,623  |             |  |   | 18,595                                        |   |  | (81.4                                         | ) 
|Interest income and other, net          |  |             | 28,691  |   |             |   | 39,879  |             |  |   | 47,736                                        |   |  | (28.1                                         | ) 
|                                        |  |             |         |   |             |   |         |             |  |   |                                               |   |  |                                               |   
|Total interest and other, net           |  | $           | (13,910 | ) |             | $ | 14,321  |             |  | $ | 27,210                                        |   |  | (197.1                                        | )%
|                                        |  |             |         |   |             |   |         |             |  |   |                                               |   |  |                                               |   



The
decrease in interest income from fiscal 2001 to fiscal 2002 and from fiscal 2002 to fiscal 2003 is due to lower returns on our investments due to significant reductions in interest rates that occurred during fiscal 2002, the partial impact of which
was felt in fiscal 2002 and the full impact of which was felt in fiscal 2003. Included in net gains on sale of equity investments are net gains of $17.4 million recorded by us in fiscal 2002 and



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$18.6 million recorded by us in fiscal 2001, which were in accordance with agreements regarding the sale of a portion of our investment
in WebGain, Inc. (WebGain) to WP Equity Partners, Inc., a related party (see Related Party Transactions below). In addition, we recorded net gains of $3.7 million and $2.2 million in fiscal 2003 and 2002, respectively related to
sales of certain other minority investments to unrelated third parties. These gains were offset by write-downs of equity investments of $24.2 million, $22.9 million and $16.2 million in fiscal 2003, 2002 and 2001, respectively, of which $22.4
million in fiscal 2003 and $5.9 million in fiscal 2002 were write-downs of the remainder of our investment in WebGain. We have a net balance of equity investments in privately-held technology companies of approximately $1.1 million at January 31,
2003. Such investments may become further impaired in fiscal 2004, particularly in view of the difficulties many technology companies have had in raising additional capital in the current economic climate.



Provision for Income Taxes



We have provided for income tax expense of $35.9 million,
$31.4 million and $30.4 million for fiscal 2003, 2002 and 2001, respectively. Our effective income tax rate was 30 percent for fiscal 2003. Excluding the impact of impairment charges of certain acquired intangible assets and goodwill, our effective
income tax rate was 45 percent for fiscal 2002. Our effective income tax rate was 64 percent for fiscal 2001. The decrease in the effective income tax rate for fiscal 2003 relative to fiscal 2002 and 2001 is due primarily to the effect of the
cessation in the amortization of goodwill in accordance with new accounting guidelines. Our effective income tax rate for fiscal 2003 differed from the U.S. federal statutory rate of 35 percent primarily due to the benefit of low taxed foreign
earnings. Our fiscal 2002 effective income tax rate was higher than the U.S. federal statutory rate of 35 percent primarily due to non-deductible goodwill amortization and goodwill impairment charges. Our fiscal 2001 effective income tax rate was
higher than the U.S. federal statutory rate of 35 percent primarily due to non-deductible goodwill amortization. The decrease in the effective income tax rate for fiscal 2002 relative to fiscal 2001 is primarily due to benefits from low taxed
foreign earnings.



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



Liquidity and Capital Resources



As of January 31, 2003, cash, cash equivalents (excluding all restricted cash) and short-term investments totaled $1,267.5 million, which increased from $1,027.2 million at January 31, 2002.



Our cash flow from operations decreased by $30.6
million from $225.0 million in fiscal 2002 to $194.4 million in fiscal 2003. Cash flow from operations was essentially unchanged from fiscal 2001 to fiscal 2002 at approximately $225 million in both years. Net income adjusted to exclude certain
non-cash items was approximately $191 million, $154 million, $135 million in fiscal 2003, 2002 and 2001, respectively. The overall net positive impact of changes in certain operating assets and liabilities on total operating cash flow in fiscal 2003
was relatively small at approximately $3 million. Accordingly, total operating cash flow of $194.4 million for fiscal 2003 is primarily attributable to net income adjusted to exclude certain non-cash items of approximately $191 million. Net income
adjusted to exclude certain non-cash items was lower in fiscal 2002 than in 2003, but total operating cash flow of $225.0 million was higher in fiscal 2002 because the overall net positive impact of changes in certain operating assets and
liabilities on total operating cash flow in fiscal 2002 was approximately $71 million, compared to only approximately $3 million in fiscal 2003.



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Cash used in
investing activities increased by $210.1 million from $243.4 million in fiscal 2002 to $453.5 million in fiscal 2003. This increase was primarily due to an increase of $319.4 million in net purchases of available-for-sale short-term
investments, as we executed our strategy during fiscal 2003 of holding investments with slightly longer maturities, which results in a greater portion of our cash resources being classified as short-term investments. This increase was partially
offset by cash received from the repayment in fiscal 2003 of a note receivable of $74.6 million from WP Equity Partners, Inc, a related party (see Related Party Transactions below). We also used $29.7 million less cash in fiscal 2003 than in
fiscal 2002 for purchases of property and equipment and $17.1 million less cash for net payments for acquisitions and equity investments. Cash used in investing activities increased by $86.7 million from $156.7 million in fiscal 2001 to $243.4
million in fiscal 2002. This increase was primarily due to an increase of $173.5 million in net purchases of short-term investments plus an increase in property and equipment purchases of $20.4 million, offset by a decrease in cash used for
acquisitions and other equity investments of $75.4 million.



Cash used in financing activities in fiscal 2003 of $261,000 was primarily related to the purchase of treasury stock of $42.1 million and the increase of $7.0 million in restricted cash for collateral on our land lease transaction,
offset by proceeds of $48.9 million from the issuance of common stock under employee stock compensation plans. Cash used in financing activities in fiscal 2002 of $61.3 million was primarily related to the $122.2 million increase in restricted cash
for collateral on our land lease transaction, partially offset by proceeds of $61.6 million from the issuance of common stock under employee stock compensation plans. Cash provided by financing activities in fiscal 2001 of $81.7 million was
primarily related to proceeds of $85.7 million from the issuance of common stock under employee stock compensation plans.



As of January 31, 2003, our outstanding short and long-term debt obligations were $554.4 million, essentially the same as at January 31,
2002. At January 31, 2003, our outstanding obligations consisted of $550.0 million of convertible notes and $4.4 million of other obligations. The $550.0 million 4% Convertible Subordinated Notes due December 15, 2006 may be settled in cash or
stock, depending upon future prices of our common stock (see Note 9 of the Notes to Consolidated Financial Statements for a description of the terms of the convertible notes.) If, during the period from February 1, 2003 to December 14, 2004, the
price of our common stock exceeds $48.51 for at least 20 trading days within a period of 30 consecutive trading days, we have the option of redeeming the notes for 28.86 shares of stock per $1,000 face value of the bond (equivalent to a stock price
of $34.65 per share) or cash plus a premium of up to 2.3%, at the option of the bondholder. For the period from December 15, 2004 to maturity on December 15, 2006, we have the option of redeeming the notes for 28.86 shares of stock per $1,000
face value of the bond or cash plus a premium of up to 1.2%, at the option of the bondholder, if the price of our common stock, as calculated above, exceeds $34.65. If our stock price, as calculated above, does not exceed $48.51 during the period
from February 1, 2003 to December 14, 2004, and if the price does not exceed $34.65 during the period from December 15, 2004 to December 15, 2006, then we will likely be required to repay the notes in cash on the maturity date of December 15, 2006.
The following table of minimum contractual obligations has been prepared assuming that the convertible notes will be repaid in cash upon maturity (in thousands):



|                                |  | Payments due in   
|------------------------------- |  | ------------------
|Minimum Contractual Obligations |  | Total Payments Due
|Convertible notes               |  | $                 
|Other obligations               |  |                   
|Operating leases                |  |                   
|                                |  |                   
|Total contractual obligations   |  | $                 
|                                |  |                   



The
above table excludes obligations related to accounts payable and accrued liabilities incurred in the ordinary course of business and also excludes any amounts that could be payable under the land lease agreement pursuant to the residual value
guarantee of approximately $330 million, as explained in the following paragraph.



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During the
first quarter of fiscal 2002, we entered into a lease agreement for the lease of approximately 40 acres of land adjacent to our San Jose, California headquarters (the land lease) and we plan to have constructed additional corporate
offices and research and development facilities on the land. This lease is commonly referred to as synthetic lease. A synthetic lease represents a form of off-balance sheet financing under which an unrelated third-party funds the costs
of the acquisition of the asset and leases the asset to a lessee (BEA), and at least 3 percent of the third-party funds represent at-risk equity. We have an option to renew the land lease agreement, purchase the land at the end of the lease term or
earlier for the outstanding lease balance, or, to arrange for the sale of the land to a third party. If we elect to renew the lease or arrange for the sale of the land, we are obligated to pay any shortfall between the fair value or sales price and
the outstanding land lease balance under a residual value guarantee of approximately $330 million. Under the land lease agreement, the lessor agreed to finance up to $331 million of land and associated costs. As of January 31, 2003, the outstanding
lease balance was approximately $327.4 million. Total minimum lease payments are estimated to be approximately $9.9 million per year, and are included in the table above, commencing in fiscal 2004 through fiscal 2006, and are based on the variable
London Interbank Offering Rate (LIBOR). Actual payments will fluctuate from time to time depending on changes in LIBOR. In the future, we may lengthen the land lease, have additional improvements built on the land, purchase the land
under our purchase option, or arrange to sell the land, or parcels of the land. If we determine to not pursue, completely or in part, the construction of additional corporate offices, this could result in a material charge to earnings. Under
generally accepted accounting principles in the United States we are required to establish a liability for exposure, if any, under the residual value guarantee from the point such exposure is probable to the end of the lease by recording rent
expense in excess of our cash rental payments. The amount of the additional monthly rent expense equals the expected residual value guarantee exposure divided by the number of months remaining on the lease. As of January 31, 2003, we believe that
there has been no impairment in the fair value of the land that we lease under the synthetic lease wherein we believe that we would be required to pay any amount under the residual value guarantee. We will continue to assess the fair value of the
underlying property and the use of the property for impairment on an annual basis. See Note 16 of the Notes to Consolidated Financial Statements for additional information regarding the land lease.



As part of the land lease agreement, we must maintain a
minimum restricted cash balance consisting of United States government securities as defined in the lease, which was $126.5 million as of January 31, 2003. This amount represents collateral for specified obligations to the lessor under the lease.
The restricted cash cannot be withdrawn and is managed by a third party subject to certain limitations. We have classified this amount as a long-term restricted asset on our consolidated balance sheet at January 31, 2003. We also must maintain
certain covenants, including liquidity, leverage and profitability ratios. As of January 31, 2003, we were in compliance with all financial covenants of the land lease agreement. In the event of a default, the lessor may demand payment equal to the
lessors outstanding lease balance, require us to purchase the land, facilitate the sale of the property or surrender the property. If we chose to purchase the land, this could materially decrease our cash available for working capital, could
make other sources of financing more difficult to obtain, and would require us to capitalize the land on our balance sheet.



No BEA officers or employees have any direct financial interest with regards to the land lease agreement.



In September 2001, the Board of Directors approved a share
repurchase program for the Company to repurchase up to $100.0 million of its common stock (the September 2001 Share Repurchase Program). An insignificant number of shares were repurchased in fiscal 2002. In fiscal 2003, 6.9 million
shares were repurchased at a total cost of approximately $42.1 million. In February and March 2003 under the September 2001 Share Repurchase Program, we repurchased an additional 5.3 million shares at a total cost of approximately $52.0 million. In
March 2003, the Board of Directors approved an additional repurchase of up to $100.0 million of our common stock.



Our principal source of liquidity is our cash, cash equivalents and short-term investments, as well as the cash flow that we generate from
our operations. The Companys liquidity could be negatively impacted by a decrease in demand for the Companys products, which are subject to rapid technological changes, or a reduction of capital expenditures by the Companys
customers as a result of a downturn in the global economy, among



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other factors. We believe that our existing cash, cash equivalents, short-term investments and cash generated from operations, if any, will
be sufficient to satisfy our currently anticipated cash requirements through January 31, 2004. However, we may make acquisitions or license products and technologies complementary to our business or we may decide to purchase the land held under
lease, and may need to raise additional capital through future debt or equity financing to the extent necessary to fund any such acquisitions, licenses, or purchase. There can be no assurance that additional financing will be available, at all, or
on terms favorable to us.



Related Party Transactions



WebGain, Inc.



In connection with the sale of investments in WebGain, Inc.
to WP Equity Partners, Inc., a related party, we recorded notes receivable from WP Equity Partners, Inc. of $24.6 million and recorded net gains of $17.4 million during fiscal 2002. We also recorded notes receivable from WP Equity Partners, Inc. of
$50.0 million and recorded net gains of $18.6 million during fiscal 2001 related to sales of investments in WebGain. The notes were due on January 31, 2003 and bore interest of 7 percent per annum. As of January 31, 2002, the balance, excluding
accrued interest, due from WP Equity Partners, Inc. was $74.6 million, which was included in other long-term assets. The notes were repaid in full on January 31, 2003. Interest income earned on the notes receivable from WP Equity Partners, Inc. was
$5.2 million in both fiscal 2002 and fiscal 2003.



Loans to Officers



We
have an unsecured advance due from William T. Coleman III, an officer of the Company, of $5.0 million as of January 31, 2002 and 2003, which is included in other long-term assets as of January 31, 2003. This advance was made in August 2001
pursuant to an unsecured line of credit issued to Mr. Coleman in September 1999 (the Unsecured Line of Credit). The Unsecured Line of Credit bears interest at 7 percent per annum and is due within 90 days following the earlier of (i)
termination of Mr. Colemans employment with us or (ii) our stock price achieving a specified average closing price. This advance was included in other current assets as of January 31, 2002.



In November 2001, we issued a secured and full recourse line
of credit of $25.0 million to Mr. Coleman (the Secured Line of Credit). The Secured Line of Credit is secured by real property and bears interest at 6 percent per annum. Borrowings under the Secured Line of Credit are due upon 90 days
written demand. During the quarter ended July 31, 2002, we advanced $19.2 million to Mr. Coleman under the Secured Line of Credit. The terms of the Secured Line of Credit stipulate that once borrowed funds have been repaid, they cannot be
re-borrowed. During the quarter ended October 31, 2002, Mr. Coleman repaid in full the $19.2 million secured loan to the Company, including interest. No borrowings were outstanding under this secured line of credit at January 31, 2002 or 2003.



In September 1999, we issued an unsecured line
of credit to Alfred Chuang, an executive officer of the Company, in the amount of $5.0 million. No borrowings were outstanding under this line of credit at January 31, 2002 or 2003.



Loans to Executives



We have secured notes receivable from four other executives totaling approximately $2.0 million and
$1.7 million at January 31, 2003 and 2002, respectively, which are included in other long-term assets. These notes receivable originated prior to June 30, 2002 and are secured by real property.



Common Board Members or Executive Officers



We occasionally sell software products or
services to companies that have board members or executive officers that are also on our Board of Directors. The total revenues recognized by us from such customers in fiscal 2003, 2002 and 2001 were insignificant.



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Effect of New Accounting
Pronouncements



In June 2002, the FASB
issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities(FAS 146). FAS 146 addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) and must be applied for exit or disposal activities that are initiated after December 31, 2002. FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair
value when the liability is incurred rather than when the exit or disposal plan is approved. The adoption of FAS 146 did not have a material impact on our financial position or results of operations.



In November 2002, the EITF reached a consensus on Issue No.
00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We are currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on our results of
operations and financial condition.



In November
2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability be recorded in
the guarantors balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entitys product warranty liabilities. The
initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim
or annual periods ending after December 15, 2002. We have adopted the disclosure requirements for our financial statements included in this form 10-K. The provisions related to recognizing a liability at inception of the guarantee do not apply to
product warranties or to indemnification provisions in our software license arrangements. However, the accounting profession and regulatory agencies continue to discuss various provisions of this pronouncement with the objective of providing
additional guidance on its application. These discussions and the issuance of any new interpretations, once finalized, could lead to an unanticipated impact on our future financial results. Therefore, although we currently do not believe these
provisions will have a material effect on our operating results or financial position, we will continue to evaluate the impact of FIN 45. The only significant guarantees issued to third parties by the Company are the product warranty and
indemnification provisions in our software license agreements and the residual value guarantee of approximately $330 million, which is pursuant to our synthetic land lease transaction.



In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (FAS 148),
Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of FASB Statement No. 123. FAS No. 148 amends FASB Statement No. 123 (FAS 123), Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure
about the effects on reported net income and earnings per share and the entitys accounting policy decisions with respect to stock-based employee compensation. Certain of the disclosure requirements are required for all companies, regardless of
whether the fair value method or intrinsic value method is used to account for stock-based employee compensation arrangements. We continue to account for our employee incentive stock option plans using the intrinsic value method in accordance with
the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The amendments to FAS 123 will be effective for financial statements for fiscal years ended after December 15,
2002 and for interim periods beginning after December 15, 2002. Accordingly, we adopted the disclosure provisions of this statement in our fourth quarter of fiscal year 2003.



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In January
2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation
by business enterprises of variable interest entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the
concept of variable interests and requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. This
interpretation applies immediately to variable interest entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a
variable interest that it acquired before February 1, 2003. For these variable interest entities, the assets, liabilities and non-controlling interest of the variable interest entity would be initially measured at their carrying amounts, with any
difference between the net amount added to the balance sheet and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN
46 first applies may be used to measure the assets, liabilities and non-controlling interest of the variable interest entity. If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity
when FIN 46 becomes effective, the enterprise shall disclose information about those entities in all financial statements issued after January 31, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the
date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. We are evaluating the impact of applying FIN 46 and
have not yet completed this analysis. We have not yet concluded whether the current land lease structure would be consolidated upon our adoption of FIN 46 because the rules are recent and contain numerous complicated provisions that the accounting
profession continues to analyze. The impact of consolidating the land held under lease at carrying value would be an increase to assets and liabilities of approximately $330 million. It is possible that the final determination under FIN 46 will be
that the land must be capitalized on our balance sheet at current fair market value, which could be less than the outstanding lease balance in the near term. This could result in a material charge to earnings, equal to the difference between the
current fair market value of the property and the outstanding lease balance at the time such determination is made. Alternatively, we could elect to restructure the financing arrangement or exercise the purchase option, which could also result in us
recording the land on our balance sheet at current fair market value, resulting in a material charge to earnings as described above.



Risk Factors that May Impact Future Operating Results



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



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



Although we have experienced significant annual revenue growth
in recent years and our revenues grew in each of the quarters of fiscal 2003, our revenues have historically fluctuated. For example, in the quarters ended October 31, 2001 and April 30, 2002, our revenues declined as compared to the previous fiscal
quarter, and in the quarters ended April 30, 2002 and July 31, 2002 our revenues declined as compared to the same quarterly periods in the prior fiscal year. If our revenues, operating results, earnings or future projections are below the levels
expected by investors or securities analysts, our stock price is likely to decline. Our stock price is also subject to the substantial volatility generally associated with Internet, software and technology stocks and may also be affected by broader
market trends unrelated to our performance, such as the substantial declines in the prices of many such stocks from March 2000 through the present.



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



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



| |  |  | difficulty predicting the size and timing of customer orders;
| | - |  | -------------------------------------------------------------



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



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



| |  |  | introduction or enhancement of our products or our competitors products;
| | - |  | -------------------------------------------------------------------------



| |  |  | the adverse impact of that the recent SARS (severe acute respiratory syndrome) outbreak may have our worldwide business, particularly in Asian countries such as
China where the outbreak has been most widespread;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



| |  |  | any slowdown in use of the Internet for business or commerce;
| | - |  | -------------------------------------------------------------



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



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



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



| |  |  | the lengthy sales cycle for our products;
| | - |  | -----------------------------------------



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



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



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



| |  |  | loss of key personnel; and
| | - |  | --------------------------



| |  |  | fluctuations in foreign currency exchange rates.
| | - |  | ------------------------------------------------



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



A material portion of our revenues has been derived from large orders, as major customers deployed our products. Increases in the dollar
size of some individual license transactions increases the risk of fluctuation in future quarterly results because the unexpected loss of a small number of larger orders can create a significant revenue shortfall. The majority of our revenue
originates from a large number of small orders with the potential to turn into large deployments. If we cannot generate a sufficient number of large customer orders, turn development orders into large deployments or if customers delay or cancel such
orders in a particular quarter, it may have a material adverse effect on our revenues and, more significantly on a percentage basis, our net income or loss in that quarter. Moreover, we typically receive and fulfill most of our orders within the
quarter, with a substantial portion of our orders typically received in the last month of each fiscal quarter. As a result, we may not learn of revenue shortfalls until late in a fiscal quarter, after it is too late to adjust expenses for that
quarter. This is particularly relevant at this time because we have previously implemented significant cost cutting measures, thereby making incremental additional cost cutting more difficult to achieve. Moreover, on-going adverse economic
conditions worldwide, particularly those related to the technology industry and the economic and political uncertainties arising out of the recent U.S. military activity in Iraq, recent and possible future terrorist activities, other potential
military and security actions in the Middle East, and instability in markets such as Korea and other parts of Asia, all of which have increased the likelihood that customers will unexpectedly delay, cancel or reduce orders, resulting in revenue
shortfalls. In addition, the recent SARS (severe acute respiratory syndrome) outbreak may have an adverse impact on our worldwide business, particularly in Asian countries such as China where the outbreak has been most widespread, and Canada. In
response to the SARS outbreak, many of people have restricted their travel in the affected regions, which impedes our ability to conduct sales operations and other company functions in these areas. If the outbreak were to continue or worsen, these
adverse effects could grow, as well as possibly impact the economies of the affected countries overall, particularly China, thereby potentially adversely our sales. The risk of delayed or cancelled orders is particularly relevant with respect to
large customer orders, which are more likely to be cancelled, delayed or reduced and also have a greater financial impact on our operating results. A number of technology companies, particularly software companies that, like us, sell enterprise-wide
software solutions, have announced in recent quarters that these conditions have adversely affected their financial results. Any revenue shortfall below our expectations could have an immediate and significant adverse effect on our results of
operations.



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



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



Some of our current principal competitors are also hardware
vendors who bundle their own application server, integration software and tool products, or similar products, with their computer systems and database



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



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



In addition, current and potential competitors may make strategic acquisitions or establish cooperative relationships among themselves or with third parties, thereby increasing the ability of their products to address the needs of
their current and prospective customers. Accordingly, it is possible that new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. Such competition could materially adversely affect our
ability to sell additional software licenses and maintenance, consulting and support services on terms favorable to us. Further, competitive pressures could require us to reduce the price of our products and related services, which could materially
adversely affect our business, operating results and financial condition. We may not be able to compete successfully against current and future competitors and any failure to do so would have a material adverse effect upon our business, operating
results and financial condition.



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



The recent U.S. military activity in Iraq; recent terrorist activities; and related military and security operations, have significantly
disrupted economic activity throughout the United States and much of the world. This significantly adversely impacted our operations and our ability to generate revenues. An unfavorable course of events related to the U.S. military activity in Iraq;
any future terrorist activities or any other military or security operations, particularly with regard to the in the Middle East involving Iraq, and the geopolitical tension in Korea could have a similar or worse effect on our operating results,
particularly if such attacks or operations occur in the last month or weeks of our fiscal quarter or are significant enough to further weaken the U.S. or global economy. In particular, such activities and operations could result in reductions in
information technology spending, deferrals, and reductions or cancellations of customer orders for our products and services.



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



We currently derive the majority of our license and service
revenues from BEA WebLogic®Server, BEA Tuxedo®and from related products and services. We expect these products and services to continue to account for the majority of our revenues in the
immediate future. As a result, factors adversely affecting the pricing of or demand for BEA WebLogic Server, BEA Tuxedo or related services, such as a continued or worsened general economic slowdown, future terrorist activities or military actions,
competition, product performance or technological change, could have a material adverse effect on our business and consolidated results of operations and financial condition. As we have increased our focus on using strategic partners to provide
services related to the deployment and use of our software solutions, we previously experienced a slowdown in the growth of our services revenue, particularly revenue derived from our consulting services. This trend could resume, particularly if the
continued industry-wide oversupply in software infrastructure consultants further increases the willingness and ability of our strategic partners to provide such services or if the current economic slowdown continues or worsens. Conversely if this
trend were to reverse as in the quarter ended October 31, 2002 when we experienced an increase from the previous fiscal quarter in our consulting revenues it may adversely affect our overall operating margins since our consulting revenue margins are
lower than our license revenue margins as well as our other services revenue margins. In addition, as we introduce new versions of our main products, such as WebLogic Server, any delay or failure of these new versions to gain market acceptance among
new and existing customers would have an adverse affect on our revenues and other operating results.



If we do not successfully develop and market our recently introduced new products, our revenues will be adversely affected



We have recently introduced and updated our
WebLogic Workshop tools product and related developer initiatives to help broaden the base of developers who can utilize our technologies and products. If WebLogic Workshop and these related initiatives are not successful, or less successful than we
anticipate, it will have an adverse impact on our sales of BEA WebLogic products, the principal driver of our revenue, and related products and services, as well as adversely affect our profit margins. In addition, we are investing substantial and
increased resources into further developing and marketing our WebLogic Integration products as well as continued significant investment in our WebLogic Liquid Data products. If any of these efforts are not successful, or less successful than we
anticipate, due to such factors as technological problems, competition, market shifts or market acceptance, it will have an adverse impact on our sales and profit margins.



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



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



Moreover, policies, guidelines and interpretations related to
revenue recognition, accounting for acquisitions, our operating lease for real estate in San Jose, California, income taxes, facilities consolidation charges, allowances for doubtful accounts and other financial reporting matters require difficult
judgments on



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complex matters that are often subject to multiple sources of authoritative guidance. To the extent that managements judgment is
incorrect, it could result in an adverse impact on the Companys financial statements. Some of these matters are also among topics currently under reexamination by accounting standards setters and regulators, such as revenue recognition and our
operating lease for real estate in San Jose, California. These standard setters and regulators could promulgate interpretations and guidance that could result in material and potentially adverse changes to our accounting policies.



In addition, there has been an ongoing public debate whether
employee stock option and employee stock purchase plan shares should be measured at their fair value and treated as a compensation expense and, if so, how to properly value such charges. If we were to elect or were required to record and expense for
our stock-based compensation plans using the fair value method, we could have significant compensation charges. For example, in fiscal year 2003, had we accounted for stock-based compensation plans under FASB Statement No. 123, as amended by FASB
Statement No. 148, diluted earnings per share would have been reduced by $0.36 per share. Although we are currently not required to record any compensation expense using the fair value method in connection with option grants that have an exercise
price at or above fair market value and for shares issued under our employee stock purchase plan, it is possible that future laws or regulations will require us to treat all stock-based compensation as a compensation expense using the fair value
method. See Note 1 of the Notes to Consolidated Financial Statements.



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



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



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



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



In addition, we already rely on formal and informal relationships with a number of consulting and systems integration firms to enhance our sales, support, service and marketing efforts, particularly
with respect to implementation and support of our products as well as lead generation and assistance in the sales process. We



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will need to expand our relationships with third parties in order to support license revenue growth. Many such firms have similar, and often
more established, relationships with our principal competitors. It is possible that these and other third parties will not provide the level and quality of service required to meet the needs of our customers, that we will not be able to maintain an
effective, long-term relationship with these third parties, and that these third parties will not successfully meet the needs of our customers.



We only recently reported net income, and could report a net loss again



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



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



When our employees exercise certain stock options, we are subject to employer payroll taxes on the difference between the price of our common stock on the date of exercise and the exercise price. These payroll taxes are determined by
the tax rates in effect in the employees taxing jurisdiction and are treated as an expense in the period in which the exercise occurs. During a particular period, these payroll taxes could be material, in particular if an increase in our stock
price causes a significant number of employees to exercise their options. However, because we are unable to predict our stock price, the number of exercises, or the country of exercise during any particular period, we cannot predict the amount, if
any, of employer payroll tax expense that will be recorded in a future period or the impact on our future financial results.



The price of our common stock may fluctuate significantly



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



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



The market for our products and services is highly fragmented,
competitive with alternative computing architectures, and characterized by continuing technological developments, evolving and competing industry standards, and changing customer requirements. The introduction of products embodying new technologies,
the emergence of new industry standards or changes in customer requirements could render our existing products obsolete and unmarketable. As a result, our success depends upon our ability to timely and effectively enhance



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



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



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



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



We sell our products and services in the application server, application integration and application component markets. These markets are emerging and are characterized by continuing technological developments, evolving industry
standards and changing customer requirements. Our success is dependent in large part on acceptance of our products by large customers with substantial legacy mainframe systems, customers establishing or building out their presence on the Web for
commerce, and developers of Web-based commerce applications. Our future financial performance will depend in large part on the continued growth in the use of the Web to run software applications and continued growth in the number of companies
extending their mainframe-based, mission-critical applications to an enterprisewide distributed computing environment



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and to the Internet through the use of application server and integration technology. The markets for application server and integration
technology and related services may not grow and could decline. Even if they do grow they may grow more slowly than we anticipate, particularly in view of the recent economic downturn affecting the technology sector in the United States, Asia and
Europe. If these markets fail to grow, grow more slowly than we currently anticipate, or decline, our business, results of operations and financial condition will be adversely affected.



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



Revenues from markets outside of the Americas accounted for 45.5 percent, 43.1 percent and 40.6 percent of our total revenues in fiscal 2003, 2002 and 2001 respectively. We sell our products and services through a network of branches
and subsidiaries located in 34 countries worldwide. In addition, we also market our products through distributors. We believe that our success depends upon continued expansion of our international operations. Our international business is subject to
a number of risks, including unexpected changes in regulatory practices and tariffs, greater difficulties in staffing and managing foreign operations, greater difficulties in maintaining U.S. accounting standards, longer collection cycles,
seasonality, potential changes in tax laws, greater difficulty in protecting intellectual property rights and the impact of fluctuating exchange rates between the U.S. dollar and foreign currencies in markets where we do business. In particular, we
are periodically subject to tax audits by government agencies in foreign jurisdictions. To date, the outcomes of these audits have not had a material impact on us. It is possible, however, that future audits could result in significant assessments
against us or our employees for transfer taxes, payroll taxes, income taxes, or other taxes as well as related employee and other claims which could adversely effect our operating results. General economic and political conditions in these foreign
markets, including the military action in the Middle East and geopolitical instabilities in Korea and other parts of Asia, may also impact our international revenues, as such conditions may cause decreases in demand, or impact our ability to collect
payment from our customers. There can be no assurances that these factors and other factors will not have a material adverse effect on our future international revenues and consequently on our business and consolidated financial condition and
results of operations.



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



From our inception in January 1995, we have made a substantial number of strategic acquisitions. In connection with acquisitions completed
prior to January 31, 2003, we recorded approximately $365.0 million as intangible assets and goodwill of which approximately $295.3 million has been amortized or written off as of January 31, 2003. In the third quarter of fiscal 2002, we recorded
asset impairment charges totaling $80.1 million against certain acquired intangible assets and goodwill. If future events cause additional impairment of any intangible assets acquired in our past or future acquisitions, we may have to record
additional charges relating to such assets sooner than we expect which would cause our profits to decline. In addition, integration of acquired companies, divisions and products involves the assimilation of potentially conflicting operations and
products, which diverts the attention of our management team and may have a material adverse effect on our operating results in future quarters. It is possible that we may not achieve any of the intended financial or strategic benefits of these
transactions. While we intend to make additional acquisitions in the future, there may not be suitable companies, divisions or products available for acquisition. Our acquisitions entail numerous risks, including the risk that we will not
successfully assimilate the acquired operations and products, retain key employees of the acquired operations, or execute successfully the product development strategy driving the acquisition. There are also risks relating to the diversion of our
managements attention, and difficulties and uncertainties in our ability to maintain the key business relationships that the acquired entities have established. In addition, we may have product liability or intellectual property liability
associated with the sale of the acquired Companys products. Acquisitions also expose us to the risk of claims by terminated employees, from shareholders of the acquired companies or other third parties related to the transaction. Finally, if
we undertake future acquisitions, we may issue dilutive securities, assume or incur additional debt obligations, incur large one-time expenses, utilize



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substantial portions of our cash, and acquire intangible assets that would result in significant future amortization expense. Any of these
events could have a material adverse effect on our business, operating results and financial condition.



On June 29, 2001, the Financial Accounting Standards Board (the FASB) eliminated pooling of interests accounting for
acquisitions. The effect of this change could be to increase the portion of the purchase price for any future acquisitions that must be charged to BEAs cost of revenues and operating expenses in the periods following any such acquisitions. As
a consequence, our results of operations in periods following any such acquisition could be materially adversely affected. Although these changes will not directly affect the purchase price for any of these acquisitions, they will have the effect of
increasing the reported expenses associated with any of these acquisitions. To that extent, these changes may make it more difficult for us to acquire other companies, product lines or technologies. Also on June 29, 2001, the FASB pronounced under
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets(FAS 142) that purchased goodwill should not be amortized, but rather, it should be periodically reviewed for impairment. Such impairment
could be caused by internal factors as well as external factors beyond our control. The FASB has further determined that at the time goodwill is considered impaired an amount equal to the impairment loss should be charged as an operating expense in
the statement of operations. The timing of such an impairment (if any) of goodwill acquired in past and future transactions is uncertain and difficult to predict. Our results of operations in periods following any such impairment could be materially
adversely affected. We are required to determine whether goodwill and any assets acquired in past acquisitions have been impaired in accordance with FAS 142 and, if so, charge such impairment as an expense. In the quarter ended October 31, 2001, we
took an asset impairment charge of $80.1 million related to past acquisitions. We have remaining net goodwill and net acquired intangible assets of approximately $69.7 million at January 31, 2003, so if we are required to take such additional
impairment charges, the amounts could have a material adverse effect to our results of operations.



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



Our customers typically use our products to implement large,
sophisticated applications that are critical to their business, and their purchases are often part of their implementation of a distributed or Web-based computing environment. Customers evaluating our software products face complex decisions
regarding alternative approaches to the integration of enterprise applications, competitive product offerings, rapidly changing software technologies and standards and limited internal resources due to other information systems requirements. For
these and other reasons, the sales cycle for our products is lengthy and is subject to delays or cancellation over which we have little or no control. We have recently experienced an increase in the number of million and multimillion dollar
license transactions. In some cases, this has resulted in more extended customer evaluation and procurement processes, which in turn have lengthened the overall sales cycle for our products. The on-going economic downturn in our key markets has also
contributed to increasing the length of our sales cycle, and there is a risk that this will continue or worsen. This delay or failure to complete large orders and sales in a particular quarter could significantly reduce revenue that quarter, as well
as subsequent quarters over which revenue for the sale would likely be recognized.



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



Our success depends upon our
proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. It is possible that other companies
could successfully challenge the validity or scope of our patents and that our patents may not provide a competitive advantage to us. As part of our confidentiality procedures, we generally enter into non-disclosure agreements with our employees,
distributors and corporate partners and into license agreements with respect to our software, documentation and other proprietary information. Despite these precautions, third parties could copy or otherwise obtain and use our products or technology
without authorization, or develop similar technology independently. In particular, we have, in the



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past, provided certain hardware OEMs with access to our source code, and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and financial condition. It is difficult for us to police unauthorized use of our products, and although we are unable to determine the extent to which piracy of our software products
exists, software piracy is a persistent problem. Effective protection of intellectual property rights is unavailable or limited in certain foreign countries. The protection of our proprietary rights may not be adequate and our competitors could
independently develop similar technology, duplicate our products, or design around patents and other intellectual property rights that we hold.



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



We have experienced substantial growth since our inception in 1995 that has placed a strain on our
administrative and operational infrastructure. Overall, we have increased the number of our employees from 120 employees in three offices in the United States at January 31, 1996 to approximately 3,063 employees in 81 offices in 34
countries at January 31, 2003. Our ability to manage our staff and growth effectively requires us to continue to improve our operational, financial, disclosure and management controls, reporting systems and procedures, and information technology
infrastructure, particularly in light of the recent enactment of the Sarbanes-Oxley Act of 2002 and related regulations. In this regard, we are continuing to update our management information systems to integrate financial and other reporting among
our multiple domestic and foreign offices. In addition, we may continue to increase our staff worldwide and continue to improve the financial reporting and controls for our global operations. We are also continuing to develop and roll out
information technology initiatives. It is possible that we will not be able to successfully implement improvements to our management information, control systems, reporting systems and information technology infrastructure in an efficient or timely
manner and that, during the course of this implementation, we could discover deficiencies in existing systems and controls, as well as past errors resulting therefrom. If we are unable to manage growth effectively, our business, results of
operations and financial condition will be materially adversely affected.



We have a real estate leasing structure, which could result in substantial charges to our consolidated statement of operations, a substantial increase in liabilities on our consolidated balance sheet and substantial cash
payments



In connection with a
lease transaction for real estate in San Jose, California that we entered into in the first quarter of fiscal 2002 for the construction of additional corporate offices, we have restricted approximately $126.5 million out of our total cash, cash
equivalents and investment securities as of January 31, 2003, as collateral for specified obligations to the lessor under the lease. The investment securities are restricted as to withdrawal and are managed by a third party subject to a number of
limitations. Commencing in fiscal 2004, we are required under this real estate transaction to make annual lease payments of approximately $9.9 million, which will fluctuate from time to time depending on short-term interest rates. During our quarter
ended January 31, 2002, we re-evaluated the scope and timing of our construction for additional corporate offices, which resulted in our recognizing a charge of $5.0 million. We continuously reevaluate the scope and timing of the construction
project. If we determine to not pursue, completely or in part, the construction, we may be required to recognize a material charge to earnings if the then current fair value of the land is less than our residual value guarantee of approximately $330
million.



Under the land lease agreement a
third-party lessor agreed to finance up to $331 million of land and associated costs. The land lease has an initial term of five years, and we have an option to renew the lease agreement, to purchase the land at any time during the lease for the
outstanding lease balance or to arrange for the sale of the land to a third party. If we elect to arrange for the sale of the land, we are obligated to pay any shortfall between the sales price and the outstanding lease balance under a residual
value guarantee. This payment could materially decrease our cash available for working capital and make other sources of financing more difficult to obtain. If it became probable that the value of the leased land would be less than the outstanding
lease balance at lease termination, the estimated deficiency would be expensed ratably over the remaining term



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of the lease which expires in 2006. Our current assessment is that it is not probable that a deficiency will exist at the end of the lease
term, however, we will continue to assess the fair value of the land to assess whether it is probable that a liability will be incurred under the residual value guarantee. This type of assessment is highly subjective and involves a detailed
understanding of such factors as the current real estate market conditions as well as future expectations for the market. Due to historical and expected volatility of the real estate market, there may be a time at which management is unable to
reasonably estimate the fair value of the property at the end of the lease term or management may determine that it is probably that the fair value at lease termination will be less than the residual value guarantee of approximately $330 million.
Accordingly, we may be required to record a liability under our residual value guarantee related to the land lease at a future date, which may have a material adverse effect on our operating results.



In addition, if we choose to purchase the land or restructure
the financing arrangement, for any reason, this could materially decrease our cash available for working capital, could make other sources of financing more difficult to obtain, and would require us to capitalize the land on our balance sheet. It is
possible under such a scenario that the land would be capitalized on our balance sheet at then current fair market value, which could be less than the outstanding lease balance in the near term. This could result in a material charge to earnings,
equal to the difference between the current fair market value of the property and the outstanding lease balance at the time such determination is made.



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



At
January 31, 2003, we had approximately $550.0 million of convertible notes outstanding. As a result of this indebtedness, we have substantial principal and interest payment obligations. The degree to which we are leveraged could significantly harm
our ability to obtain financing for working capital, acquisitions or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future
performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control.



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



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



We
believe our future success will depend upon our ability to attract and retain highly skilled personnel, including our Chairman, Chief Executive Officer and President, Alfred Chuang, and other key members of management. Competition for these types of
employees is intense, and it is possible that we will not be able to



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retain our key employees and that we will not be successful in attracting, assimilating and retaining qualified candidates in the future. As
we seek to expand our global organization, the hiring of qualified sales, technical and support personnel will be difficult due to the limited number of qualified professionals. Failure to attract, assimilate and retain key personnel would have a
material adverse effect on our business, results of operations and financial condition.



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



The software products we offer are internally complex and, despite extensive testing and quality control, may contain errors or defects,
especially when we first introduce them. We may need to issue corrective releases of our software products to fix any defects or errors. Any defects or errors could also cause damage to our reputation and result in loss of revenues, product returns
or order cancellations, or lack of market acceptance of our products. Accordingly, any defects or errors could have a material and adverse effect on our business, results of operations and financial condition.



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



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



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



ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



Foreign Exchange



Our revenues originating outside the Americas were 45.5 percent, 43.1 percent and 40.6 percent of total revenues in fiscal 2003, 2002 and
2001, respectively. International revenues from each individual country outside of the United States were less than 10 percent of total revenues in fiscal 2003 and 2002. The only individual country outside of the United States with revenues greater
than 10 percent of total revenues in fiscal 2001 was the United Kingdom with $84.7 million or 10.3 percent. International sales were made mostly from our foreign sales subsidiaries in the local countries and are typically denominated in the local
currency of each country. These subsidiaries also incur most of their expenses in the local currency. Accordingly, foreign subsidiaries use the local currency as their functional currency.



Our international operations are subject to risks typical of an international business, including, but not
limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations



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and restrictions, and foreign exchange volatility. Accordingly, our future results could be materially adversely impacted by changes in these
or other factors.



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



We use derivative instruments to manage certain exposures to foreign currency. Our objectives in holding derivatives are to minimize the risks using the most effective methods to eliminate or reduce
the impacts of these exposures.



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



We have a program to reduce the effect of foreign exchange gains and losses from recorded foreign
currency-denominated assets and liabilities. This program involves the use of forward foreign exchange contracts in certain European, Asian and Latin and North American currencies. A forward foreign exchange contract obligates us to exchange
predetermined amounts of specified foreign currencies at specified exchange rates on specified dates or to make an equivalent U.S. dollar payment equal to the value of such exchange. Under this program, foreign currency gains and losses due to
exchange rate fluctuations are partially offset by gains and losses on the forward contracts. We do not use foreign currency contracts for speculative or trading purposes. All foreign currency transactions and all outstanding forward contracts are
marked-to-market on a monthly basis with realized gains and losses included in interest income and other, net. Net losses resulting from foreign currency transactions were approximately $351,000 for fiscal 2003.



Our outstanding forward contracts as of January 31, 2003 are
presented in the table below. This table presents the net notional amount in U.S. dollars using the spot exchange rate in January 2003 and the weighted average contractual foreign currency exchange rates. Notional weighted average exchange rates are
quoted using market conventions where the currency is expressed in units per U.S. dollar. All of these forward contracts mature within 30 days or less as of January 31, 2003. Net sales of foreign currency are stated as a positive net notional amount
and net purchases of foreign currency are stated as a negative net notional amount.



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|                                      |  | Notional Amount |        |   | Notional Weighted Average Exchange Rate
|------------------------------------- |  | --------------- | ------ | - | ---------------------------------------
|                                      |  | (in thousands)  |        |   |                                        
|Functional CurrencyU.S. Dollar       |  |                 |        |   |                                        
|                                     
|Australian dollars                    |  | $               | 6,900  |   |                                        
|Brazilian reals                       |  |                 | (500   | ) |                                        
|British pounds                        |  |                 | (5,200 | ) |                                        
|Canadian dollars                      |  |                 | 6,300  |   |                                        
|Euros                                 |  |                 | 57,900 |   |                                        
|Israeli shekels                       |  |                 | (5,300 | ) |                                        
|Japanese yen                          |  |                 | (1,100 | ) |                                        
|Korean won                            |  |                 | 17,700 |   |                                        
|Mexican pesos                         |  |                 | 100    |   |                                        
|New Zealand dollars                   |  |                 | (500   | ) |                                        
|Singapore dollars                     |  |                 | (3,100 | ) |                                        
|Swedish krona                         |  |                 | 5,000  |   |                                        
|Swiss francs                          |  |                 | (900   | ) |                                        
|                                      |  |                 |        |   |                                        
|Total                                 |  |                 | 77,300 |   |                                        
|                                      |  |                 |        |   |                                        
|Functional CurrencyEURO              |  |                 |        |   |                                        
|                                     
|British pounds                        |  |                 | 1,100  |   |                                        
|Danish krone                          |  |                 | (400   | ) |                                        
|Israeli shekels                       |  |                 | 5,800  |   |                                        
|Norwegian kron                        |  |                 | 2,800  |   |                                        
|Swedish krona                         |  |                 | 2,100  |   |                                        
|Swiss francs                          |  |                 | 1,600  |   |                                        
|                                      |  |                 |        |   |                                        
|Total                                 |  |                 | 13,000 |   |                                        
|                                      |  |                 |        |   |                                        
|Functional CurrencyAustralian Dollar |  |                 |        |   |                                        
|                                     
|New Zealand dollars                   |  |                 | 3,300  |   |                                        
|Singapore dollars                     |  |                 | 5,600  |   |                                        
|                                      |  |                 |        |   |                                        
|Total                                 |  |                 | 8,900  |   |                                        
|                                      |  |                 |        |   |                                        
|Grand total                           |  | $               | 99,200 |   |                                        
|                                      |  |                 |        |   |                                        



Interest Rates



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



We account for our investment instruments in
accordance with Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities(FAS 115). All of the cash equivalents, short-term investments and short-term and long-term
restricted cash are treated as available-for-sale under FAS 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes
in interest rates or we may suffer losses in principal if forced to sell securities which have seen a decline in market value due to changes in interest rates. However, we reduce our interest rate risk by investing our cash in instruments with
remaining



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time to maturity of less than two years. As of January 31, 2003, the average holding period until maturity of our cash equivalents, short and
long-term restricted cash and short-term investments was approximately 265 days. The table below presents the principal amount and related weighted average interest rates for our investment portfolio. Short-term investments are all in fixed rate
instruments.



Table of investment securities (in
thousands) at January 31, 2003:



|                                      |  | Fair Value |           | Average Interest Rate |     
|------------------------------------- |  | ---------- | --------- | --------------------- | ----
|Cash equivalents                      |  | $          | 382,650   |                       | 1.63
|Short-term investments (0-1year)      |  |            | 101,059   |                       | 1.72
|Short-term investments (1-2 years)    |  |            | 587,694   |                       | 2.47
|Short-term restricted cash (0-1 year) |  |            | 4,369     |                       | 1.50
|Long-term restricted cash (0-1 year)  |  |            | 131,727   |                       | 1.24
|                                      |  |            |           |                       |     
|Total cash and investment securities  |  | $          | 1,207,499 |                       |     
|                                      |  |            |           |                       |     



We are
exposed to changes in short-term interest rates through a lease that we entered into on February 13, 2001, which includes a variable short-term interest rate based on LIBOR. The annual lease expense will fluctuate from time to time depending on
changes in the London Interbank Offering Rate (LIBOR). A 1.0 percent increase in LIBOR will generate an increase in annual lease expense of approximately $3.3 million. We are also exposed to changes in short-term interest rates through
our invested balances of cash equivalents, restricted cash and short term investments, the yields on which will fluctuate with changes in short-term interest rates. The annual interest rate on our $550 million convertible notes is fixed at 4.0
percent through the maturity date in December 2006. A 1.0 percent decrease in short-term interest rates would result in an annual reduction of interest income of approximately $8.1 million.



ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.



Supplementary Quarterly Financial Data (unaudited):



|                                                                                                         |  | Quarter Ended                        
|-------------------------------------------------------------------------------------------------------- |  | -------------------------------------
|                                                                                                         |  | January 31,2003                      
|                                                                                                         |  | (in thousands, except per share data)
|                                                                                                        
|Total revenues                                                                                           |  | $                                    
|Gross profit                                                                                             |  | $                                    
|Net income (loss)                                                                                        |  | $                                    
|Net income (loss) per share:                                                                             |  |                                      
|Basic                                                                                                    |  | $                                    
|Diluted                                                                                                  |  | $                                    
|Total asset impairment charges included in cost of revenues and
operating expenses                       |  |                                      
|Total facilities consolidation and severance charges included in cost of
revenues and operating expenses |  |                                      



The
Company ceased the amortization of goodwill at the start of the year ended January 31, 2003. See Note 5 of the Notes to Consolidated Financial Statements.



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BEA SYSTEMS, INC.



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                         |  | Page
|------------------------------------------------------------------------------------------------------------------------ |  | ----
|AUDITED FINANCIAL STATEMENTS                                                                                             |  |     
|                                                                                                                        
|Report of Ernst & Young LLP, Independent Auditors                                                                        |  | 49  
|                                                                                                                        
|Consolidated Balance Sheets as of January 31, 2003 and 2002                                                              |  | 50  
|                                                                                                                        
|Consolidated Statements of Operations and Comprehensive Income (Loss) for the years
endedJanuary 31, 2003, 2002 and 2001 |  | 51  
|                                                                                                                        
|Consolidated Statements of Stockholders Equity for the years ended January 31,
2003, 2002 and 2001                      |  | 52  
|                                                                                                                        
|Consolidated Statements of Cash Flows for the years ended January 31, 2003, 2002 and
2001                                |  | 53  
|                                                                                                                        
|Notes to Consolidated Financial Statements                                                                               |  | 54  



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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS



The Board of Directors and Stockholders

BEA Systems, Inc.



We have audited the accompanying consolidated balance sheets of BEA Systems, Inc. as of January 31, 2003 and 2002 and the related
consolidated statements of operations and comprehensive income (loss), stockholders equity, and cash flows for each of the three years in the period ended January 31, 2003. Our audits also included the financial statement schedule listed in
the index at Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.



We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those 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 BEA Systems, Inc. at January 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 January 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



As discussed in Note 5 to the consolidated financial statements, the Company changed its method of accounting
for goodwill and other intangible assets in the year ended January 31, 2003.



/s/  ERNST & YOUNG LLP



San Francisco, California

February 19, 2003



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BEA SYSTEMS, INC.



CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)



|                                                                                                                                                         |  | January 31, |          
|-------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ---------
|                                                                                                                                                         |  | 2003        |          
|A S S E T S                                                                                                                                              |  |             |          
|Current Assets:                                                                                                                                          |  |             |          
|Cash and cash equivalents                                                                                                                                |  | $           | 578,717  
|Restricted cash                                                                                                                                          |  |             | 4,369    
|Short-term investments                                                                                                                                   |  |             | 688,753  
|Accounts receivable, net of allowance for doubtful accounts of $11,210 and $10,700 at
January 31, 2003 and 2002, respectively                            |  |             | 208,189  
|Deferred tax assets                                                                                                                                      |  |             |         
|Other current assets (see Note 7Related Party Transaction)                                                                                              |  |             | 43,869   
|                                                                                                                                                         |  |             |          
|Total current assets                                                                                                                                     |  |             | 1,523,897
|Property and equipment, net                                                                                                                              |  |             | 63,938   
|Goodwill, net of accumulated amortization of $133,348 at both January 31, 2003 and
2002                                                                  |  |             | 53,565   
|Acquired intangible assets, net                                                                                                                          |  |             | 16,159   
|Long-term restricted cash                                                                                                                                |  |             | 131,727  
|Other long-term assets (see Note 7Related Party
Transaction)                                                                                            |  |             | 20,673   
|                                                                                                                                                         |  |             |          
|Total assets                                                                                                                                             |  | $           | 1,809,959
|                                                                                                                                                         |  |             |          
|L I A B I L I T I E S   A N D   S T O C K H O L D E R
S   E Q U I T Y                                                                                   |  |             |          
|Current liabilities:                                                                                                                                     |  |             |          
|Accounts payable                                                                                                                                         |  | $           | 10,807   
|Accrued liabilities                                                                                                                                      |  |             | 89,348   
|Accrued facilities consolidation and severance charges                                                                                                   |  |             | 17,617   
|Accrued payroll and related liabilities                                                                                                                  |  |             | 54,295   
|Accrued income taxes                                                                                                                                     |  |             | 38,992   
|Deferred revenues                                                                                                                                        |  |             | 233,758  
|Deferred tax liabilities                                                                                                                                 |  |             | 600      
|Current portion of notes payable and other obligations                                                                                                   |  |             | 164      
|                                                                                                                                                         |  |             |          
|Total current liabilities                                                                                                                                |  |             | 445,581  
|Deferred tax liabilities                                                                                                                                 |  |             | 4,214    
|Notes payable and other long-term obligations                                                                                                            |  |             | 4,215    
|Convertible subordinated notes                                                                                                                           |  |             | 550,000  
|Commitments and contingencies                                                                                                                            |  |             |          
|Stockholders equity:                                                                                                                                    |  |             |          
|Preferred stock$0.001 par value; 5,000 shares authorized; none issued and
outstanding                                                                   |  |             |         
|Common stock$0.001 par value; 1,035,000 shares authorized; 405,751 and 403,860
shares issued and outstanding at January 31, 2003 and 2002, respectively |  |             | 406      
|Additional paid-in capital                                                                                                                               |  |             | 1,002,846
|Treasury stock, at cost                                                                                                                                  |  |             | (42,095  
|Accumulated deficit                                                                                                                                      |  |             | (137,675 
|Deferred compensation                                                                                                                                    |  |             | (18,479  
|Accumulated other comprehensive income (loss)                                                                                                            |  |             | 946      
|                                                                                                                                                         |  |             |          
|Total stockholders equity                                                                                                                               |  |             | 805,949  
|                                                                                                                                                         |  |             |          
|Total liabilities and stockholders equity                                                                                                               |  | $           | 1,809,959
|                                                                                                                                                         |  |             |          

See accompanying notes



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BEA SYSTEMS, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share data)



|                                                                                                                    |  | Fiscal year ended January 31, |        
|------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | -------
|                                                                                                                    |  | 2003                          |        
|Revenues:                                                                                                           |  |                               |        
|License fees                                                                                                        |  | $                             | 515,883
|Services                                                                                                            |  |                               | 418,175
|                                                                                                                    |  |                               |        
|Total revenues                                                                                                      |  |                               | 934,058
|                                                                                                                    |  |                               |        
|Cost of revenues:                                                                                                   |  |                               |        
|Cost of license fees                                                                                                |  |                               | 18,797 
|Cost of services                                                                                                    |  |                               | 178,105
|Amortization of acquired intangible assets                                                                          |  |                               | 25,388 
|Impairment of certain acquired intangible assets                                                                    |  |                               |       
|Severance charges                                                                                                   |  |                               |       
|                                                                                                                    |  |                               |        
|Total cost of revenues                                                                                              |  |                               | 222,290
|                                                                                                                    |  |                               |        
|Gross profit                                                                                                        |  |                               | 711,768
|Operating expenses:                                                                                                 |  |                               |        
|Sales and marketing                                                                                                 |  |                               | 368,874
|Research and development                                                                                            |  |                               | 132,771
|General and administrative                                                                                          |  |                               | 76,390 
|Amortization of goodwill                                                                                            |  |                               |       
|Facilities consolidation and severance charges                                                                      |  |                               |       
|Impairment of goodwill                                                                                              |  |                               |       
|Acquisition-related charges                                                                                         |  |                               |       
|                                                                                                                    |  |                               |        
|Total operating expenses                                                                                            |  |                               | 578,035
|                                                                                                                    |  |                               |        
|Income (loss) from operations                                                                                       |  |                               | 133,733
|Interest and other, net:                                                                                            |  |                               |        
|Interest expense                                                                                                    |  |                               | (22,086
|Write-down of equity investments                                                                                    |  |                               | (24,174
|Net gains on sale of equity investments (see Note 7Related Party
Transactions)                                     |  |                               | 3,659  
|Interest income and other, net (see Note 7Related Party
Transactions)                                              |  |                               | 28,691 
|                                                                                                                    |  |                               |        
|Total interest and other, net                                                                                       |  |                               | (13,910
|Income (loss) before provision for income taxes                                                                     |  |                               | 119,823
|Provision for income taxes                                                                                          |  |                               | 35,947 
|                                                                                                                    |  |                               |        
|Net income (loss)                                                                                                   |  |                               | 83,876 
|Other comprehensive income (loss):                                                                                  |  |                               |        
|Foreign currency translation adjustments                                                                            |  |                               | 5,477  
|Unrealized gain (loss) on available-for-sale investments, net of income taxes of $834,
$203 and $(12), respectively |  |                               | 1,943  
|                                                                                                                    |  |                               |        
|Comprehensive income (loss)                                                                                         |  | $                             | 91,296 
|                                                                                                                    |  |                               |        
|Net income (loss) per share:                                                                                        |  |                               |        
|Basic                                                                                                               |  | $                             | 0.21   
|                                                                                                                    |  |                               |        
|Diluted                                                                                                             |  | $                             | 0.20   
|                                                                                                                    |  |                               |        
|Shares used in computing net income (loss) per share:                                                               |  |                               |        
|Basic                                                                                                               |  |                               | 405,515
|                                                                                                                    |  |                               |        
|Diluted                                                                                                             |  |                               | 418,540
|                                                                                                                    |  |                               |        



See accompanying notes



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BEA SYSTEMS, INC.



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands)



|                                                                               |  | Commonstock |     |   | Class Bcommonstock |   |     | Additionalpaid-incapital |  |   | Treasury stock |   |  | Accumulateddeficit |         |   | Notesreceivablefromstockholders |   |          | Deferredcompensation |  |   | Accumulatedothercomprehensiveloss |   |  | Totalstockholdersequity |        
|------------------------------------------------------------------------------ |  | ----------- | --- | - | ------------------ | - | --- | ------------------------ |  | - | -------------- | - |  | ------------------ | ------- | - | ------------------------------- | - | -------- | -------------------- |  | - | --------------------------------- | - |  | ------------------------ | -------
|Balance at January 31, 2000                                                    |  | $           | 290 |   |                    | $ | 71  |                          |  | $ | 650,128        |   |  | $                  |        |   |                                 | $ | (202,951 | )                    |  | $ | (296                              | ) |  | $                        | (1,144 
|Issuance of common stock                                                       |  |             | 2   |   |                    |   |    |                          |  |   | 23,258         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Common shares issued under stock option and stock purchase plans               |  |             | 25  |   |                    |   |    |                          |  |   | 85,725         |   |  |                    |        |   |                                 |   | (4       | )                    |  |   |                                  |   |  |                          |       
|Conversion of Class B common stock                                             |  |             | 71  |   |                    |   | (71 | )                        |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Conversion of debt obligations                                                 |  |             | 2   |   |                    |   |    |                          |  |   | 10,823         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Repayment of notes receivable from stockholders                                |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   | 98                                |   |  |                          |       
|Amortization of deferred compensation                                          |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          | 621    
|Return of shares from escrow previously issued in connection with
acquisitions |  |             |    |   |                    |   |    |                          |  |   | (2,060         | ) |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Tax benefit on stock options                                                   |  |             |    |   |                    |   |    |                          |  |   | 25,855         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Net income                                                                     |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   | 17,082   |                      |  |   |                                  |   |  |                          |       
|Foreign currency translation adjustment                                        |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Unrealized losses on available-for-sale investments, net of tax                |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|                                                                               |  |             |     |   |                    |   |     |                          |  |   |                |   |  |                    |         |   |                                 |   |          |                      |  |   |                                   |   |  |                          |        
|Balance at January 31, 2001                                                    |  |             | 390 |   |                    |   |    |                          |  |   | 793,729        |   |  |                    |        |   |                                 |   | (185,873 | )                    |  |   | (198                              | ) |  |                          | (523   
|Issuance of common stock                                                       |  |             | 1   |   |                    |   |    |                          |  |   | 28,013         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          | (12,945
|Common shares issued under stock option and stock purchase plans               |  |             | 11  |   |                    |   |    |                          |  |   | 62,660         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Conversion of debt obligations                                                 |  |             | 2   |   |                    |   |    |                          |  |   | 11,233         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Repayment of notes receivable from stockholders                                |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   | 198                               |   |  |                          |       
|Amortization of deferred compensation                                          |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          | 1,431  
|Tax benefit on stock options                                                   |  |             |    |   |                    |   |    |                          |  |   | 17,939         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Net loss                                                                       |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   | (35,678  | )                    |  |   |                                  |   |  |                          |       
|Foreign currency translation adjustment                                        |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Unrealized gains on available-for-sale investments, net of tax                 |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|                                                                               |  |             |     |   |                    |   |     |                          |  |   |                |   |  |                    |         |   |                                 |   |          |                      |  |   |                                   |   |  |                          |        
|Balance at January 31, 2002                                                    |  |             | 404 |   |                    |   |    |                          |  |   | 913,574        |   |  |                    |        |   |                                 |   | (221,551 | )                    |  |   |                                  |   |  |                          | (12,037
|Issuance of restricted common stock                                            |  |             |    |   |                    |   |    |                          |  |   | 1,203          |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          | (1,202 
|Common shares issued under stock option and stock purchase plans               |  |             | 9   |   |                    |   |    |                          |  |   | 49,428         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Stock repurchases                                                              |  |             | (7  | ) |                    |   |    |                          |  |   |               |   |  |                    | (42,095 | ) |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Deferred compensation related to stock option grants                           |  |             |    |   |                    |   |    |                          |  |   | 11,738         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          | (11,738
|Amortization of deferred compensation, net of cancellations                    |  |             |    |   |                    |   |    |                          |  |   | (98            | ) |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          | 6,498  
|Tax benefit on stock options                                                   |  |             |    |   |                    |   |    |                          |  |   | 27,001         |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Net income                                                                     |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   | 83,876   |                      |  |   |                                  |   |  |                          |       
|Foreign currency translation adjustment                                        |  |             |     |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|Unrealized gains on available-for-sale investments, net of tax                 |  |             |    |   |                    |   |    |                          |  |   |               |   |  |                    |        |   |                                 |   |         |                      |  |   |                                  |   |  |                          |       
|                                                                               |  |             |     |   |                    |   |     |                          |  |   |                |   |  |                    |         |   |                                 |   |          |                      |  |   |                                   |   |  |                          |        
|Balance at January 31, 2003                                                    |  | $           | 406 |   |                    | $ |    |                          |  | $ | 1,002,846      |   |  | $                  | (42,095 | ) |                                 | $ | (137,675 | )                    |  | $ |                                  |   |  | $                        | (18,479
|                                                                               |  |             |     |   |                    |   |     |                          |  |   |                |   |  |                    |         |   |                                 |   |          |                      |  |   |                                   |   |  |                          |        



See accompanying notes



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BEA SYSTEMS, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                                             |  | Fiscal year ended January 31, |         
|------------------------------------------------------------------------------------------------------------ |  | ----------------------------- | --------
|                                                                                                             |  | 2003                          |         
|Operating activities:                                                                                        |  |                               |         
|Net income (loss)                                                                                            |  | $                             | 83,876  
|Adjustments to reconcile net income (loss) to net cash provided by operating
activities:                     |  |                               |         
|Depreciation                                                                                                 |  |                               | 32,607  
|Property and equipment write-offs                                                                            |  |                               | 7,386   
|Amortization of deferred compensation                                                                        |  |                               | 6,252   
|Amortization of acquired intangible assets and goodwill and write-off of in-process
research and development |  |                               | 25,388  
|Write-down of equity investments, net of gains                                                               |  |                               | 20,515  
|Impairment of acquired intangible assets and goodwill                                                        |  |                               |        
|Other                                                                                                        |  |                               | 15,277  
|Changes in operating assets and liabilities, net of those acquired in business
combinations:                 |  |                               |         
|Accounts receivable                                                                                          |  |                               | (16,917 
|Other current assets                                                                                         |  |                               | (8,863  
|Other long-term assets                                                                                       |  |                               | (151    
|Accounts payable                                                                                             |  |                               | (11,193 
|Accrued liabilities                                                                                          |  |                               | 14,145  
|Deferred revenues                                                                                            |  |                               | 41,262  
|Other                                                                                                        |  |                               | (15,138 
|                                                                                                             |  |                               |         
|Net cash provided by operating activities                                                                    |  |                               | 194,446 
|Investing activities:                                                                                        |  |                               |         
|Purchases of property and equipment                                                                          |  |                               | (25,986 
|Payments for acquisitions, net of cash acquired, and other equity
investments                                |  |                               | (15,359 
|Repayment of note from WP Equity Partners, Inc. (see Note 7Related Party
Transactions)                      |  |                               | 74,570  
|Purchases of available-for-sale short-term investments                                                       |  |                               | (817,864
|Proceeds from maturities of available-for-sale short-term investments                                        |  |                               | 251,398 
|Proceeds from sales of available-for-sale short-term investments                                             |  |                               | 78,335  
|Other                                                                                                        |  |                               | 1,381   
|                                                                                                             |  |                               |         
|Net cash used in investing activities                                                                        |  |                               | (453,525
|Financing activities:                                                                                        |  |                               |         
|Increase in restricted cash for collateral on land lease transaction                                         |  |                               | (7,014  
|Proceeds from issuance of common stock, net of issuance costs                                                |  |                               | 48,855  
|Purchases of treasury stock                                                                                  |  |                               | (42,102 
|Other                                                                                                        |  |                               |        
|                                                                                                             |  |                               |         
|Net cash provided by (used in) financing activities                                                          |  |                               | (261    
|                                                                                                             |  |                               |         
|Net increase (decrease) in cash and cash equivalents                                                         |  |                               | (259,340
|Effect of foreign exchange rate changes on cash                                                              |  |                               | 16,255  
|Cash and cash equivalents at beginning of year                                                               |  |                               | 821,802 
|                                                                                                             |  |                               |         
|Cash and cash equivalents at end of year                                                                     |  | $                             | 578,717 
|                                                                                                             |  |                               |         



See accompanying notes



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    Organization and Significant Accounting Policies



Description of business



BEA Systems, Inc. (BEA or the
Company) is a provider of application infrastructure software and related services that help companies of all sizes build distributed systems that extend investments in existing computer systems and provide the foundation for running an
integrated business. BEAs customers use BEA products as a deployment platform for Internet-based applications, including custom-built and packaged applications, and as a means for robust enterprise application integration among mainframe,
client/server and Internet-based applications. Our revenues are derived from a single group of similar and related products and related services.



Principles of consolidation



The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions
and balances have been eliminated. The operating results of businesses acquired and accounted for as purchases are included from the date of their acquisition.



Use of estimates



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



Foreign currencies



The assets and liabilities of foreign subsidiaries are translated from their respective functional currencies
at the rates in effect at the end of each reporting period while revenue and expense accounts are translated at weighted average rates during the period. Foreign currency translation adjustments are reflected as a separate component of accumulated
other comprehensive income (loss).



The Company
hedges a portion of its exposure on certain foreign currency denominated monetary assets and liabilities, primarily intercompany balances, using forward foreign exchange contracts, which are recorded at fair value based on current exchange rates
each month. Gains and losses resulting from exchange rate fluctuations on forward foreign exchange contracts are recorded in interest income and other, net and are generally offset by the corresponding foreign exchange gains and losses from the
foreign currency denominated assets and liabilities. Net losses resulting from foreign currency transactions were approximately $351,000, $848,000 and $787,000 in the years ended January 31, 2003, 2002 and 2001, respectively.



Cash equivalents and short-term investments



Cash equivalents consist of highly liquid
investments, including corporate debt securities and money market funds with maturities of 90 days or less from the date of purchase.



Short-term investments consist principally of corporate debt securities and U.S. Treasuries with remaining time to maturity of two years
or less. The Company considers all investments with remaining time to maturity greater than one year but less than two years to be short-term investments. The investments are classified in the balance sheet as current assets because they can be
readily converted at any time into cash or into securities with a shorter remaining time to maturity and because the Company is not committed to holding the investments until



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



maturity, but rather the investments are selected for yield management purposes only. The Company determines the appropriate classification
of its investments at the time of purchase and re-evaluates such designations as of each balance sheet date. All short-term investments and cash equivalents in the portfolio are classified as available-for-sale and are stated at fair
market value, with the unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such
amortization and accretion are included in interest income and other, net.



Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in interest income and other, net. The cost of securities sold is based
on the average cost method.



Accounts
Receivable



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



Property and equipment



Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful
lives of the assets:



|Computer hardware and software |  | 2-5 years
|------------------------------ |  | ---------
|Furniture and equipment        |  | 2-5 years



Leasehold improvements are amortized over the remaining lease term.



Acquired intangible assets



Acquired intangible assets consist of purchased technology, patents and trademarks, non-compete agreements, distribution rights and customer base related to the Companys acquisitions accounted
for using the purchase method. Amortization of these acquired intangible assets is calculated on a straight-line basis over the following estimated useful lives of the assets:



|Purchased technology   |  | 2-4 years
|---------------------- |  | ---------
|Patents and trademarks |  | 2-5 years
|Non-compete agreements |  | 2 years  
|Distribution rights    |  | 2.5 years
|Customer base          |  | 3 years  



Amortization of purchased technology, patents and trademarks, non-compete agreements, distribution rights and customer base is included as a component of cost of revenues. Acquired in-process research and development without
alternative future use is charged to operations when acquired.



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Company periodically assesses the impairment of its acquired intangible assets in accordance with the provisions of Statement of Financial Accounting Standards No. 144 (FAS 144), Accounting for the Impairment and Disposal of
Long-Lived Assets. An impairment review is performed whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include,
but are not limited to, significant under-performance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for the Companys overall business, and
significant industry or economic trends. When the Company determines that the carrying value of the intangible assets may not be recoverable based upon the existence of one or more of the above indicators, the Company measures any impairment based
on a discounted future cash flow method using a discount rate commensurate with the risk inherent in its current business model.



Goodwill



Goodwill represents the excess of the purchase price over the fair value of net tangible and identified intangible assets acquired in
business combinations accounted for under the purchase accounting method. Prior to January 31, 2002, goodwill was amortized on a straight-line basis over two to five years. Subsequent to January 31, 2002 goodwill is accounted for under a
non-amortization approach and is evaluated at least annually for impairment on November 1 of each year and whenever events or circumstances may indicate that the carrying amount of the recorded goodwill might not be recoverable.



Software development costs



Statement of Financial Accounting Standards No. 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. Based on the
Companys product development process, technological feasibility is established upon the completion of a working model. Costs incurred by the Company between the completion of the working model and the point at which the product is ready for
general release have been insignificant. Accordingly, the Company has charged all such costs to research and development expense in the period incurred.



Equity investments



The Company has made equity investments in privately held companies for business and strategic purposes. These investments are included in
other long-term assets and are accounted for under the cost method because ownership is less than 20 percent and the Company does not have the ability to exercise significant influence over the operating, investing and financing activities of the
investee companies. Under the cost method, the Company does not record its pro-rata share of the investee companys income or loss but rather the investment is recorded at its initial cost and is periodically reviewed for impairment. The
Company regularly reviews the investee companys actual and forecasted operating results, financial position and liquidity, and business and industry factors in assessing whether a decline in value of an equity investment has occurred that is
other than temporary. When such a decline in value is identified, the fair value of the equity investment is estimated based on the preceding factors and an impairment loss is recognized in interest and other, net.



Revenue recognition



The Company recognizes revenues in accordance with the
American Institute of Certified Public Accountants (AICPA) Statement of Position 97-2, Software Revenue Recognition, as amended. Revenue from software license agreements is recognized when persuasive evidence of an agreement
exists, delivery of the



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



product has occurred, the fee is fixed or determinable, and collection is probable. The Company uses the residual method to recognize revenue
when a license agreement includes one or more elements to be delivered at a future date and vendor specific evidence of the fair value of all undelivered elements exists. Under the residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist, the revenue is deferred and recognized when delivery of those elements occurs or
when fair value can be established.



When
licenses are sold together with services, license fees are recognized upon delivery, provided that (1) the above criteria have been met, (2) payment of the license fees is not dependent upon the performance of the services, and (3) the services
do not provide significant customization of the software products and are not essential to the functionality of the software that was delivered. The majority of license fees are recognized in this manner. For arrangements that do not meet the above
criteria, the license and related services revenue is recognized in accordance with AICPA Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts.



If the fee due from the customer is not fixed or determinable,
revenue is recognized as payment is due from the customer, assuming all other revenue recognition criteria have been met. Generally, the Company considers arrangements with extended payment terms not to be fixed or determinable. In certain regions
or countries where collection risk is generally considered to be high, such as Latin America, China and Korea, revenue is generally recognized when full cash payment is received from the customer. Revenue arrangements with resellers are recognized
on a sell-through basis, that is, when the Company receives persuasive evidence that the reseller has sold the products to an end user customer. Revenue from sales to independent software vendors (ISVs) who embed BEAs products into their
software products is recognized either upon shipment to the ISV or on a sell-through basis, depending upon the facts and circumstances and BEAs past experience with the particular ISV. The amount of revenue recognized on a sell-through basis
for sales to ISVs has been insignificant to date.



Services revenue includes consulting services, customer support and education. Consulting revenue and the related cost of services are recognized on a time and materials basis; however, revenues from certain fixed-price contracts are
recognized on the percentage of completion basis, which involves the use of estimates. The amount of consulting contracts recognized on a percentage of completion basis has not been significant to date. Customer support agreements provide technical
support and the right to unspecified future upgrades on an if-and-when available basis. Customer support revenue is recognized ratably over the term of the support period (generally one year) and education revenues are recognized as the related
training services are provided. The unrecognized portion of amounts billed in advance for licenses and services is recorded as deferred revenues.



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



Stock-based compensation



The Company generally grants stock options to its employees for a fixed number of shares with an exercise price equal to the fair market
value of the stock on the date of grant. As permitted under the Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation(FAS 123), the Company has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees(APB 25) and related interpretations in accounting for stock awards to employees. Accordingly, no compensation expense is recognized in the Companys financial
statements in connection with employee stock awards where the exercise price of the award is equal to the fair market value of the stock at the date of the



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



award. When stock options are granted with an exercise price that is lower than the fair market value of the stock on the date of grant, the
difference is recorded as deferred compensation and amortized to expense on a straight-line basis over the vesting term of the stock options.



Pro forma information regarding net income (loss) and net income (loss) per share is required by FAS 123. This information is required to
be determined as if the Company had accounted for its employee stock options (including shares issued under the Employee Stock Purchase Plan, collectively called stock-based awards), under the fair value method of that statement. The
fair value of the Companys stock-based awards granted to employees in fiscal years prior to the Companys initial public offering in fiscal 1998, was estimated using the minimum value method. Stock based awards granted in fiscal years
subsequent to the Companys initial public offering, have been valued using the Black-Scholes option pricing model. Among other things, the Black-Scholes model considers the expected volatility of the Companys stock price, determined in
accordance with FAS 123, in arriving at an option valuation. The minimum value method does not consider stock price volatility. Further, certain other assumptions necessary to apply the Black-Scholes model may differ significantly from assumptions
used in calculating the value of stock based awards granted in fiscal years prior to the Companys initial public offering under the minimum value method.



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



|                         |  | Employee stock optionsFiscal year ended January 31, |   |  | Employee stockpurchase
planFiscal year ended January 31, |  
|------------------------ |  | --------------------------------------------------- | - |  | -------------------------------------------------------- | -
|                         |  | 2003                                                |   |  | 2002                                                     |  
|Expected life (in years) |  | 4.00                                                |   |  | 4.00                                                     |  
|Risk-free interest rate  |  | 2.82                                                | % |  | 4.34                                                     | %
|Expected volatility      |  | 65                                                  | % |  | 75                                                       | %



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



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





For
purposes of pro forma disclosures, the estimated fair value of the stock-based awards is amortized to expense over the awards vesting period. The Companys pro forma information is as follows (in thousands, except per share amount):



|                                                                                                                          |  | Fiscal year ended January 31, |         
|------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | --------
|                                                                                                                          |  | 2003 (fiscal 2003)          |         
|Net income (loss) as reported                                                                                             |  | $                             | 83,876  
|Add back:                                                                                                                 |  |                               |         
|Stock-based employee compensation included in reported net income, net of related
tax                                     |  |                               | 4,490   
|Less:                                                                                                                     |  |                               |         
|Total stock-based employee compensation expense determined under the fair value method
for all awards, net of related tax |  |                               | (154,233
|                                                                                                                          |  |                               |         
|Pro forma net loss                                                                                                        |  | $                             | (65,867 
|                                                                                                                          |  |                               |         
|Basic net income (loss) per share as reported                                                                             |  | $                             | 0.21    
|Diluted net income (loss) per share as reported                                                                           |  | $                             | 0.20    
|Pro forma basic and diluted net loss per share                                                                            |  | $                             | (0.16   
|Proceeds from stock option exercises and employee share purchases, net of issuance
costs                                  |  | $                             | 49,437  



The pro
forma compensation expense, net of related tax, for fiscal 2003 calculated using the fair value method of $154.2 million included in the above table consists of approximately $23.0 million for amortization of stock awards that were granted in fiscal
2003 and $131.2 million for amortization of stock awards that were granted in prior fiscal years. The pro forma compensation expense, net of related tax, for fiscal 2003 consists of approximately $70.6 million for amortization of stock awards
granted with an exercise price less than $30 per share and $83.6 million for amortization of stock awards granted in prior fiscal years with an exercise price greater than $30 per share.



Net income (loss) per share



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



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



|                                                                                                                       |  | Fiscal year ended January 31, |        
|---------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | -------
|                                                                                                                       |  | 2003                          |        
|Numerator:                                                                                                             |  |                               |        
|Numerator for basic net income (loss) per share:                                                                       |  |                               |        
|Net income (loss)                                                                                                      |  | $                             | 83,876 
|Numerator for diluted net income (loss) per share:                                                                     |  |                               |        
|Interest and amortization charges for 4% Convertible Subordinated Notes due June 15,
2005 (2005 Notes), net of taxes |  |                               |       
|                                                                                                                       |  |                               |        
|Numerator for diluted net income (loss) per share                                                                      |  | $                             | 83,876 
|                                                                                                                       |  |                               |        
|Denominator:                                                                                                           |  |                               |        
|Denominator for basic net income (loss) per share:                                                                     |  |                               |        
|Weighted average shares outstanding                                                                                    |  |                               | 406,030
|Weighted average shares subject to repurchase and shares held in escrow                                                |  |                               | (515   
|                                                                                                                       |  |                               |        
|Denominator for basic net income (loss) per share, weighted average shares
outstanding                                 |  |                               | 405,515
|Weighted average dilutive potential common shares:                                                                     |  |                               |        
|Convertible shares on the 2005 Notes                                                                                   |  |                               |       
|Options, shares subject to repurchase and shares held in escrow                                                        |  |                               | 13,025 
|                                                                                                                       |  |                               |        
|Denominator for diluted net income (loss) per share                                                                    |  |                               | 418,540
|                                                                                                                       |  |                               |        
|Basic net income (loss) per share                                                                                      |  | $                             | 0.21   
|                                                                                                                       |  |                               |        
|Diluted net income (loss) per share                                                                                    |  | $                             | 0.20   
|                                                                                                                       |  |                               |        



The
computation of diluted net income per share for the fiscal year ended January 31, 2003 (fiscal 2003) excludes the impact of options to purchase 34.4 million shares of common stock and the conversion of the $550 million 4%
Convertible Subordinated Notes due December 15, 2006 (2006 Notes) which are convertible into 15.9 million shares of common stock at January 31, 2003, as such impact would be antidilutive for this period.



The computation of diluted net loss per share for the fiscal
year ended January 31, 2002 (fiscal 2002) excludes the impact of options to purchase 42.2 million shares of common stock and the conversion of the 2006 Notes which are convertible into 15.9 million shares of common stock at January 31,
2002, as such impact would be antidilutive for this period.



The computation of diluted net income per share for the fiscal year ended January 31, 2001 (fiscal 2001) excludes the impact of options to purchase 9.0 million shares of common stock and the conversion of the 2006 Notes
which are convertible into 15.9 million shares of common stock at January 31, 2001, as such impact would be antidilutive for this period.



Segment information



The Company operates in one operating segment, application infrastructure software and related services. The Companys chief
operating decision maker evaluates the performance of the Company based upon software



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



license and service revenues by geographic region as disclosed in Note 14Geographic Information and Revenue by Type of Product or
Service, as well as revenues and gross margins for license and service revenues and operating expenses by functional area as disclosed in the Companys statement of operations.



Advertising costs



The Company expenses advertising costs as incurred. Total advertising expenses were approximately
$5.4 million, $17.6 million and $18.2 million in fiscal 2003, 2002 and 2001, respectively.



Projects funded by third parties



The Company occasionally enters into product development agreements with third parties that provide funding to BEA, which is intended by BEA and the third party to offset certain operating costs
incurred by BEA. Such amounts are recorded as a reduction in BEAs operating expenses. During fiscal 2003, approximately $8.9 million of third party funding was recorded as a reduction in operating expenses. The amount of such funding
received by BEA in fiscal 2002 and 2001 was insignificant.



Reclassifications



Certain prior year amounts have been reclassified to conform to the current year presentation.



Effect of new accounting pronouncements



In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or
Disposal Activities(FAS 146). FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) and must be applied for exit or disposal activities that are initiated after December 31, 2002. FAS
146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value when the liability is incurred rather than when the exit or disposal plan is approved. The adoption of FAS 146
did not have a material impact on the Companys financial position or results of operations.



In November 2002, the EITF reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of EITF Issue No. 00-21 will have on its results of operations and financial condition.



In November 2002, the FASB issued Interpretation No. 45
(FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that a liability be recorded in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entitys product warranty liabilities. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Company has adopted the disclosure requirements for its financial statements included in this form



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10-K. The provisions related to recognizing a liability at inception of the guarantee do not apply to product warranties or to
indemnification provisions in the Companys software license arrangements. However, the accounting profession and regulatory agencies continue to discuss various provisions of this pronouncement with the objective of providing additional
guidance on its application. These discussions and the issuance of any new interpretations, once finalized, could lead to an unanticipated impact on the Companys future financial results. Therefore, although the Company currently does not
believe these provisions will have a material effect on its operating results or financial position, it will continue to evaluate the impact of FIN 45. The only significant guarantees issued to third parties by the Company are the product warranty
and indemnification provisions in our software license agreements and the residual value guarantee of approximately $330 million, which is pursuant to our synthetic land lease transaction.



In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (FAS 148),
Accounting for Stock-Based CompensationTransition and Disclosurean Amendment of FASB Statement No. 123. FAS No. 148 amends FASB Statement No. 123 (FAS 123), Accounting for Stock-Based Compensation, to provide
alternative methods of transition for an entity that voluntarily changes to the fair-value-based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that statement to require prominent disclosure
about the effects on reported net income and earnings per share and the entitys accounting policy decisions with respect to stock-based employee compensation. Certain of the disclosure requirements are required for all companies, regardless of
whether the fair value method or intrinsic value method is used to account for stock-based employee compensation arrangements. The Company continues to account for its employee incentive stock option plans using the intrinsic value method in
accordance with the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The amendments to FAS 123 will be effective for financial statements for fiscal years ended
after December 15, 2002 and for interim periods beginning after December 15, 2002. Accordingly, the Company adopted the disclosure provisions of this statement in its fourth quarter of fiscal year 2003.



In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities (FIN 46). This interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by business enterprises of variable interest
entities. Under current practice, two enterprises generally have been included in consolidated financial statements because one enterprise controls the other through voting interests. FIN 46 defines the concept of variable interests and
requires existing unconsolidated variable interest entities to be consolidated by their primary beneficiaries if the entities do not effectively disperse risks among the parties involved. This interpretation applies immediately to variable interest
entities created after January 31, 2003. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003.
For these variable interest entities, the assets, liabilities and non-controlling interest of the variable interest entity would be initially measured at their carrying amounts, with any difference between the net amount added to the balance sheet
and any previously recognized interest being recognized as the cumulative effect of an accounting change. If determining the carrying amounts is not practicable, fair value at the date FIN 46 first applies may be used to measure the assets,
liabilities and non-controlling interest of the variable interest entity. If it is reasonably possible that an enterprise will consolidate or disclose information about a variable interest entity when FIN 46 becomes effective, the enterprise shall
disclose information about those entities in all financial statements issued after January 31, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The Company is evaluating the impact of applying FIN 46 and has not yet completed this analysis. The
Company has not yet concluded whether the current land lease structure would be consolidated upon its adoption of FIN 46 because the rules are recent and contain numerous complicated provisions that the accounting profession continues to analyze.
The impact of



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



consolidating the land held under lease at carrying value would be an increase to assets and liabilities of approximately $330 million. It is
possible that the final determination under FIN 46 will be that the land must be capitalized on the Companys balance sheet at current fair market value, which could be less than the outstanding lease balance in the near term. This could result
in a material charge to earnings, equal to the difference between the current fair market value of the property and the outstanding lease balance at the time such determination is made. Alternatively, the Company could elect to restructure the
financing arrangement or exercise the purchase option, which could also result in it recording the land on its balance sheet at current fair market value, resulting in a material charge to earnings as described above.



2.    Financial Instruments



Concentration of credit risk and bad debt expense



Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist principally of investments in debt securities and trade receivables. The Company invests its cash, cash equivalents and short-term investments in commercial paper rated
A-1/P-1, corporate bonds rated A2/A or higher, money market instruments and U.S. Treasuries and limits the amounts invested with any one institution, type of security and issuer.



The Company sells its products to customers, typically large corporations, in a variety of industries in the
Americas, Europe and the Asia/Pacific region. The Company performs credit evaluations of its customers financial condition and limits the amount of credit extended as deemed appropriate, but generally requires no collateral. The Company
maintains allowances for estimated credit losses and, to date, such losses have been within managements expectations. Future credit losses may differ from the Companys estimates, particularly if the financial conditions of its customers
were to deteriorate, and could have a material impact on the Companys future results of operations. Bad debt expense was $3.5 million, $8.7 million and $5.0 million in fiscal 2003, 2002 and 2001, respectively.



No customer accounted for more than 10 percent of total
revenues in fiscal 2003, 2002 or 2001. There were no customers that accounted for more than 10 percent of accounts receivable as of January 31, 2003, 2002 or 2001. The only individual country outside of the United States with revenues greater than
10 percent of total revenues in fiscal 2001 was the United Kingdom with 10.3 percent or $84.7 million. No one individual country outside of the United States accounted for more than 10 percent of total revenues in either fiscal 2003 or 2002.



Available-for-sale securities



The following is a summary of
available-for-sale securities at January 31, 2003 and 2002 (in thousands):



|                          |  | January 31, 2003 |           | January 31, 2002         
|------------------------- |  | ---------------- | --------- | -------------------------
|                          |  | Amortized cost   |           | Unrealized gains (losses)
|Corporate debt securities |  | $                | 702,409   |                          
|U.S. Treasuries           |  |                  | 128,060   |                          
|Money market              |  |                  | 374,070   |                          
|                          |  |                  |           |                          
|                          |  | $                | 1,204,539 |                          
|                          |  |                  |           |                          



Included
in the above table are securities with fair values totaling $382.6 million and $711.2 million at January 31, 2003 and 2002, respectively, which are classified as cash and cash equivalents; $4.4 million and



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



$6.9 million at January 31, 2003 and 2002, respectively, which are classified as short-term restricted cash; $688.8 million and
$205.4 million at January 31, 2003 and 2002, respectively, which are classified as short-term investments; $131.7 million and $122.8 million at January 31, 2003 and 2002, respectively, which is classified as long-term restricted cash in the
accompanying balance sheets.



Foreign currency
contracts



The Company enters into forward
foreign currency contracts to reduce its exposure to the effect of foreign currency fluctuations on certain foreign currency denominated monetary assets and liabilities. The contracts are marked-to-market on a monthly basis and are not used for
trading or speculative purposes. At January 31, 2003 and 2002, the Company had outstanding forward foreign currency contracts with notional amounts of approximately $220.8 million and $175.4 million, respectively. All of the Companys forward
foreign currency contracts have original maturities of 115 days or less.



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
information below is provided in U.S. dollar equivalent amounts, as presented in the consolidated financial statements. The Companys forward foreign currency contract notional amounts outstanding at January 31, 2003 and 2002 were as follows
(in thousands):



|                                                                  |  | January 31,
|----------------------------------------------------------------- |  | -----------
|                                                                  |  | 2003       
|Contracts to sell foreign currency (purchase U.S. dollars):       |  |            
|Australian dollars                                                |  | $          
|British pounds                                                    |  |            
|Canadian dollars                                                  |  |            
|Euros                                                             |  |            
|Israeli shekels                                                   |  |            
|Japanese yen                                                      |  |            
|Korean won                                                        |  |            
|Mexican pesos                                                     |  |            
|Norwegian kroner                                                  |  |            
|Swedish krona                                                     |  |            
|Swiss francs                                                      |  |            
|                                                                  |  |            
|                                                                  |  | $          
|                                                                  |  |            
|Contracts to purchase foreign currency (sell U.S. dollars):       |  |            
|Brazilian real                                                    |  | $          
|British pounds                                                    |  |            
|Canadian dollars                                                  |  |            
|Euros                                                             |  |            
|Japanese yen                                                      |  |            
|Israeli shekels                                                   |  |            
|New Zealand dollar                                                |  |            
|Norwegian kroner                                                  |  |            
|Singapore dollars                                                 |  |            
|Swedish krona                                                     |  |            
|Swiss francs                                                      |  |            
|                                                                  |  |            
|                                                                  |  | $          
|                                                                  |  |            
|Contracts to sell foreign currency (purchase Euros):              |  |            
|British pounds                                                    |  | $          
|Israeli shekels                                                   |  |            
|Norwegian kroner                                                  |  |            
|Swedish krona                                                     |  |            
|Swiss francs                                                      |  |            
|                                                                  |  |            
|                                                                  |  | $          
|                                                                  |  |            
|Contracts to purchase foreign currency (sell Euros):              |  |            
|British pounds                                                    |  | $          
|Danish krone                                                      |  |            
|                                                                  |  |            
|                                                                  |  | $          
|                                                                  |  |            
|Contracts to sell foreign currency (purchase Australian dollars): |  |            
|New Zealand dollars                                               |  | $          
|Singapore dollars                                                 |  |            
|                                                                  |  |            
|                                                                  |  | $          
|                                                                  |  |            



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Fair
value of financial instruments



The carrying
amounts and estimated fair values of the Companys financial instruments were as follows (in thousands):



|                                                                                                     |  | January 31,    
|---------------------------------------------------------------------------------------------------- |  | ---------------
|                                                                                                     |  | 2003           
|                                                                                                     |  | Carrying amount
|Financial assets:                                                                                    |  |                
|Cash and cash equivalents                                                                            |  | $              
|Forward foreign currency contracts                                                                   |  |                
|                                                                                                     |  |                
|Total cash and cash equivalents                                                                      |  |                
|Short-term restricted cash (0-1 year)                                                                |  |                
|Short-term investments (0-1 year)                                                                    |  |                
|Short-term investments (1-2 years)                                                                   |  |                
|Long-term restricted cash (0-1 year)                                                                 |  |                
|Financial liabilities:                                                                               |  |                
|Notes payable, capital lease obligations and other long-term obligations (including
current portion) |  |                
|Convertible subordinated 2006 Notes                                                                  |  |                



The
estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies, however, judgment is required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented above are not necessarily indicative of the amounts that the Company could realize in a current market exchange.



For certain of the Companys financial instruments, including cash and cash equivalents, restricted cash, short-term investments, and
notes payable, the carrying amounts approximate fair value due to their short maturities. The fair value of forward foreign currency contracts was based on the estimated amount at which they could be settled based on quoted exchange rates. The fair
values of the convertible subordinated notes are determined using quoted market prices.



3.    Property and Equipment



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



|                                             |  | January 31, |        
|-------------------------------------------- |  | ----------- | -------
|                                             |  | 2003        |        
|Computer hardware and software               |  | $           | 67,776 
|Furniture and equipment                      |  |             | 31,797 
|Leasehold improvements                       |  |             | 39,537 
|Furniture and equipment under capital leases |  |             | 1,538  
|                                             |  |             |        
|                                             |  |             | 140,648
|Accumulated depreciation and amortization    |  |             | (76,710
|                                             |  |             |        
|                                             |  | $           | 63,938 
|                                             |  |             |        



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Accumulated amortization for furniture and equipment under capital leases was approximately $1.5 million both at January 31, 2003 and 2002, respectively.



4.    Business Combinations



CrossGain Corporation



On July 17, 2001, the Company acquired CrossGain Corporation (CrossGain) for total consideration
of $25.1 million, consisting of $10.8 million in cash and the issuance of 458,466 shares of BEA common stock, valued at $26.67 per share and the assumption of certain stock options. The Company recorded the business combination using the purchase
method with a substantial majority of the purchase price allocated to deferred compensation, intangible assets and goodwill.



Bauhaus Technologies



On October 3, 2000, BEA purchased Bauhaus Technologies, Inc. (Bauhaus), a small consulting services business. The purchase
price was approximately $19.8 million in cash. The acquisition was accounted for using the purchase method, with a substantial majority of the purchase price allocated to intangible assets and goodwill.



In the third quarter of fiscal 2002, an impairment charge of
$10.0 million was recorded against the net intangible assets and goodwill related to the Bauhaus acquisition (see Note 6Impairment of Certain Acquired Intangible Assets and Goodwill).



The Object People



On April 19, 2000, the Company acquired the services business
of The Object People, Inc. (TOP). The purchase price was approximately $20.5 million in cash. The acquisition was accounted for using the purchase method, with a substantial majority of the purchase price allocated to intangible assets
and goodwill.



The Workflow Automation
Corporation



On March 21, 2000, BEA
purchased The Workflow Automation Corporation (Workflow), a privately held software company located in Ontario, Canada, for approximately $28.6 million, consisting of $4.9 million in cash and the issuance of 470,718 shares of BEA common
stock, valued at $49.41 per share. The acquisition was accounted for using the purchase method, with a substantial majority of the purchase price allocated to intangible assets and goodwill.



Other Acquisitions



During fiscal 2003 and 2002, the Company acquired several
small companies, for which the total consideration was approximately $13.5 million and $22.6 million, respectively, in aggregate. The acquisitions were accounted for using the purchase method, with a substantial majority of the purchase price
allocated to deferred compensation, intangible assets and goodwill.



5.    Goodwill and Acquired Intangible Assets



On February 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets and as a result will no longer amortize goodwill, but will test
for impairment at least annually on November 1 of each year or more frequently whenever events or changes in circumstances suggest that the carrying amount may not be recoverable.



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The
following table provides a summary of the carrying amount of goodwill which includes amounts originally allocated to assembled workforce (in thousands):



|                                                                         |  | January 31, 2003 |          |   | January 31, 2002 |  
|------------------------------------------------------------------------ |  | ---------------- | -------- | - | ---------------- | -
|Gross carrying amount of goodwill                                        |  | $                | 186,913  |   |                  | $
|Gross carrying amount of assembled workforce reclassified to goodwill    |  |                  |         |   |                  |  
|                                                                         |  |                  |          |   |                  |  
|Adjusted gross carrying amount of goodwill                               |  |                  | 186,913  |   |                  |  
|Accumulated amortization of goodwill                                     |  |                  | (133,348 | ) |                  |  
|Accumulated amortization of assembled workforce reclassified to goodwill |  |                  |         |   |                  |  
|                                                                         |  |                  |          |   |                  |  
|Net carrying amount of goodwill                                          |  | $                | 53,565   |   |                  | $
|                                                                         |  |                  |          |   |                  |  



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



|                        |  | January 31, 2003     
|----------------------- |  | ---------------------
|                        |  | Gross Carrying Amount
|Purchased technology    |  | $                    
|Non-compete agreements  |  |                      
|Patents and trademarks  |  |                      
|Other intangible assets |  |                      
|                        |  |                      
|Total                   |  | $                    
|                        |  |                      



|                        |  | January 31, 2002     
|----------------------- |  | ---------------------
|                        |  | Gross Carrying Amount
|Purchased technology    |  | $                    
|Non-compete agreements  |  |                      
|Patents and trademarks  |  |                      
|Other intangible assets |  |                      
|                        |  |                      
|Total                   |  | $                    
|                        |  |                      



The
total amortization expense related to goodwill and acquired intangible assets is provided in the table below (in thousands):



|                           |  | Year ended January 31,
|-------------------------- |  | ----------------------
|                           |  | 2003                  
|Goodwill                   |  | $                     
|Assembled workforce        |  |                       
|Purchased technology       |  |                       
|Non-compete agreements     |  |                       
|Patents and trademarks     |  |                       
|Other intangible assets    |  |                       
|                           |  |                       
|Total amortization expense |  | $                     
|                           |  |                       



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The total
expected future amortization related to acquired intangible assets is provided in the table below (in thousands):



|Fiscal Year |  | Future Amortization
|----------- |  | -------------------
|2004        |  | $                  
|2005        |  |                    
|            |  |                    
|Total       |  | $                  
|            |  |                    



For
comparative purposes, the pro forma adjusted net income (loss) per share excluding amortization of goodwill and assembled workforce for the fiscal years ending January 31, 2003, 2002 and 2001 is as follows (in thousands):



|                                                    |  | For the Fiscal Year EndedJanuary 31,
|--------------------------------------------------- |  | ------------------------------------
|                                                    |  | 2003                                
|Net income (loss) as reported                       |  | $                                   
|Add back FAS 142 adjustments (net of income taxes): |  |                                     
|Amortization of goodwill                            |  |                                     
|Amortization of assembled workforce                 |  |                                     
|                                                    |  |                                     
|Adjusted net income                                 |  | $                                   
|                                                    |  |                                     
|Basic net income (loss) per share as reported       |  | $                                   
|Add back:                                           |  |                                     
|Amortization of goodwill                            |  |                                     
|Amortization of assembled workforce                 |  |                                     
|                                                    |  |                                     
|Pro forma adjusted basic net income per share       |  | $                                   
|                                                    |  |                                     
|Diluted net income (loss) per share as reported     |  | $                                   
|Add back:                                           |  |                                     
|Amortization of goodwill                            |  |                                     
|Amortization of assembled workforce                 |  |                                     
|                                                    |  |                                     
|Pro forma adjusted diluted net income per share     |  | $                                   
|                                                    |  |                                     



6.    Impairment of Certain Acquired Intangible Assets and Goodwill



In the third quarter of fiscal 2002, the Company recorded asset impairment charges totaling $80.1 million against certain acquired
intangible assets and goodwill, $7.1 million of which was a write-down of certain acquired intangible assets that is included in cost of revenues and $73.0 million of which was a write-down of goodwill that is included in operating expenses. The
acquired intangible assets and goodwill that were impaired primarily originated from the acquisitions of The Theory Center, Inc. (the Theory Center) in November 1999 and Bauhaus in October 2000.



During the third quarter of fiscal 2002, the Company observed
indicators that the acquired intangible assets and goodwill from the Theory Center and Bauhaus were possibly impaired and, accordingly, performed an assessment for impairment. With respect to the Theory Center, the Company made product and strategic
changes during the third quarter that significantly decreased the importance and value of the technology acquired from the Theory Center, including the decision to discontinue the use of certain technology acquired from the Theory



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Center. With respect to Bauhaus, the Company observed a significant downturn in its consulting business during the third quarter of fiscal
2002, and in particular the consulting business of Bauhaus, which indicated possible impairment.



The Company performed asset impairment tests at the lowest operational level that had separately identifiable cash flows related to the Theory Center and Bauhaus intangible assets and goodwill. The
tests were performed by comparing the expected undiscounted cash flows over a 39 month period for the Theory Center and a 51 month period for Bauhaus to the carrying amount of the long-lived assets resulting from the acquisitions. The conclusion of
these tests was that the decline in value of the Theory Center and Bauhaus intangible assets and goodwill was significant and other than temporary. The impairment loss was measured as the amount by which the carrying values of such assets exceeded
their fair value. Measurement of fair value was based on analyses of the discounted future cash flows at the Theory Center and Bauhaus level. In performing these analyses, the Company used the best information available under the circumstances,
including reasonable and supportable assumptions and projections of future operating results. The discount rates used in the analyses were 30 percent for the Theory Center and 20 percent for Bauhaus, which were based on historical risk premiums
required by investors for companies of BEAs size, industry and capital structure and included risk factors specific to the sectors in which the Theory Center and Bauhaus operated. The analyses indicated that the intangible assets and goodwill
for the Theory Center were impaired by an amount totaling $64.5 million and for Bauhaus by an amount totaling $10.0 million. In addition, an impairment charge of $5.6 million was recorded during the third quarter of fiscal 2002, which related to the
write-off of goodwill associated with a small foreign sales operation that was disposed.



The total impairment charge recorded during the third quarter of fiscal 2002 is summarized as follows (in millions):



|The Theory Center |  | $ | 64.5
|----------------- |  | - | ----
|Bauhaus           |  |   | 10.0
|Other             |  |   | 5.6 
|                  |  |   |     
|                  |  | $ | 80.1
|                  |  |   |     



The
Company did not record any write-downs of acquired intangible assets or goodwill in fiscal 2003 or 2001.



7.    Other Long-Term Assets and Related Party Transactions



Other long-term assets consist of the following (in thousands):



|                                                               |  | January 31,
|-------------------------------------------------------------- |  | -----------
|                                                               |  | 2003       
|Equity investment in WebGain, Inc.                             |  | $          
|Other equity investments in private companies                  |  |            
|Note receivable from WP Equity Partners, Inc., a related party |  |            
|Loan to officer                                                |  |            
|Notes receivable from other executives                         |  |            
|Debt issuance costs                                            |  |            
|Other long-term assets                                         |  |            
|                                                               |  |            
|                                                               |  | $          
|                                                               |  |            



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





WebGain, Inc.



BEA holds
non-voting Series A preferred stock in WebGain, Inc. (WebGain), a privately held software company. Other major shareholders of WebGain include venture capital funds managed by Warburg Pincus LLC, of which certain BEA directors are
managing directors. During fiscal 2001, the Company sold investments in WebGain to WP Equity Partners, Inc. (WP Equity Partners), a party that is related to Warburg Pincus LLC and to BEA, in exchange for a note receivable due from WP
Equity Partners in the amount of $50.0 million with an annual interest rate of 7 percent. The terms of this sale also provided for additional notes receivable of $18.0 million that were issued upon the occurrence of certain events during fiscal
2002. The principal amount of the notes was due and repaid in full on January 31, 2003. During fiscal 2001 and 2002, the Company recorded net gains in connection with this transaction of $18.6 million and $13.7 million. During fiscal 2002, the
Company sold additional shares of WebGain Series A Preferred Stock to WP Equity Partners in exchange for notes receivable due from WP Equity Partners totaling approximately $6.6 million with an annual interest rate of 7 percent, for which the
Company recorded a net gain of $3.7 million in fiscal 2002. These notes receivable from WP Equity Partners were also due and repaid in full on January 31, 2003. During fiscal 2003, the Company wrote-off its remaining investment in WebGain of $22.4
million. Interest income earned on the notes receivable from WP Equity Partners was $5.2 million in fiscal 2002 and 2003.



Loans to Officers



The Company has an unsecured advance due from William T. Coleman III, an officer of the Company, of $5.0 million as of January 31, 2003,
which is included in other long-term assets as of January 31, 2003. This advance was made in August 2001 pursuant to an unsecured line of credit issued to Mr. Coleman in September 1999 (the Unsecured Line of Credit). The Unsecured Line
of Credit bears interest at 7 percent per annum and is due within 90 days following the earlier of (i) termination of Mr. Colemans employment with the Company or (ii) the Companys stock price achieving a specified average closing price.
This loan was included in other current assets as of January 31, 2002.



In November 2001, the Company issued a secured and full recourse line of credit of $25.0 million to Mr. Coleman (the Secured Line of Credit). The Secured Line of Credit is secured by real property and bears
interest at 6 percent per annum. Borrowings under the Secured Line of Credit are due upon 90 days written demand. During the quarter ended July 31, 2002, the Company loaned $19.2 million to Mr. Coleman under the Secured Line of Credit. The terms of
the Secured Line of Credit stipulate that once borrowed funds have been repaid, they cannot be re-borrowed. During the quarter ended October 31, 2002, Mr. Coleman repaid in full the $19.2 million secured loan to the Company, including interest. No
borrowings were outstanding under this secured line of credit at January 31, 2003 or 2002.



In September 1999, the Company issued an unsecured line of credit to Alfred Chuang, an executive officer of the Company, in the amount of $5.0 million. No borrowings were outstanding under this line of
credit at January 31, 2003 or 2002.



Loans to
Executives



Notes receivable from four other
executives are for the financing of real property. These notes, originated prior to June 30, 2002 and are secured by deeds of trust on real property. They bear interest ranging from the quoted prime rate to 7 percent per annum and are due and
payable on the earlier of dates ranging from May 31, 2004 to May 10, 2007, or the termination of employment with the Company. The notes may be repaid at any time prior to the due date.



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





8.    Facilities Consolidation and Severance Charges



During the third quarter of fiscal 2002, the Company approved a plan to consolidate certain facilities in regions including the United
States, Canada, and Germany. A facilities consolidation charge of $20.0 million was calculated using managements best estimates and was based upon the remaining future lease commitments and brokerage fees for vacant facilities from the date of
facility consolidation, net of estimated future sublease income. The facilities consolidation charge also included the write-off of $2.2 million of leasehold improvements. The estimated costs of abandoning these leased facilities, including
estimated costs to sublease, were based on market information and trend analyses, including information obtained from third party real estate industry sources. As of January 31, 2003, $12.6 million of lease termination costs, net of anticipated
sublease income, remains accrued and is expected to be fully utilized by fiscal 2012. In calculating this charge, certain assumptions were made relating to such factors as the estimated time periods of vacancy and sublease rates and opportunities.
If actual circumstances prove to be materially worse than management has estimated, the Companys total charges for these vacant facilities could be significantly higher. Additionally, during the fourth quarter of fiscal 2002, the Company
reduced the scope and re-evaluated the timing of the planned construction of facilities at its San Jose, California headquarters, resulting in an additional facilities related charge of $5.0 million. Adjustments to the facilities consolidation
charge will be made in future periods, if necessary, based upon then current actual events and circumstances.



During the third and fourth quarters of fiscal 2002, the Company reduced its workforce by approximately 10 percent and, accordingly,
it recorded total severance charges of $15.5 million, of which $10.3 million was paid in fiscal 2002 and $5.2 million was paid in fiscal 2003. The employee reductions were across all business functions, operating units and major geographic regions.
Severance charges included severance benefits, notice pay and out-placement counseling services.



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



|                                                                  |  | Facilities Consolidation |        |   | Severance |   |         | Total | 
|----------------------------------------------------------------- |  | ------------------------ | ------ | - | --------- | - | ------- | ----- | 
|Charges accrued during fiscal 2002 included in cost of revenues   |  | $                        |       |   |           | $ | 2,461   |       | 
|Charges accrued during fiscal 2002 included in operating expenses |  |                          | 25,000 |   |           |   | 12,992  |       | 
|Write-off of leasehold improvements                               |  |                          | (2,152 | ) |           |   |        |       | 
|Cash payments during fiscal 2002                                  |  |                          | (1,447 | ) |           |   | (10,302 | )     | 
|                                                                  |  |                          |        |   |           |   |         |       | 
|Accrued at January 31, 2002                                       |  |                          | 21,401 |   |           |   | 5,151   |       | 
|                                                                  |  |                          |        |   |           |   |         |       | 
|Cash payments during fiscal 2003                                  |  |                          | (3,784 | ) |           |   | (5,151  | )     | 
|                                                                  |  |                          |        |   |           |   |         |       | 
|Accrued at January 31, 2003                                       |  | $                        | 17,617 |   |           | $ |        |       | 
|                                                                  |  |                          |        |   |           |   |         |       | 



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





9.    Notes Payable and Other Obligations



Notes payable and other obligations



Notes payable and other obligations consists of current acquisition-related liabilities, deferred rent and other long-term obligations. Scheduled maturities of current and long-term notes payable and
other obligations are as follows (in thousands):



|                       |  | Principal Amount
|---------------------- |  | ----------------
|Year ended January 31, |  |                 
|2004                   |  | $               
|2005                   |  |                 
|2006                   |  |                 
|2007                   |  |                 
|2008                   |  |                 
|Thereafter             |  |                 
|                       |  |                 
|                       |  | $               
|                       |  |                 



Convertible subordinated notes



In December 1999, the Company completed the sale of $550 million of 2006 Notes in an offering to Qualified Institutional Buyers. The 2006 Notes bear interest at a fixed rate of 4 percent and are subordinated to all existing and
future senior indebtedness of the Company. The principal amount of the 2006 Notes is convertible at the option of the holder at any time into common stock of the Company at a conversion rate of 28.86 shares per $1,000 principal amount of 2006 Notes
(equivalent to an approximate conversion price of $34.65 per share). The 2006 Notes are redeemable at the option of the Company in whole or in part at any time, in cash plus a premium of up to 2.3% plus accrued interest, if any, through the
redemption date, subject to certain events. Interest is payable semi-annually.



In June and July 1998, the Company completed the sale of $250 million of 2005 Notes in an offering to Qualified Institutional Buyers. The 2005 Notes bore interest at a fixed rate of 4 percent and were
subordinated to all existing and future senior indebtedness of the Company. The principal amount of the 2005 Notes was convertible at the option of the holder at any time into common stock of the Company at a conversion rate of 151.48 shares per
$1,000 principal amount of 2005 Notes (equivalent to an approximate conversion price of $6.60 per share). The 2005 Notes were redeemable at the option of the Company in whole or in part at any time on or after June 20, 2001, in cash plus accrued
interest, if any, through the redemption date, subject to certain events. Interest was payable semi-annually. During fiscal 2001, approximately $11.1 million of the 2005 Notes were converted to common stock, with the remaining balance of $11.4
million converted during fiscal 2002.



10.    Income Taxes



The components of the provisions for income taxes consist of the following (in thousands):



|                           |  | January 31, |       
|-------------------------- |  | ----------- | ------
|                           |  | 2003        |       
|Federal:                   |  |             |       
|Current                    |  | $           | 12,513
|Deferred                   |  |             | (7,341
|State:                     |  |             |       
|Current                    |  |             | 9,795 
|Deferred                   |  |             | (3,798
|Foreign:                   |  |             |       
|Current                    |  |             | 24,778
|                           |  |             |       
|Provision for income taxes |  | $           | 35,947
|                           |  |             |       



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Pretax
income from foreign operations was approximately $127.5 million, $97.9 million, and $32.1 million for fiscal 2003, 2002 and 2001, respectively.



The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rate (35 percent) to
income tax expense is as follows (in thousands):



|                                               |  | January 31, |        
|---------------------------------------------- |  | ----------- | -------
|                                               |  | 2003        |        
|Tax provision (benefit) at U.S. statutory rate |  | $           | 41,938 
|State income taxes, net of federal benefit     |  |             | 3,898  
|Nondeductible amortization of goodwill         |  |             |       
|Nondeductible impairment of goodwill           |  |             |       
|Valuation allowance                            |  |             |       
|Foreign income and withholding taxes           |  |             | (10,420
|Other                                          |  |             | 531    
|                                               |  |             |        
|Provision for income taxes                     |  | $           | 35,947 
|                                               |  |             |        



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 the Companys
deferred tax assets for federal and state income taxes are as follows (in thousands):



|                                                    |  | January 31, |         
|--------------------------------------------------- |  | ----------- | --------
|                                                    |  | 2003        |         
|Deferred tax assets:                                |  |             |         
|Deferred revenue                                    |  | $           | 21,020  
|Accruals and reserves                               |  |             | 19,754  
|Equity investment write-downs                       |  |             | 27,421  
|Net operating loss and credit carryforwards         |  |             | 91,938  
|Property and equipment                              |  |             | 11,482  
|Intangible assets                                   |  |             | 49,521  
|Other                                               |  |             | 20      
|                                                    |  |             |         
|Subtotal                                            |  |             | 221,156 
|Valuation allowance                                 |  |             | (199,345
|                                                    |  |             |         
|Total deferred tax assets                           |  | $           | 21,811  
|                                                    |  |             |         
|Deferred tax liabilities:                           |  |             |         
|U.S. deferred taxes for unremitted foreign earnings |  |             | (26,625 
|                                                    |  |             |         
|Net deferred tax liabilities                        |  | $           | (4,814  
|                                                    |  |             |         



Realization of deferred tax assets is primarily dependent on future taxable income, if any, the timing and amount of which is uncertain in part due to the potential impact of future stock option deductions. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets dependent upon future taxable income at January 31, 2003 and 2002, has been established to reflect these uncertainties. The valuation allowance decreased by approximately $12.2 million in
fiscal year 2003 and increased by approximately $43.0 million in fiscal year 2002. Approximately $189.5 million and $201.6 million of the valuation allowance at January 31, 2003 and 2002, respectively, relates to tax benefits associated with
exercises of stock options, which will reduce income taxes payable and be credited to additional paid-in capital when realized.



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





As of
January 31, 2003, the Company had federal net operating loss carry forwards of approximately $201.5 million, which will expire in 2009 through 2022. Utilization of net operating loss carry forwards may be subject to substantial limitations due
to ownership change and other limitations provided by the Internal Revenue Code and similar state provisions. These limitations may result in the expiration of net operating loss carry forwards before full utilization.



11.    Stockholders Equity



Share activity



The following table represents changes in outstanding shares
of common stock (in thousands):



|                                                                               |  | Common stock |   |  | Class B common stock |  
|------------------------------------------------------------------------------ |  | ------------ | - |  | -------------------- | -
|Balance at January 31, 2000                                                    |  | 290,568      |   |  | 71,296               |  
|Issuance of common stock                                                       |  | 1,969        |   |  |                     |  
|Conversion of Class B common stock                                             |  | 71,296       |   |  | (71,296              | )
|Shares issued under stock option and stock purchase plans                      |  | 24,754       |   |  |                     |  
|Repurchase of common shares                                                    |  | (48          | ) |  |                     |  
|Return of shares from escrow previously issued in connection with
acquisitions |  | (127         | ) |  |                     |  
|Shares issued from exercise of warrant                                         |  | 109          |   |  |                     |  
|Conversion of debt obligations                                                 |  | 1,675        |   |  |                     |  
|                                                                               |  |              |   |  |                      |  
|Balance at January 31, 2001                                                    |  | 390,196      |   |  |                     |  
|Shares issued under stock option and stock purchase plans                      |  | 10,769       |   |  |                     |  
|Issuance of common stock                                                       |  | 1,165        |   |  |                     |  
|Conversion of debt obligations                                                 |  | 1,730        |   |  |                     |  
|                                                                               |  |              |   |  |                      |  
|Balance at January 31, 2002                                                    |  | 403,860      |   |  |                     |  
|Shares issued under stock option and stock purchase plans                      |  | 8,672        |   |  |                     |  
|Issuance of common stock                                                       |  | 100          |   |  |                     |  
|Purchases of treasury stock                                                    |  | (6,881       | ) |  |                     |  
|                                                                               |  |              |   |  |                      |  
|Balance at January 31, 2003                                                    |  | 405,751      |   |  |                     |  
|                                                                               |  |              |   |  |                      |  



Common stock



The Company
has issued shares of its common stock to certain employees of the Company, pursuant to which the Company has the right to repurchase the shares of common stock sold to such employees at the original issuance price upon the employees
termination of employment. The repurchase option of these shares expires monthly over a four-year period, subject to acceleration upon the occurrence of certain events. As of January 31, 2003, approximately 329,000 shares were subject to the
Companys right of repurchase.



The Company
has reserved shares of common stock for future issuance at January 31, 2003, as follows (in thousands):



|Shares reserved for Incentive Stock Option Plans                         |  | 107,546
|------------------------------------------------------------------------ |  | -------
|Shares reserved for Employee Stock Purchase Plan                         |  | 5,894  
|Shares reserved for conversion of convertible notes payable (2006 Notes) |  | 15,873 
|                                                                         |  |        
|Total common stock reserved for future issuance                          |  | 129,313
|                                                                         |  |        



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





On
February 1, 2003, 20 million additional shares became available for issuance under the Incentive Stock Option Plans and 4 million additional shares became available for issuance under the Employee Stock Purchase Plan.



Class B common stock



In March 1997, BEAs Board of Directors authorized 35
million shares of an additional class of common stock (Class B common stock), convertible into 140 million shares of ordinary common stock. The Class B common stock had the same rights, preferences, privileges and restrictions as the common stock,
except that each share of Class B common stock was convertible into one share of common stock, had no voting rights except as required by Delaware law and had no right to vote for the election of directors. The shares of Class B common stock were
convertible at the option of the holder into common stock, provided that such conversion did not result in the converting stockholder holding more than 49 percent of the Companys outstanding voting securities. The shares of Class B common
stock could be automatically converted into common stock upon the occurrence of certain events. During fiscal 2001, all remaining outstanding shares of Class B common stock were converted into common stock.



Share Repurchase Program



In September 2001, the Board of Directors approved a share
repurchase program for the Company to repurchase up to $100.0 million of its common stock (the September 2001 Share Repurchase Program). An insignificant number of shares were repurchased in fiscal 2002. In fiscal 2003, approximately 6.9
million shares of the Companys common stock were repurchased at a total cost of approximately $42.1 million.



Preferred Stock Rights Plan



In September 2001, the Board of Directors approved a Preferred Stock Rights Plan, which has the antitakeover effect of causing substantial
dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors. Under the Plan, the Company issued a dividend of one right for each share of the Companys common stock, par value of $0.001 per
share, held by stockholders of record as of the close of business on October 12, 2001. Each right will initially entitle stockholders to purchase a fractional share of the Companys preferred stock for $150.00. The rights are not immediately
exercisable and will become exercisable only upon the occurrence of certain events. If a person or group acquires, or announces a tender or exchange offer that would result in the acquisition of, 15 percent or more of the Companys common stock
(except pursuant to an amendment dated January 15, 2003 in the case of FMR Corp., for whom the threshold is an amount greater than 16 percent) while the stockholder rights plan remains in place, the rights will become exercisable, unless redeemed
for $0.001 per right, by all rights holders except the acquiring person or group, for shares of the Company or of the third party acquirer having a value of twice the rights then-current exercise price.



Deferred compensation



During fiscal 2003, the Company granted approximately 5.9
million discounted stock options to certain employees and executive officers with an exercise price that was lower than the fair market value of the Companys stock on the date of grant (grant date fair value). The discounts on
these stock options ranged from 25 percent to 50 percent of the grant date fair value. The exercise prices of these stock options range from $2.78 to $6.46, and the weighted average exercise price of these stock options was $3.61. The aggregate
amount by which the price of the Companys stock on the date of grant exceeded the exercise price of the stock options was approximately $11.7 million, which was recorded as deferred compensation. This balance is amortized on a



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



straight-line basis over the three and four year vesting terms of the stock options. The amortization expense related to these stock options
was approximately $1.9 million in fiscal 2003. During fiscal 2003, the Company also granted 100,000 shares of restricted stock with a purchase price of $0.01 per share and a vesting term of one year. The aggregate amount by which the price of the
Companys stock on the date of grant exceeded the purchase price of the restricted stock was approximately $1.2 million, which was recorded as deferred compensation and is amortized over the one year vesting term.



During fiscal 2002, BEA recorded total deferred compensation
of approximately $12.9 million, which represented the portion of the consideration for the acquisitions of CrossGain and other small companies that is dependent upon the continued employment of certain employees. This balance of deferred
compensation is being amortized to operating expenses on a straight-line basis over the vesting term, which ranges from two to four years.



An insignificant amount of deferred compensation was recorded in fiscal 2001.



12.    Employee Benefit Plans



Stock option plans



Under the Companys stock option plans, incentive and nonqualified stock options may be granted to
eligible participants to purchase shares of the Companys common stock. Options generally vest over a four-year period and have a term of ten years. Annually, the number of shares available in the stock option plan is automatically increased by
an amount of up to 6 percent of the outstanding shares of common stock on the last day of the immediately preceding fiscal year, less the number of shares of common stock added to the Employee Stock Purchase Plan, based on a formula, but not to
exceed 24 million shares per fiscal year. The exercise price of the stock options is determined by the Companys Board of Directors on the date of grant and is generally equal to the fair market value of the stock on the grant date.



Information with respect to option activity
under the Companys stock option plans are summarized as follows:



|                                                |  | Options outstanding   |   |  | Exercise price per share |  | Weighted average exercise price per share
|----------------------------------------------- |  | --------------------- | - |  | ------------------------ |  | -----------------------------------------
|                                                |  | (shares in thousands)
|Options outstanding at January 31, 2000         |  | 67,686                |   |  | $ 0.03 - $41.35          |  | $6.17                                    
|Granted                                         |  | 14,820                |   |  | $29.33 - $85.56          |  | $48.53                                   
|Exercised                                       |  | (20,486               | ) |  | $ 0.01 - $58.19          |  | $3.10                                    
|Canceled                                        |  | (6,731                | ) |  | $ 0.07 - $85.56          |  | $4.54                                    
|                                                |  |                       |   |  |                          |  |                                          
|Options outstanding at January 31, 2001         |  | 55,289                |   |  | $ 0.07 - $85.56          |  | $16.97                                   
|Granted                                         |  | 24,022                |   |  | $ 6.27 - $60.50          |  | $20.00                                   
|Exercised                                       |  | (8,960                | ) |  | $ 0.07 - $37.87          |  | $4.22                                    
|Canceled                                        |  | (9,437                | ) |  | $ 0.07 - $85.56          |  | $27.32                                   
|                                                |  |                       |   |  |                          |  |                                          
|Options outstanding at January 31, 2002         |  | 60,914                |   |  | $ 0.07 - $85.56          |  | $18.43                                   
|Granted                                         |  | 29,543                |   |  | $ 2.78 - $16.04          |  | $6.82                                    
|Exercised                                       |  | (6,229                | ) |  | $ 0.07 - $12.99          |  | $4.75                                    
|Canceled                                        |  | (9,233                | ) |  | $ 0.31 - $85.56          |  | $23.55                                   
|                                                |  |                       |   |  |                          |  |                                          
|Options outstanding at January 31, 2003         |  | 74,995                |   |  | $ 0.07 - $85.56          |  | $14.37                                   
|                                                |  |                       |   |  |                          |  |                                          
|Options exercisable at January 31, 2003         |  | 29,526                |   |  | $ 0.07 - $85.56          |  | $17.02                                   
|                                                |  |                       |   |  |                          |  |                                          
|Options exercisable at January 31, 2002         |  | 23,369                |   |  | $ 0.07 - $85.56          |  | $13.84                                   
|                                                |  |                       |   |  |                          |  |                                          
|Options exercisable at January 31, 2001         |  | 17,925                |   |  | $ 0.07 - $83.50          |  | $5.06                                    
|                                                |  |                       |   |  |                          |  |                                          
|Options available for grant at January 31, 2003 |  | 32,551                |   |  |                          |  |                                          
|                                                |  |                       |   |  |                          |  |                                          



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
weighted average grant date fair value of stock options, as calculated using the Black Scholes model under FAS 123, was as follows:



|                                                                                                  |  | Fiscal 2003 |      | Fiscal 2002 |   | Fiscal 2001
|------------------------------------------------------------------------------------------------- |  | ----------- | ---- | ----------- | - | -----------
|Stock options granted with an exercise price equal to the Companys stock price on
date of grant  |  | $           | 3.92 |             | $ | 11.78      
|Stock options granted with an exercise price less than the Companys stock price on
date of grant |  | $           | 3.64 |             | $ |           



The
following table summarizes information about outstanding and exercisable stock options at January 31, 2003:



|                                   |  | Outstanding           |  | Exercisable                                           
|---------------------------------- |  | --------------------- |  | ------------------------------------------------------
|                                   |  | Number of shares      |  | Weighted average remaining contractual life (in years)
|                                   |  | (shares in thousands)
|Range of per share exercise prices |  |                       |  |                                                       
|$ 0.07  $ 3.97                    |  | 8,457                 |  | 6.44                                                  
|$ 3.98  $ 4.33                    |  | 7,542                 |  | 7.66                                                  
|$ 4.33  $ 5.18                    |  | 7,919                 |  | 9.14                                                  
|$ 5.22  $ 6.50                    |  | 9,434                 |  | 8.19                                                  
|$ 6.51  $ 9.29                    |  | 7,173                 |  | 8.46                                                  
|$ 9.44  $11.45                    |  | 3,615                 |  | 8.54                                                  
|$11.54  $11.70                    |  | 9,787                 |  | 8.76                                                  
|$11.72  $20.94                    |  | 5,809                 |  | 8.84                                                  
|$21.18  $36.09                    |  | 6,768                 |  | 7.85                                                  
|$36.13  $85.56                    |  | 8,491                 |  | 7.50                                                  
|                                   |  |                       |  |                                                       
|$0.07  $85.56                     |  | 74,995                |  | 8.10                                                  
|                                   |  |                       |  |                                                       



Employee stock purchase plan



In March 1997, the Companys stockholders approved an Employee Stock Purchase Plan (the ESPP Plan) for all employees meeting certain eligibility criteria. Under the ESPP Plan, employees may purchase shares of the
Companys common stock, subject to certain limitations, at 85 percent of the lower of the closing sale price of BEAs Common Stock reported on the Nasdaq National Market (Nasdaq) at the beginning or the end of each six-month
offering period. Additionally, the price paid by the employee will not exceed 85 percent of the closing sale price as reported on Nasdaq at the beginning of a 24 month period that restarts in January or July of every second year, determined by the
employees enrollment date in the plan. Eligible employees may purchase common stock through payroll deductions by electing to have between 1 percent and 15 percent of their compensation withheld, subject to certain limitations. Annually, the
number of shares available in the ESPP Plan automatically increases by an amount equal to the lesser of 24 million shares or 6 percent of the outstanding shares of common stock on the last day of the immediately preceding fiscal year less the number
of shares of common stock added to the stock option plan. Approximately 2.4 million, 1.8 million, and 4.3 million shares for total proceeds of approximately $19.5 million, $24.7 million and $22.8 million were sold through the ESPP Plan in fiscal
2003, 2002 and 2001, respectively. At January 31, 2003, 20.3 million shares had been issued under the



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



ESPP Plan and 5.9 million shares were reserved for future issuance. On February 1, 2003, 4 million additional shares became available for
issuance under the Employee Stock Purchase Plan. The weighted average grant date fair value of the ESPP shares was $4.99, $18.82 and $15.01 in fiscal years 2003, 2002 and 2001, respectively.



401(k) plan



The Company has a 401(k) Profit Sharing Plan (the 401K
Plan) that allows eligible employees to contribute up to 15 percent of their annual compensation to the 401K Plan, subject to certain limitations. The employees funds are not held in BEA stock directly, but rather the employee directs
how the funds are distributed across a series of mutual funds. The Company matches 50 percent of the employee contributions subject to a maximum rate of 6 percent of salary, not to exceed $3,000 per year. Employee contributions vest immediately,
whereas the Companys matching contributions vest at a rate of 25 percent per year of employment. The 401K Plan also allows the Company to make discretionary contributions; however, none have been made to date. The Company recognized matching
contribution expense of $3.8 million, $4.6 million and $1.4 million in fiscal 2003, 2002 and 2001, respectively.



13.    Accumulated Other Comprehensive Income (Loss)



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



|                                                                                                                                           |  | January 31, |       
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ------
|                                                                                                                                           |  | 2003        |       
|Foreign currency translation adjustment                                                                                                    |  | $           | (1,125
|                                                                                                                                          
|Unrealized gain (loss) on available-for-sale investments, net of taxes of $889, $55 and
$(148) in fiscal 2003, 2002 and 2001, respectively |  |             | 2,071 
|                                                                                                                                           |  |             |       
|Total accumulated other comprehensive income (loss)                                                                                        |  | $           | 946   
|                                                                                                                                           |  |             |       



14.    Geographic Information and Revenue by Type of Product or Service



Geographic information



Information regarding the Companys operations by geographic area at January 31, 2003, 2002, and 2001 and for the fiscal years then
ended is as follows (in thousands):



|                                       |  | January 31,
|-------------------------------------- |  | -----------
|                                       |  | 2003       
|Total revenues:                        |  |            
|Americas                               |  | $          
|Europe, Middle East and Africa (EMEA)  |  |            
|Asia/Pacific (APAC)                    |  |            
|                                       |  |            
|                                       |  | $          
|                                       |  |            
|Long-lived assets(1) (at end of year): |  |            
|Americas                               |  | $          
|EMEA                                   |  |            
|APAC                                   |  |            
|                                       |  |            
|                                       |  | $          
|                                       |  |            

---

|(1) |  | Long-lived assets include all long-term assets except those specifically excluded under the Statement of Financial Accounting Standard No. 131, Disclosure about
Segments of an Enterprise and Related Information, such as deferred income taxes.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Company generally assigns revenues to geographic areas based on the location from which the invoice is generated. Certain large revenue transactions with multi-national customers are allocated to multiple regions based on the relative contribution
of each region to the overall sales effort. The only individual country that accounted for more than 10 percent of total revenues in fiscal 2003 was the United States, which was $476.6 million or 51.0 percent. The only individual country that
accounted for more than 10 percent of total revenues in fiscal 2002 was the United States, which was $527.8 million or 54.1 percent. The only individual countries with revenues greater than 10 percent of total revenues in fiscal 2001 was the United
States with 58.4 percent or $478.6 million and the United Kingdom with 10.3 percent or $84.7 million. The only individual country which accounted for more than 10 percent of total long-lived assets in any of fiscal 2003, 2002 and 2001 was the
United States with $273.0 million or 95.4 percent, $379.7 million or 95.8 percent, and $352.8 million or 93.9 percent, respectively.



Revenue by type of product or service



The Company considers all license revenue derived from its various software products to be revenue from a group of similar products.



The following table provides a breakdown of
services revenue by similar type (in millions):



|                                  |  | Fiscal Year Ended January 31,
|--------------------------------- |  | -----------------------------
|                                  |  | 2003                         
|Consulting and education revenues |  | $                            
|Customer support revenues         |  |                              
|                                  |  |                              
|Total Services revenue            |  | $                            
|                                  |  |                              



15.    Supplemental Cash Flow Disclosures



Cash payments for interest were $22.1 million, $22.3 million, and $22.4 million in fiscal 2003, 2002 and 2001, respectively. Cash payments for income taxes were approximately $10.4 million, $9.7
million and $285,000 for fiscal 2003, 2002 and 2001, respectively. In fiscal 2003, 2002 and 2001, the convertible debt holders converted approximately $0, $11.4 million and $11.1 million of the 2005 Notes into common stock. The value of stock issued
in connection with business acquisitions in fiscal 2003, 2002 and 2001 was $0, $27.9 million and $23.3 million, respectively. The Company recorded deferred compensation during fiscal 2003 of approximately $12.9 million for restricted common
stock and for stock options granted with an exercise price lower than the fair market value of the Companys stock on the date of grant. During fiscal 2001, the Company sold investments in WebGain with a cost of $28.3 million to WP Equity
Partners in exchange for a note receivable due from WP Equity Partners in the amount of approximately $50.0 million. In connection with this transaction, additional notes receivable of $18.0 million were issued to BEA during fiscal 2002. During
fiscal 2002, the Company sold investments in WebGain with a cost of $2.9 million to WP Equity Partners in exchange for a note receivable due from WP Equity Partners in the amount of approximately $6.6 million. The Company recorded a tax benefit from
stock options of $27.0 million, $17.9 million, and $25.9 million in fiscal 2003, 2002 and 2001, respectively.



16.    Commitments and Contingencies



Operating Leases



The Company leases its facilities under operating lease arrangements with remaining terms ranging from less than 1 year up to 9 years.
Certain of the leases provide for specified annual rent increases as well as options



80



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##### Table of Contents

BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



to extend the lease beyond the initial term for additional terms ranging from 1 to 15 years. The Company has entered into agreements to
sublease portions of its leased facilities, the rental income from which is not significant.



Approximate annual minimum operating lease commitments, including the Companys obligations under its land lease agreement (See Land Leasebelow) (in thousands):



|January 31,                  |  | Commitments
|---------------------------- |  | -----------
|2004                         |  | $          
|2005                         |  |            
|2006                         |  |            
|2007                         |  |            
|2008                         |  |            
|Thereafter                   |  |            
|                             |  |            
|Total minimum lease payments |  | $          
|                             |  |            



The land
lease payments included in the above table of approximately $9.9 million per year commencing in fiscal 2004 through 2006 are calculated based on a variable London Interbank Offering Rate (LIBOR) (see Land Leasebelow). The Company
has estimated future lease obligations based on current LIBOR. Actual future lease payments will differ based on changes in LIBOR. The land lease payments included in the above table exclude any amounts that could be payable under the residual value
guarantee (see Land Lease below).



Total
rent expense charged to operations for fiscal 2003, 2002 and 2001 was approximately $55.5 million, $37.7 million and $24.2 million, respectively.



Litigation and Other Claims



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



Land Lease



During the first quarter of fiscal 2002, the Company entered into a lease agreement for the lease of approximately 40 acres of land
adjacent to the Companys San Jose, California headquarters (the land lease). The Company intends to construct additional corporate offices and research and development facilities on the leased land. Under the land lease agreement,
the lessor will finance up to $331 million of land and associated costs. The land lease has an initial term of five years with renewal options. Rent payments commence at the beginning of the third year. Although no rental payments are currently
being made under the land lease, the Company began expensing rent in the fourth quarter of fiscal 2002 of approximately $3 million per quarter, as it re-evaluated the scope and timing of the construction for additional corporate offices. The
agreement qualifies for operating lease accounting treatment under Statement of Financial Accounting Standards No. 13, Accounting for Leases, and, as such, the land and the related obligation discussed below are not included on the
Companys balance sheet.



Total minimum
lease payments are estimated to be approximately $9.9 million per year commencing in fiscal 2004 through fiscal 2006, and are calculated based on LIBOR. The minimum lease payments will fluctuate



81



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



from time to time depending on changes in LIBOR. As of January 31, 2003, the outstanding lease balance was approximately $327.4 million. The
Company has an option to renew the land lease agreement, purchase the land at the end of the lease term or earlier for the outstanding lease balance, or, to arrange for the sale of the land to a third party. If the Company elects to renew the lease
or arrange for the sale of the land, it is obligated to pay any shortfall between the fair value or sales price and the outstanding land lease balance under a residual value guarantee of approximately $330 million. If it became probable that the
value of the leased property would be less than the outstanding lease balance at lease termination, the estimated deficiency would be expensed ratably over the remaining lease term. If the Company elects to purchase the land, the Company could be
required to capitalize the land on the Companys balance sheet at then current fair market value, which could be less than the outstanding lease balance in the near term. This could result in a material charge to earnings at the time of
purchase, equal to the difference between the current fair market value of the property and the outstanding lease balance.



As part of the land lease agreement, the Company must maintain a minimum restricted cash balance consisting of United States government
securities as defined in the lease, which was $126.5 million as of January 31, 2003. This amount represents collateral for specified obligations to the lessor under the lease. The restricted cash cannot be withdrawn and is managed by a third party
subject to certain limitations. The Company has classified this amount as a long-term restricted asset on the consolidated balance sheet at January 31, 2003. The Company must maintain certain covenants, including liquidity, leverage and
profitability ratios. As of January 31, 2003, the Company is in compliance with all financial covenants. In the event of a default, the lessor may demand payment equal to the lessors investment, require BEA to purchase, facilitate the
sale of, or surrender the property.



Employer
Payroll Taxes



The Company is subject to
employer payroll taxes when employees exercise stock options. The payroll taxes are assessed on the stock option gain, which is the difference between the common stock price on the date of exercise and the exercise price. The tax rate varies
depending upon the employees taxing jurisdiction. The timing and amount of employer payroll taxes is directly related to the timing and number of options exercised by employees, the gain thereon and the tax rate in the applicable jurisdiction.
During fiscal 2003, 2002 and 2001, the Company recorded employer payroll taxes related to stock option exercises of approximately $736,000, $2.6 million and $13.3 million, respectively. Because the Company is unable to predict these employer
payroll taxes the Company is unable to predict what, if any, expense will be recorded in a future period.



Warranties and Indemnification



The Company generally provides a warranty for its software products and services to its customers and accounts for its warranties under
Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (FAS 5). The Companys products are generally warranted to perform substantially as described in the associated product documentation for a
period of 90 days. The Companys services are generally warranted to be performed consistent with industry standards for a period of 90 days from delivery. In the event there is a failure of such warranties, the Company generally is obligated
to correct the product or service to conform to the warranty provision or, if the Company is unable to do so, the customer is entitled to seek a refund of the purchase price of the product or service. The Company has not provided for a warranty
accrual as of January 31, 2003 or January 31, 2002. To date, the Companys product warranty expense has not been significant.



The Company generally agrees to indemnify its customers against legal claims that the Companys software products infringe certain
third-party intellectual property rights and accounts for its indemnification obligations



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BEA SYSTEMS, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



under FAS 5. In the event of such a claim, the Company is generally obligated to defend its customer against the claim and to either settle
the claim at the Companys expense or pay damages that the customer is legally required to pay to the third-party claimant. In addition, in the event of an infringement, the Company agrees to modify or replace the infringing product, or, if
those options are not reasonably possible, to refund the cost of the software, as pro-rated over a three-year period. To date, the Company has not been required to make any payment resulting from infringement claims asserted against our customers.
As such, the Company has not recorded a liability for infringement costs as of January 31, 2003.



17.    Events Subsequent to Date of Auditors Report



In February and March 2003, under the September 2001 Share Repurchase Program, the Company repurchased approximately 5.3 million shares of
its common stock at a total cost of approximately $52.0 million. In March 2003, the Board of Directors approved an additional repurchase of up to $100.0 million of the Companys common stock.



83



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##### Table of Contents

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



Not Applicable.



PART III



ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.



Information regarding directors and executive officers of the Company is incorporated by reference to the sections entitled Election
of Directors, Management and Section 16(a) Beneficial Ownership Reporting Compliance in the Companys definitive Proxy Statement with respect to the Registrants 2003 Annual Meeting to be filed with the SEC
within 120 days of January 31, 2003 (the Proxy Statement).



ITEM 11.    EXECUTIVE COMPENSATION.



The information in the sections entitled Executive Compensation and Related Information and Election of Directors and related information in the Proxy Statement is incorporated
herein by this reference.



ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.



The information in the section entitled Security Ownership of Certain Beneficial Owners and Management and the section
entitled Equity Compensation Plans in the Proxy Statement is incorporated herein by this reference.



ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



The information in the section entitled Certain Relationships and Related Transactions in the Proxy Statement is incorporated
herein by this reference.



ITEM 14.    CONTROLS AND PROCEDURES



Annual Evaluation of our Disclosure Controls and Internal Controls.



Within the 90 days prior to the date of this Annual Report on Form 10-K, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures and our internal controls and procedures for financial reporting. This controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and Chief
Financial Officer. Rules adopted by the Securities and Exchange Commission (SEC) require that in this section of the Annual Report on Form 10-K, we present the conclusions of the CEO and the CFO about the effectiveness of our disclosure
controls and internal controls based on and as of the date of the controls evaluation.



CEO and CFO Certifications.



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



84



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##### Table of Contents



Disclosure Controls and
Internal Controls.



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



Limitations on the
Effectiveness of Controls.



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



Scope of the Controls Evaluation.



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



Conclusions.



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



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PART IV



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.



(a) Documents filed as a part of this Report



(1) Index to Financial Statements



The index to the financial statements included in Part II,
Item 8 of this document is filed as part of this Report.



(2) Financial Statement Schedules



The financial statement schedule included in Part II, Item 8 of this document is filed as part of this Report. All of the other schedules are omitted as the required information is inapplicable or the information is presented in the
consolidated financial statements or related notes.



(3) Exhibits



|Exhibit |  | Description                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       
|3.1     |  | Form of Registrants Amended and Restated Certificate of Incorporation(10)                                                                                                                                                               
|       
|3.2     |  | Registrants Bylaws, as currently in effect along with Certificate of Amendment of Bylaws(1)                                                                                                                                             
|       
|4.1     |  | Investor Rights Agreements by and among the Registrant and the investors and the founders named
therein(1)                                                                                                                               
|       
|4.2     |  | Form of Indenture Agreement for the 4% Convertible Notes due June 15, 2005(4)                                                                                                                                                            
|       
|4.3     |  | Form of Promissory Note for the 4% Convertible Notes due June 15, 2005(4)                                                                                                                                                                
|       
|4.4     |  | Form of Purchase Agreement for the 4% Convertible Notes due June 15, 2005(4)                                                                                                                                                             
|       
|4.5     |  | Form of Registration Rights Agreement for the 4% Convertible Notes due June 15, 2005(4)                                                                                                                                                  
|       
|4.6     |  | Form of Indenture Agreement for the 4% Convertible Notes due December 15, 2006(9)                                                                                                                                                        
|       
|4.7     |  | Form of Promissory Note for the 4% Convertible Notes due December 15, 2006(9)                                                                                                                                                            
|       
|4.8     |  | Form of Purchase Agreement for the 4% Convertible Notes due December 15, 2006(9)                                                                                                                                                         
|       
|4.9     |  | Form of Registration Rights Agreement for the 4% Convertible Notes due December 15, 2006(9)                                                                                                                                              
|       
|4.10    |  | Form of Preferred Stock Rights Agreement between the Registrant and Equiserve Trust Company, N.A., dated as of
September 14, 2001, including the Certificate of Designation, the form of Rights Certificate and the Summary of Rights(12)
|       
|4.11    |  | Amendment No. 1 to the Preferred Stock Rights Agreement, dated as of January 15, 2003.(14)                                                                                                                                               
|       
|10.1    |  | Employment Agreement between the Registrant and the three founders dated as of September 28,
1995(1)*                                                                                                                                    
|       
|10.2    |  | Form of Promissory Notes entered into between the Registrant, William T. Coleman III, Edward W. Scott, Jr. and Alfred
S. Chuang each dated September 28, 1995(1)                                                                         
|       
|10.3    |  | Agreement between the Registrant and Novell, dated January 24, 1996, and Amendments thereto(1)                                                                                                                                           
|       
|10.4    |  | Lease Agreement between the Registrant and William H. and Leila A. Cilker dated November 15, 1995 and First Amendment
thereto(1)                                                                                                         
|       
|10.5    |  | Registrants 1995 Flexible Stock Incentive Plan, including forms of agreements
thereunder(1)*                                                                                                                                            
|       
|10.6    |  | Registrants 1997 Stock Incentive Plan, including forms of agreements thereunder(3)*                                                                                                                                                     
|       
|10.7    |  | Registrants 1997 Employee Stock Purchase Plan, including forms of agreements thereunder(3)*                                                                                                                                             
|       
|10.8    |  | License Agreement between the Registrant and Digital Equipment Corporation, dated January 31, 1997 and Amendments
thereto(2)                                                                                                             



86



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##### Table of Contents

|Exhibit |  | Description                                                                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.9    |  | 1997 Management Bonus Plan(2)*                                                                                                                                       
|       
|10.10   |  | Lease agreement between the Registrant and Sobrato Interest III for premise located at 2315 North First Street, San
Jose, dated December 26, 1997(6)                 
|       
|10.11   |  | Lease agreement between the Registrant and Sobrato Interest III for premise located at 2345 North First Street, San
Jose, dated December 26, 1997(6)                 
|       
|10.12   |  | Employment Agreement between the Registrant and Alfred S. Chuang dated as of September 1,
1999(10)*                                                                  
|       
|10.13   |  | Employment Agreement between the Registrant and William T. Coleman III dated as of September 1,
1999(10)*                                                            
|       
|10.14   |  | Lease agreement between the Registrant and Russ Building for premise located at 235 Montgomery Street, San Francisco,
dated September 24, 1999(10)                   
|       
|10.15   |  | First amendment to lease between the Registrant and Russ Building for premise located at 235 Montgomery Street,
San Francisco, dated March 15, 2000(10)              
|       
|10.16   |  | Registrants 2000 Non-Qualified Stock Incentive Plan, including forms of agreements
thereunder(10)*                                                                  
|       
|10.17   |  | Form of Lease agreement between the Registrant and ABN AMRO Leasing, Inc., dated February 13,
2001(11)                                                               
|       
|10.18   |  | 2001 Executive Staff Bonus Plan(11)*                                                                                                                                 
|       
|10.19   |  | Registrants Amended 1997 Employee Stock Purchase Plan(11)*                                                                                                          
|       
|10.20   |  | Secured Full Recourse Promissory Note between the Registrant and William T. Coleman, III and Claudia L. Coleman, dated
November 2, 2001(13)*                         
|       
|10.21   |  | BEA Systems, Inc. Employment Agreement between the Registrant and William T. Coleman III dated November 2,
2001(13)*                                                 
|       
|10.22   |  | Amendment of Employment Agreement of Alfred S. Chuang dated November 2, 2001(13)*                                                                                    
|       
|10.23   |  | Form of Employment Agreement between the Registrant and Charles Ill, III                                                                                             
|       
|10.24   |  | Fiscal 2004 Executive Staff Bonus Plan                                                                                                                               
|       
|10.25   |  | Form of Restricted Stock Purchase Award Agreement between the Registrant and Charles Ill, III                                                                        
|       
|11.1    |  | Statement re: computation of income (loss) per share (included on page 59 of this Report)                                                                            
|       
|12.1    |  | Ratio of Earnings to Fixed Charges                                                                                                                                   
|       
|21.1    |  | Subsidiaries of the Registrant                                                                                                                                       
|       
|23.1    |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                   
|       
|99.1    |  | Certification of Alfred S. Chuang, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|       
|99.2    |  | Certification of William M. Klein, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.

---

|(1) |  | Incorporated by reference to such exhibit as filed in the Registrants Registration Statement on Form SB-2, filed January 31, 1997
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Incorporated by reference to such exhibit as filed in the Registrants Registration Statement on Form SB-2/A, filed March 20, 1997
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Incorporated by reference to such exhibit as filed in the Registrants Registration Statement on Form SB-2/A, filed April 3, 1997
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Incorporated by reference to such exhibit as filed in the Registrants Registration Statement on Form S-3, filed September 9, 1998
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(5) |  | Incorporated by reference to such exhibit as filed in the Registrants Registration Statement on Form S-3, filed October 30, 1998
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------

|(6) |  | Incorporated by reference to such exhibit as filed in the Registrants Report on Form 10-KSB, filed April 30, 1998
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(7) |  | Incorporated by reference to such exhibit as filed in the Registrants Registration Statement on Form S-3, filed August 10, 1998
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

|(8) |  | Incorporated by reference to such exhibit as filed in the Registrants Report on Form 8-K, filed June 30, 1998
|--- |  | --------------------------------------------------------------------------------------------------------------

|(9) |  | Incorporated by reference to such exhibit as filed in the Registrants Registration Statement on Form S-3, filed March 13, 2000
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

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

|(11) |  | Incorporated by reference to such exhibit as filed in the Registrants Report on Form 10-K, filed May 1, 2001
|---- |  | -------------------------------------------------------------------------------------------------------------

|(12) |  | Incorporated by reference to such exhibit as filed in the Registrants Registration Statement on Form  8-A12G, filed October 1, 2001
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------

|(13) |  | Incorporated by reference to such exhibit as filed in the Registrants Report on Form 10-K, filed April 23, 2002
|---- |  | ----------------------------------------------------------------------------------------------------------------

|(14) |  | Incorporated by reference to such exhibit as filed in the Registrants Report on Form 8-K, filed January 31, 2003.
|---- |  | ------------------------------------------------------------------------------------------------------------------

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



(b) Reports on Form 8-K and 8-K/A



On January 7, 2003, the Registrant filed a Current Report on Form 8-K relating to the acquisition of XQRL,
Inc.



On January 22, 2003, the Registrant filed a
Current Report on Form 8-K relating to the amendment of its Preferred Stock Rights Agreement with EquiServe Trust Company, N.A



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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.



BEA SYSTEMS, INC.By:

/s/    WILLIAM M.
KLEINWilliam M. Klein Chief Financial Officer and Executive Vice
PresidentAdministration




April 29, 2003



Pursuant to
the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.



|Signature                                           |  | Title                                                        |  | Date          
|--------------------------------------------------- |  | ------------------------------------------------------------ |  | --------------
|                                                   
|/s/    ALFRED. S.
CHUANGAlfred S. Chuang            |  | President, Chief Executive Officer and Chairman of the Board |  | April 29, 2003
|                                                   
|/s/    WILLIAM T. COLEMAN
IIIWilliam T. Coleman
III |  | Director                                                     |  | April 29, 2003
|                                                   
|/s/    CAROL A.
BARTZCarol A. Bartz                 |  | Director                                                     |  | April 29, 2003
|                                                   
|/s/    STEWART K.P.
GROSSStewart K.P. Gross         |  | Director                                                     |  | April 29, 2003
|                                                   
|/s/    WILLIAM H.
JANEWAYWilliam H. Janeway         |  | Director                                                     |  | April 29, 2003
|                                                   
|/s/    ROBERT L.
JOSSRobert L. Joss                 |  | Director                                                     |  | April 29, 2003
|                                                   
|/s/    DEAN O.
MORTONDean O. Morton                 |  | Director                                                     |  | April 29, 2003
|                                                   
|/s/    L. DALE
CRANDALLL. Dale Crandall             |  | Director                                                     |  | April 29, 2003



89



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##### Table of Contents

CERTIFICATION



I, Alfred S. Chuang, certify that:



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



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



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



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



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



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



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



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



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



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



|6. |  | The registrants other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:  April 29, 2003



By:

/s/    ALFRED S.
CHUANGAlfred S. Chuang Chief Executive Officer




90



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##### Table of Contents

CERTIFICATION



I, William M. Klein, certify that:



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



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



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



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



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



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



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



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



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



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



|6. |  | The registrants other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date:  April 29, 2003



By:

/s/    WILLIAM M.
KLEINWilliam M. Klein Chief Financial Officer




91



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##### Table of Contents

BEA SYSTEMS, INC.



SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS



Year Ended January 31, 2003, 2002 and 2001

(in thousands)



|                                |  | Balance at beginning of period |        | Additions |   | Deductions |  | Balance at end of  period
|------------------------------- |  | ------------------------------ | ------ | --------- | - | ---------- |  | -------------------------
|January 31, 2003                |  |                                |        |           |   |            |  |                          
|Allowance for doubtful accounts |  | $                              | 10,700 |           | $ | 3,489      |  | $                        
|January 31, 2002                |  |                                |        |           |   |            |  |                          
|Allowance for doubtful accounts |  |                                | 9,399  |           |   | 8,669      |  |                          
|January 31, 2001                |  |                                |        |           |   |            |  |                          
|Allowance for doubtful accounts |  |                                | 5,512  |           |   | 5,045      |  |                          



92