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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended November 30, 2003

For the transition period from                                          to                                         

Commission File Number: 000-26579

TIBCO SOFTWARE INC.

(Exact name of registrant as specified in its charter)

3303 Hillview Avenue, Palo Alto, CA 94304

(Address of principal executive offices) (Zip Code)

(650) 846-1000

(Registrant’s telephone number, including area code)

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

None

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

Common Stock, $0.001 par value per share

(Title of Class)

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

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

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

The aggregate market value of the voting stock held by non-affiliates of the registrant (based upon the closing sale price of such shares on the Nasdaq National Market on May 30, 2003) was approximately $438,828,204. Shares of common stock held by each executive officer and director and by each entity that owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of January 14, 2004, there were 213,809,794 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders to be held on April 15, 2004 are incorporated by reference into Part III of this Annual Report on Form 10-K to the extent stated herein.

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TIBCO SOFTWARE INC. FORM 10-K

For the Fiscal Year Ended November 30, 2003

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Forward Looking Statements

This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements relate to expectations concerning matters that are not historical facts. Words such as “projects,” “believes,” “anticipates,” “plans,” “expects,” “intends” and similar words and expressions are intended to identify forward-looking statements. We believe that the expectations reflected in the forward-looking statements are reasonable but we cannot assure you that those expectations will prove to be correct. Important factors that could cause our actual results to differ materially from those expectations are disclosed in this report, including, without limitation, in the “Factors That May Affect Operating Results” described in Item 7. All forward-looking statements are expressly qualified in their entirety by these factors and all related cautionary statements. We do not undertake any obligation to update any forward-looking statements.

Trademarks

TIBCO, TIBCO Software, TIBCO ActiveEnterprise, TIBCO Rendezvous, TIBCO SmartSockets, TIBCO BusinessWorks, TIBCO ActiveExchange, TIBCO ActivePortal and TIBCO BusinessFactor are the trademarks or registered trademarks of TIBCO Software Inc. in the United States and other countries. This report also refers to the trademarks of other companies.

PART I

ITEM 1.    BUSINESS

Overview

Our suite of business integration software solutions makes us a leading enabler of real-time business. We use the term “real-time business” to refer to those companies that use current information in their businesses to execute their critical business processes. Our business integration solutions include products that provide business process visualization and management, and application integration capability, giving businesses the ability to connect and coordinate their applications, employees, partners and customers and automate their business processes from end-to-end within the enterprise. This allows our customers to better automate, monitor, analyze, understand, and modify the business activities that span those systems and people so they can better respond to problems and opportunities. Our products do this by enabling computer systems to interact with each other in real-time, automating processes that span those systems, and by giving people the ability to monitor and interact with information and processes.

Our products can make corporate assets such as applications and databases more effective and valuable by tying them together with a common framework and coordinating the interactions between them. Our products can lower IT costs by enabling companies to more quickly and easily create, manage and modify interactions. Our products can make companies more efficient by automating routine processes to allow their employees to focus their efforts on managing exceptional problems and opportunities. Our products can give managers and executives the information they need to identify and understand both the strengths and weaknesses of their business and external factors that shape their business, along with the ability to quickly reallocate their assets or adapt their operations to fix the problem or capitalize on the opportunity.

Our products are currently licensed by approximately 2,100 companies worldwide in diverse industries such as telecommunications, retail, healthcare, manufacturing, energy, transportation, logistics, financial services, government and insurance. We sell our products through a direct sales force and through alliances with leading software vendors and systems integrators.

Our objective is to establish TIBCO Software as the leading provider of business optimization, business integration and enterprise backbone software. The core elements of our strategy include providing our customers with a comprehensive suite of products and services, promoting the widespread adoption of our technology, leveraging our vertical market expertise, expanding our business in the financial services industry and pursuing strategic acquisitions to expand and strengthen our offerings. We believe we are the market leader among independent integration software companies. See “—Competition.”

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We operate through subsidiaries and offices throughout North America, Europe and the Pacific Rim. Where advantageous to us for business or other reasons, we conduct our business through wholly owned subsidiaries of TIBCO Software Inc. No individual subsidiary is material to our business as a whole.

Relationship with Reuters

We are the successor to a portion of the business of Teknekron Software Systems, Inc. Teknekron was acquired by Reuters Group PLC, a global information company (“Reuters”), in 1994. In January 1997, we were established as an entity separate from Teknekron. In connection with our establishment as a separate entity, Reuters transferred to us certain assets and liabilities related to its business and granted to us a royalty-free license to the intellectual property from which some of our products originated. Reuters also assigned to us at that time certain related license and service contracts.

As of November 30, 2003, Reuters owned approximately 49% of our outstanding capital stock and nominated one member of our Board of Directors. Through the third quarter of fiscal 2003, we had a license, distribution and maintenance agreement with Reuters pursuant to which Reuters was paying us certain minimum guaranteed distribution fees related to sales of our products to financial services market customers. Reuters’ obligations with respect to these minimum guaranteed distribution fees were to expire at the end of calendar 2003. Under our previous commercial agreement with Reuters, we were restricted from selling our products and providing consulting services directly to companies in the financial services market, except in limited circumstances. Accordingly, to date we have relied on Reuters and, to a lesser extent, other third-party resellers and distributors to sell our products to financial services market customers. In the past, when we did sell our products to financial services market customers other than through Reuters or when we resold Reuters’ products and services, we were required to pay certain fees to Reuters.

In October 2003, we entered into a new commercial agreement with Reuters relating to the licensing, distribution and maintenance of our products that replaced our original agreement with Reuters. This new agreement was the result of lengthy negotiations between Reuters and us and, because of Reuters’ relationship with us and its influence over our business, was approved by a special committee of our Board of Directors comprised solely of independent and disinterested directors.

Pursuant to this new agreement, Reuters will continue to act as a non-exclusive reseller of our products to certain specified customers in the financial services market until March 2005 and will pay us a distribution license fee equal to 60% of license revenue it receives from sales to such customers. Reuters may also continue to use our products internally and embed them into its solutions. We have agreed to provide certain fee-based support services to Reuters for TIBCO products Reuters uses internally and may provide additional support services if purchased by Reuters. We will now have the right to market and sell our products, other than risk management and market data distribution products, directly and through third party resellers (other than four specified resellers) to customers in the financial services market. The limitations on our ability to sell risk management and market data distribution products and to resell through the specified resellers will expire in May 2008. Reuters has agreed to continue to pay us minimum guaranteed fees in the amount of $5 million per quarter through March 2005. The quarterly minimum guaranteed fees will be reduced by an amount equal to 10% of the license and maintenance revenues from our sales to financial services companies (or, in the case of customers transitioned to us by Reuters, 40% of our maintenance revenue from such customers for up to one year after effectiveness of the agreement). Furthermore, Reuters began transitioning maintenance and support of our products for its customers, as well as associated revenue, upon entering into the new agreement. As a result, we began providing maintenance and support services directly to customers transitioned from Reuters in the fourth quarter of fiscal 2003. In addition to acting as a reseller of our products in the financial services market, Reuters will be eligible to receive a fee of between 5% and 20% of revenue from sales to approved customers referred to us by Reuters, depending upon the level of assistance Reuters provides in supporting the sale.

We are also party to a stockholders agreement with Reuters, Cisco Systems, Mayfield and Vivek Ranadivé, our President and Chief Executive Officer, pursuant to which Reuters has a consent right with respect to certain

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fundamental decisions, including issuances by us of specified amounts of stock, acquisitions and other significant transactions, has additional rights with respect to board representation and registration of certain TIBCO shares, and has certain financial information and inspection rights. Specifically, Reuters has the right to nominate three directors for election to our board of directors; however, today only one member of our board is a Reuters’ representative. Reuters’ consent right with respect to fundamental decisions will terminate at such time as Reuters ownership interest in TIBCO falls below 30%. Reuters’ board representation rights and information and inspection rights also terminate at various times when Reuters’ ownership interest falls below certain levels.

In October 2003, we entered into a Registration and Repurchase Agreement with Reuters. Pursuant to the terms of that agreement, we filed a registration statement during the fourth quarter of fiscal 2003, which was declared effective in January 2004, to register a portion of the common stock held by Reuters for resale to the public market. Pursuant to the agreement, if Reuters sells more than $100 million of our common stock held by it in a single transaction, we have agreed to repurchase an equal amount of common stock at the same price which the shares are sold to the public, up to a maximum of $115 million. Reuters has agreed to pay certain expenses incurred in connection with the registration and repurchase. Reuters’ additional rights with respect to registration of its shares of our common stock, board representation and approval rights with respect to certain fundamental corporate decisions by us remain unchanged.

TIBCO^® Products

We sell a wide range of products that address different elements of business integration and optimization. All of our products can be sold individually to solve specific technical challenges, but the emphasis of our product development and sales efforts is to create products that interoperate seamlessly and that can be sold together as a complete solution to business problems.

Our products are marketed and sold as part of our TIBCO ActiveEnterprise^™ standards-based platform for real-time business. TIBCO ActiveEnterprise is a comprehensive set of solutions comprised of three categories of software: business optimization software, business integration software and enterprise backbone software.

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Services

Professional Services

Our professional services offerings include a wide range of consulting services such as systems planning and design, custom development and systems integration for the rapid deployment of TIBCO products. We offer our professional services with the initial deployment of our products as well as on an ongoing basis to address the continuing needs of our customers. Our professional services staff is located throughout North America, Europe and the Pacific Rim, enabling us to perform installations and respond to customer demands rapidly across our global customer base. Many of our professional services employees have advanced degrees, substantial TIBCO experience and industry expertise in systems architecture and design and also have domain expertise in manufacturing, telecommunications, energy, logistics, healthcare, financial services and other industries.

We also have relationships with resellers, professional service organizations and system integrators including Accenture, Cap Gemini/Ernst & Young, Deloitte Consulting and BearingPoint, to cooperate in the deployment of our products to customers. These relationships help promote TIBCO products and provide additional technical expertise to enable us to provide the full range of professional services our customers require to deploy our products.

Maintenance and Support

We offer a suite of software support and maintenance options that are designed to meet the needs of our diverse customer base. These support options include twenty-four hour coverage that is available seven days a week, 365 days a year, to meet the needs of our global customers. To accomplish this level of support we have established a worldwide support organization with major support centers in Palo Alto, California; London, England; and Sydney, Australia. These centers, working in conjunction with several smaller support offices located throughout the United States, Japan and India, provide seamless support using a “follow-the-sun” support model. In addition to support teams around the globe, we have a Customer Support Website that provides our customers with the ability to submit service requests, receive confirmation that a service request has been opened and to obtain current status on these requests. Additionally, the Customer Support Website provides access to our support procedures, escalation numbers and late breaking news (LBN). LBN is used to provide updates and new information about our products.

Training

We provide a comprehensive and global training program for customers and partners. Training is available at our main office in Palo Alto and at major training centers in Cambridge, Massachusetts; Houston, Texas; Munich, Germany; and Tokyo, Japan. We also deliver training on-site at customer locations. We provide specialized training for our professional services partners to enhance their effectiveness in integrating our products. Our Educational Services group has the capability to develop solutions to address the specific needs of individual customers and partners. Our curriculum leads to an industry recognized technical certification in high visibility TIBCO technologies.

Sales and Marketing

Sales

We currently market our software and services primarily through a direct sales organization complemented by indirect sales channels. Our direct sales force is located in nineteen U.S. cities and in twenty-one locations internationally across North America, Europe and the Pacific Rim and operates globally through our foreign subsidiaries. We have established distribution and licensing relationships with several strategic hardware vendors, database providers, software and toolset developers and systems integrators. We have also developed alliances with key solution providers to target vertical industry sectors, including energy, telecommunications and manufacturing.

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Under the terms of our original commercial agreement with Reuters, we were restricted from selling our products to customers in the financial services market. Pursuant to the terms of the new agreement with Reuters, we are now permitted to market and sell our products, other than risk management and market data distribution products, directly and through third party resellers (other than four specified resellers) to customers in the financial services market. Reuters will continue to act as a non-exclusive reseller of our products to certain specified customers through March 2005, and will pay us a distribution license fee equal to 60% of license revenue it receives from sales to such customers. Reuters may continue to internally use and embed our products in its solutions. The limitations on our ability to sell risk management and market data distribution products and to resell through the specified resellers will expire in May 2008. The distribution relationship with Reuters accounted for 12%, 9% and 8% of our total revenue in each of fiscal 2003, 2002 and 2001, respectively.

Our revenue consists primarily of license and maintenance fees from our customers and distributors, including fees from Reuters pursuant to our license agreement, both of which were primarily attributable to sales of our TIBCO ActiveEnterprise product suite. License fees represented approximately 53%, 58% and 67% of our total revenue in 2003, 2002 and 2001, respectively. Revenue from services and maintenance represented approximately 47%, 42% and 33% of our total revenues in 2003, 2002 and 2001, respectively.

Sales to customers outside North America totaled $126.5 million for the year ended November 30, 2003. For a geographic breakdown of our revenue and long-lived assets, see note 11 to our consolidated financial statements included elsewhere in this report.

Marketing

We use a mix of market research, analyst updates, seminars, direct mail, print advertising, trade shows, speaking engagements, public relations, customer newsletters and web marketing in order to achieve our marketing goals. Our marketing department also produces collateral material for distribution to potential customers including presentation materials, white papers, brochures and fact sheets. We also host annual user conferences for our customers and provide support to our channel partners with a variety of programs, training and product marketing support materials.

Product Development

Reuters has granted us a perpetual, royalty-free license to The Information Bus^™ (TIB^™) messaging technology as it existed on December 31, 1996. We have concentrated our product development efforts since then on further developing this technology and on developing new products. We expect that most of our enhancements to existing products and new products will be developed internally. However, we will evaluate on an ongoing basis the acquisition of externally developed technologies for integration into our product lines.

We expect that a majority of our research and development activities will focus on enhancing and extending our TIBCO products. In fiscal 2003, we continued our development focus on creating products that interoperate seamlessly. We expect that we will continue to commit significant resources to product development in the future. Product development costs are recorded as research and development expenses. Our research and development expenses were $64.6 million, $72.3 million and $91.0 million in 2003, 2002 and 2001, respectively. To date, all product development costs have been expensed as incurred.

Competition

The market for our products and services is extremely competitive, continually evolving and subject to rapid change. While we offer a comprehensive suite of integration solutions and believe we are the market leader among independent integration software companies, we compete with various providers of integration products including BEA, IBM, Microsoft, SeeBeyond, Vitria and webMethods. We believe that none of these companies has a suite of integration products as complete as ours, but IBM, Microsoft and BEA offer products outside our

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segment and routinely bundle their broader set of products. We expect additional competition from other established and emerging companies. In addition, we may face pricing pressures from our current competitors and new market entrants in the future. We believe that the competitive factors affecting the market for our products and services include product functionality and features, quality of professional services offerings, performance and price, ease of product implementation, quality of customer support services, customer training and documentation, and vendor and product reputation. The relative importance of each of these factors depends upon the specific customer environment. We believe that our products and services currently compete favorably with respect to such factors. However, we may not be able to maintain our competitive position against current and potential competitors.

Some of our current competitors have, and some of our potential customers may have, longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and larger customer bases than we do. Our present or future competitors may be able to develop products comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends or customer requirements, or devote greater resources to the development, promotion and sale of their products than we do. Accordingly, we may not be able to compete effectively in our markets, or competition may intensify and harm our business and operating results. If we are not successful in developing new products and enhancements to our existing products or achieving customer acceptance, our gross margins may decline, and our business and operating results may suffer.

Our license agreement with Reuters does not prohibit Reuters from providing enterprise infrastructure software products and services in competition with us. Under the terms of our new license agreement with Reuters, we have the right to market and sell our products, other than risk management and market data distribution products, directly and through third party resellers (other than four specified resellers) to customers in the financial services market. The limitations on our ability to sell risk management and market data distribution products to financial services customers and to resell through the four specified resellers will expire in May 2008. Reuters may continue to sell our products to certain financial services companies until March 2005. In addition, pursuant to the license agreement, Reuters will continue to have access to the source code for TIBCO Rendezvous^® through 2011 and to TIBCO SmartSockets^™ until March 2005. Although Reuters currently does not create TIB-based products designed for general use in all markets, if Reuters were to decide to begin providing information integration products and services in our markets, we would face additional competition for customers in these markets.

Proprietary Technology

Our success is dependent upon our proprietary software technology. We license the patents relating to some of the technology underlying some of our software, including TIBCO Rendezvous, from Reuters on a royalty-free basis. Consequently, we can assert infringement of these patents only through Reuters or with the consent of Reuters. We have several pending patent applications and four issued patents, although we rely principally on trade secret, copyright and trademark laws, and nondisclosure and other contractual agreements to protect our technology. We also believe that factors such as the technological and creative skills of our personnel, product enhancements and new product developments are essential to establishing and maintaining a technology leadership position. We enter into confidentiality and/or license agreements with our employees, distributors and customers, and limit access to and distribution of our software, documentation and other proprietary information. Nevertheless, the steps we have taken may fail to prevent misappropriation of our technology, and the protections we have may not prevent our competitors from developing products with functionality or features similar to our products.

Furthermore, third parties might independently develop competing technologies that are substantially equivalent or superior to our technologies. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries where we operate. If we fail to protect our proprietary technology, our business could be seriously harmed.

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Although we do not believe our products infringe the proprietary rights of any third parties, third parties may nevertheless assert infringement claims against our customers or us in the future. Furthermore, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Litigation, whether resolved in our favor or not, would cause us to incur substantial costs and divert our management resources from productive tasks, which would harm our business. Parties making claims against us could secure substantial damages, as well as injunctive or other equitable relief, which could effectively block our ability to sell our products in the United States or abroad. Such a judgment could seriously harm our business. If it appears necessary or desirable, we may seek licenses to intellectual property if we believe that our technology potentially infringes on such intellectual property. We may not, however, be able to obtain such licenses on commercially reasonable terms or at all, and the terms of any offered licenses might not be acceptable to us. The failure to obtain necessary licenses or other rights could seriously harm our business. As the number of software products in our industry increases and the functionality of those products further overlaps, we believe that software developers may become increasingly subject to infringement claims.

Employees

As of November 30, 2003, we employed 895 persons, including 295 in sales and marketing, 214 in research and development, 144 in finance and administration and 242 in professional services and technical support. Of our 895 employees, 150 were located in Europe, 61 in the Pacific Rim and the balance in North America. Our success is highly dependent on our ability to attract and retain qualified employees. Competition for employees is intense in the software industry. To date, we believe we have been successful in our efforts to recruit qualified employees, but there is no assurance that we will continue to be as successful in the future. None of our employees are subject to collective bargaining agreements. We believe that our relationship with our employees is good.

Available Information

Our principal Internet address is www.tibco.com. We make available free of charge on www.tibco.com our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained or referenced on our website is not incorporated by reference in and does not form a part of this Annual Report on Form 10-K.

ITEM 2.    PROPERTIES

Our principal administrative, sales, marketing, service and research and development facilities are located in a four building campus totaling approximately 292,000 square feet in Palo Alto, California. We purchased these buildings in June 2003. In connection with the purchase, we entered into a 51-year lease of the land upon which the buildings are located. Further information on the terms of the building acquisition can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 5 to our consolidated financial statements included elsewhere in this report.

In addition, we lease field support offices in 40 cities throughout the world. The field offices range from small executive offices to a 13,820 square foot facility. Lease terms range from month-to-month on certain executive offices to seven and a half years on certain direct leases. Because our professional services are generally performed at the client site, field facilities are generally small. Field facilities are generally used for periodic meetings, training, and administration and by account managers. Our principal field facilities are in Atlanta, Georgia; Beijing, China; Shanghai, China; Bethesda, Maryland; Brussels, Belgium; Calgary, Canada; Cambridge, Massachusetts; Chapel Hill, North Carolina; Chicago, Illinois; Columbus, Ohio; Dallas, Texas; Denver, Colorado; Falls Church, Virginia; Houston, Texas; Iselin, New Jersey; Lisbon, Portugal; London, England; Madrid, Spain; Melbourne, Australia; Milan, Italy; Minneapolis, Minnesota; Montreal, Canada;

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Munich, Germany; New York, New York; Newport Beach, California; Oslo, Norway; Paris, France; Philadelphia, Pennsylvania; Rome, Italy; Rotterdam, Netherlands; Seattle, Washington; Singapore; Seoul, Korea; Stockholm, Sweden; Sydney, Australia; Taipei, Taiwan; Tokyo, Japan; Toronto, Canada; Warrenville, Illinois and Woy Woy, Australia. We are continually evaluating the adequacy of existing facilities and additional facilities in new cities and we believe that suitable additional space will be available in the future on commercially reasonable terms as needed.

We have approximately 127,000 square feet under lease that is in excess of our requirements and we no longer occupy, do not intend to occupy, and plan to sublease. The estimated loss on subleases has been included in the excess facilities charges recorded in 2001 and 2002.

ITEM 3.    LEGAL PROCEEDINGS

We, certain of our directors and officers and certain investment bank underwriters have been named in a putative class action for violation of the federal securities laws in the U.S. District Court for the Southern District of New York, captioned “In re TIBCO Software Inc. Initial Public Offering Securities Litigation.” This is one of a number of cases challenging underwriting practices in the initial public offerings (IPOs) of more than 300 companies, which have been coordinated for pretrial proceedings as “In re Initial Public Offering Securities Litigation.” Plaintiffs generally allege that the underwriters engaged in undisclosed and improper underwriting activities, namely the receipt of excessive brokerage commissions and customer agreements regarding post-offering purchases of stock in exchange for allocations of IPO shares. Plaintiffs also allege that various investment bank securities analysts issued false and misleading analyst reports. The complaint against us claims that the purported improper underwriting activities were not disclosed in the registration statements for our IPO and secondary public offering and seeks unspecified damages on behalf of a purported class of persons who purchased our securities or sold put options during the time period from July 13, 1999 to December 6, 2000.

A lawsuit with similar allegations of undisclosed improper underwriting practices, and part of the same coordinated proceedings, is pending against Talarian Corporation (“Talarian”), which we acquired in 2002. That action is captioned “In re Talarian Corp. Initial Public Offering Securities Litigation.” The complaint against Talarian, certain of its underwriters, and certain of its former directors and officers claims that the purported improper underwriting activities were not disclosed in the registration statement for Talarian’s IPO and seeks unspecified damages on behalf of a purported class of persons who purchased Talarian securities during the time period from July 20, 2000 to December 6, 2000.

A proposal to settle the claims against all of the issuers and individual defendants in the coordinated litigation was conditionally accepted by us and Talarian on June 20, 2003. The completion of the settlement is subject to a number of conditions, including Court approval. Under the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in the action, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay an amount equal to $1.0 billion less any amounts ultimately collected by the plaintiffs from the underwriter defendants in all the cases. Unlike most of the defendant issuers’ insurance policies, including ours, Talarian’s policy contains a specific self-insured retention in the amount of $500,000 for IPO “laddering” claims, including those alleged in this matter. Thus, under the proposed settlement, if any payment is required under the insurers’ guaranty, Talarian would be responsible for paying its pro rata share of the shortfall, up to $500,000 of the self-insured retention remaining under its policy.

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 2003.

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PART II

ITEM 5.    MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

Market Information

Our common stock has been quoted on the Nasdaq National Market under the symbol TIBX since July 1999. The following table presents, for the periods indicated, the high and low intra-day sale prices per share of our common stock during the quarters indicated, as reported on the Nasdaq National Market.

Holders of Record

We had 608 stockholders of record as of November 30, 2003.

Dividends

We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

Equity Compensation Plan Information

The following table provides information as of November 30, 2003 about our common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans, including the 1996 Stock Option Plan and the 1998 Director Option Plan.

The Extensibility Inc. 2000 Stock Option Plan, Talarian Corporation 2000 Equity Incentive Plan, Talarian Corporation 1998 Equity Incentive Plan, Talarian Corporation 1991 Stock Option Plan, White Barn, Inc. Stock Option Plan and White Barn, Inc. 2000 Equity Incentive Plans, under which we do not intend to grant any new options, were assumed upon our acquisition of other companies.

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ITEM 6.    SELECTED FINANCIAL DATA

The selected consolidated financial data below have been derived from our audited financial statements. You should read the following table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto included elsewhere in this annual report on Form 10-K. The historical results presented below are not indicative of any future results.

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The following contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially include those set forth in the following discussion, and, in particular, the risks discussed below under the subheading “Factors that May Affect Operating Results” and in other documents we file with the Securities and Exchange Commission. Unless required by law we undertake no obligation to update publicly any forward-looking statements.

Overview

Our suite of business integration software solutions makes us a leading enabler of real-time business. We use the term “real-time business” to refer to those companies that use current information in their businesses to execute their critical business processes. We are the successor to a portion of the business of Teknekron Software Systems, Inc. Teknekron developed software, known as the TIB technology, for the integration and delivery of market data, such as stock quotes, news and other financial information, in trading rooms of large banks and financial services institutions. In 1992, Teknekron expanded its development efforts to include solutions designed to enable complex and disparate manufacturing equipment and software applications—primarily in the semiconductor fabrication market—to communicate within the factory environment. Teknekron was acquired by Reuters Group PLC, the global information company, in 1994. Following the acquisition, continued development of the TIB technology was undertaken to expand its use in the financial services markets.

In January 1997, our company, TIBCO Software Inc., was established as an entity separate from Teknekron. We were formed to create and market software solutions for use in the integration of business information, processes and applications in diverse markets and industries outside the financial services sector. In connection with our establishment as a separate entity, Reuters transferred to us certain assets and liabilities related to our business and granted to us a royalty-free license to the intellectual property from which some of our messaging software products originated. Reuters also assigned to us at that time license and service contracts primarily within the high-tech manufacturing and energy markets, including contracts with NEC, Motorola, Mobil and Chevron.

Our products are currently licensed by approximately 2,100 companies worldwide in diverse industries such as telecommunications, retail, healthcare, manufacturing, energy, transportation, logistics, financial services, government and insurance. We sell our products through a direct sales force and through alliances with leading software vendors and systems integrators.

Our revenue in fiscal 2003, 2002 and 2001 consisted primarily of license and maintenance fees from our customers and distributors, including fees from Reuters pursuant to our license agreement, both of which were primarily attributable to sales of our TIBCO ActiveEnterprise product suite. In addition, we receive fees from our customers for providing project integration services. We also receive revenue from our strategic relationships with business partners who embed our products in their hardware and networking systems as well as from systems integrators who resell our products.

First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. Maintenance revenue is determined based on vendor-specific objective evidence of fair value and amortized over the term of the maintenance contract, typically 12 months. Consulting and training revenues are recognized as the services are performed and are usually on a time and materials basis. Such services primarily consist of implementation services related to the installation of our products and generally do not include significant customization to or development of the underlying software code.

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Our revenue is derived from a diverse customer base, and no single customer represented greater than 10% of total revenue during fiscal 2002 or 2001. During fiscal 2003, Reuters represented 12% of total revenue. One customer, Federal Express, had a balance in excess of 10% of net accounts receivable at November 30, 2002. There were no customers with a balance in excess of 10% of net accounts receivable at November 30, 2001 or 2003. We establish allowances for doubtful accounts based on our evaluation of collectibility and an allowance for returns and discounts based on specifically identified credits and historical experience.

Since the first quarter of fiscal 2001, adverse general economic conditions and conditions in the enterprise software industry have impacted purchases of our products and services as uncertainty in our potential customers’ businesses increased. These conditions have caused our sales cycle to lengthen, customer budgets for research and development to decrease and customer purchases to be delayed or decreased in size. We expect these conditions in the general economy and in our industry to continue to adversely impact our customers’ ability to purchase our products and services for the foreseeable future. In response to these adverse business conditions, we initiated cost containment actions that included headcount reductions, abandonment of excess facilities and other cost reductions.

Relationship with Reuters

Reuters had been the primary distributor of our products to customers in the financial services segment since 1997. As of November 30, 2003, Reuters owned approximately 49% of our outstanding capital stock and nominated one member of our Board of Directors. Through the third quarter of fiscal 2003, we had a license, maintenance and distribution agreement with Reuters pursuant to which Reuters was paying us certain minimum guaranteed distribution fees related to sales of our products to financial services customers. Reuters’ obligations with respect to these minimum guaranteed distribution fees were to expire at the end of calendar 2003. Reuters’ guaranteed minimum distribution fees were $20.0 million for each of the calendar years ended December 31, 2003, 2002 and 2001. These fees were recognized ratably in the period earned as related party revenue. In addition, our previous agreement with Reuters required us to provide Reuters with internal maintenance and support for a fee of $2.0 million per year plus an annual CPI-based increase. To date, this amount has been recognized ratably over the corresponding period as related party service and maintenance revenue.

Under our previous agreement with Reuters, we were restricted from selling our products and providing consulting services directly to companies in the financial services market, except in limited circumstances. Accordingly, to date we have relied on Reuters and, to a lesser extent, other third-party resellers and distributors to sell our products to financial services market customers. In the past, when we did sell our products to financial services market customers other than through Reuters or when we resold Reuters’ products and services, we were required to pay certain fees to Reuters, which were recorded as related party cost of revenue.

In October 2003, we entered into a new agreement with Reuters relating to the licensing, distribution and maintenance of our products that replaced our original agreement with Reuters. Pursuant to the terms of this new agreement, Reuters will continue to act as a non-exclusive reseller of our products to certain specified customers in the financial services market until March 2005 and will pay us a distribution license fee equal to 60% of license revenue it receives from sales to such customers. Reuters may also continue to use our products internally and embed them into its solutions. We have agreed to provide certain fee-based support services to Reuters for TIBCO products Reuters uses internally and may provide additional support services if purchased by Reuters. We will now have the right to market and sell our products, other than risk management and market data distribution products, directly and through third party resellers (other than four specified resellers) to customers in the financial services market. The limitations on our ability to sell risk management and market data distribution products and to resell through the specified resellers will expire in May 2008. Reuters has agreed to continue to pay us minimum guaranteed fees in the amount of $5.0 million per quarter through March 2005. The quarterly minimum guaranteed fees will be reduced by an amount equal to 10% of the license and maintenance revenues from our sales to financial services companies (or, in the case of customers transitioned to us by Reuters, 40% of our maintenance revenue from such customers for up to one year after effectiveness of the agreement).

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Reuters began transitioning maintenance and support of our products for its customers, as well as associated revenue, upon entering into the new agreement. As a result, we began providing maintenance and support services directly to customers transitioned from Reuters in the fourth quarter of fiscal 2003. Consequently, service and maintenance revenue and associated costs increased as a result of our assumption of Reuters’ contracts in the fourth quarter of fiscal 2003 and we expect these increases to continue through at least fiscal 2004. To the extent, as a result of our increased service and maintenance obligations, our cost of revenue increases faster than our service and maintenance revenue, our gross margins will be adversely affected.

In addition to acting as a reseller of our products in the financial services market, Reuters will be eligible to receive a fee of between 5% and 20% of revenue from sales to approved customers referred to us by Reuters, depending upon the level of assistance Reuters provides in supporting the sale.

Critical Accounting Policies, Judgments and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 2 to the annual consolidated financial statements as of and for the year ended November 30, 2003. We believe our most critical accounting policies and estimates include the following:

Revenue Recognition.    We recognize license revenue when a signed contract or other persuasive evidence of an arrangement exists, the software has been shipped or electronically delivered, the license fee is fixed or determinable, and collection of the resulting receivable is reasonably assured. When contracts contain multiple elements wherein vendor specific objective evidence exists for all undelivered elements, we account for the delivered elements in accordance with the “Residual Method” prescribed by AICPA Statement of Position 98-9. Revenue from subscription license agreements, which include software, rights to future products and maintenance, is recognized ratably over the term of the subscription period. Revenue on shipments to resellers, when subject to certain rights of return and price protection, is recognized when the products are sold by the resellers to the end-user customer.

We assess whether the fee is fixed or determinable and collection is reasonably assured at the time of the transaction. In determining whether the fee is fixed or determinable we compare the payment terms of the transaction to our normal payment terms. If a significant portion of a fee is due after our normal payment terms, we account for the fee as not being fixed or determinable and recognize revenue as the payments become due. We assess whether collection is reasonably assured based on a number of factors, including the customer’s past transaction history and credit-worthiness. Generally, we do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash.

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First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. For such arrangements with multiple obligations, we allocate revenue to each component of the arrangement based on the fair value of the undelivered elements. Fair values of ongoing maintenance and support obligations are based on separate sales of renewals to other customers or upon renewal rates quoted in the contracts when the quoted renewal rates are deemed to be substantive. Maintenance revenue is deferred and recognized ratably over the term of the maintenance and support period. Fair value of services, such as consulting or training, is based upon separate sales of these services. Consulting and training services are generally billed based on hourly rates and revenues are generally recognized as the services are performed. Consulting services primarily consist of implementation services related to the installation of our products and generally do not include significant customization to or development of the underlying software code. The determination as to whether services involve significant production, modification or customization of the underlying software code is a matter of judgment and can materially impact the timing of revenue recognition.

Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result.

Allowance for Doubtful Accounts, Returns and Discounts.    We establish allowances for doubtful accounts, returns and discounts based on our review of credit profiles of our customers, contractual terms and conditions, current economic trends and historical payment, return and discount experience. We reassess the allowances for doubtful accounts, returns and discounts each period. Historically our actual losses and credits have been consistent with these provisions. However, unexpected events or significant future changes in trends could result in a material impact to our future statements of operations and of cash flows. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue or bad debt expense recognized could result. Our allowances for doubtful accounts, returns and discounts as a percentage of net revenues were 0.8%, 1.2% and 1.1% in fiscal 2003, 2002 and 2001, respectively. Based on our results for the year ended November 30, 2003, a one-percentage point deviation in our allowances for doubtful accounts, returns and discounts as a percentage of net revenues would have resulted in an increase or decrease in revenue and/or expense of approximately $2.6 million.

Accrued Restructuring Costs.    During fiscal 2001 and fiscal 2002, we recorded restructuring charges to align our cost structure with changing market conditions. Our restructuring plan resulted in a reduction in headcount and the consolidation of facilities through the closing of excess field offices and relocation of corporate offices into one campus. Our restructuring charges included accruals for the estimated loss on facilities that we intend to sublease based on estimates of the timing and amount of sublease income and the non-cash write-down of leasehold improvements. We reassess this liability each period based on market conditions. Revisions to our estimates of this liability could materially impact our operating results and financial position in future periods if anticipated events and key assumptions, such as the timing and amounts of sublease rental income, either change or do not materialize. As of November 30, 2003, a $0.50 square-foot per month change in our estimate of sublease income for space not yet sublet would have resulted in an increase or decrease in our accruals for excess facilities of approximately $2.0 million. Vacancy rates for commercial properties in the San Francisco Bay Area remain at high levels and there can be no assurance we will be successful in securing sublease income currently anticipated in our accrual for excess facilities.

Accounting for Income Taxes.    As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our current tax exposure under currently enacted tax laws and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must also assess the likelihood that our deferred tax assets will be recovered from future taxable income, and, to the extent we believe that it is more likely than not that some portion or all of our deferred tax assets will not be realized, we must establish a valuation allowance. To the extent we establish a valuation allowance or change the allowance

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in a period, we must reflect the corresponding increase or decrease within the tax provision in the statement of operations. A full valuation allowance is currently held against our net deferred tax assets because management believes it is more likely than not that the deferred tax assets will not be realized through the generation of future taxable income. Our deferred tax assets include net operating losses relating to acquired businesses and the exercise of employee stock-options for which any change in associated valuation allowance will be recorded as an adjustment to goodwill and a credit to additional paid-in-capital, respectively. We also do not provide for taxes on undistributed earnings of our foreign subsidiaries, as it is our intention to reinvest undistributed earnings indefinitely.

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to realize any future benefit from our deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our operating results and financial position could be materially affected. Due to our history of losses, as of November 30, 2003, we hold a full valuation allowance in the amount of $237.8 million against our net deferred tax assets. If we were to fully release our valuation allowance, we estimate that approximately $33.9 million of the change would result in an income tax benefit, approximately $11.2 million would be credited to goodwill and approximately $192.7 million relating to stock option exercises and related tax credits would be credited directly to additional paid-in capital. The following analysis demonstrates the potential effect the full release of our valuation allowance would have upon our consolidated financial statements and is not intended to provide a range of exposure or expected deviation (in thousands, except per share data):

Valuation of Long-Lived and Intangible Assets.    We assess long-lived and other intangible assets for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If we determine that the carrying value of long-lived and other intangible assets may not be recoverable we measure impairment by using the projected discounted cash-flow method. As of November 30, 2003, we have not recorded an impairment charge against our long-lived or other intangible assets.

On December 1, 2002 we adopted the remaining provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” as related to goodwill and intangibles acquired prior to July 1, 2002. In accordance with SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but, instead, tested for impairment annually or sooner if circumstances indicate that it might not be recoverable. Additionally, workforce no longer qualifies as a separately identifiable intangible and was reclassified as goodwill. The adoption of SFAS No. 142 resulted in the cessation of approximately $4.7 million in goodwill amortization per quarter including reclassified amounts at the time of implementation. In conjunction with adopting SFAS No. 142, we have determined that based on our current operations we operate in a single reporting unit. Accordingly we have performed the impairment assessment required under SFAS No. 142 at the enterprise level. We have used the market approach to assess the fair value of the enterprise. As of November 30, 2003, we have $103.0 million of goodwill and have not recorded any goodwill impairment charges. If our estimates or the related assumptions change in the future, we may be required to record impairment charges to reduce the carrying value of these assets. Changes in the valuation of goodwill could be substantial.

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Accounting for Investments.    We determine the appropriate classification of marketable securities at the time of purchase and evaluate such designation as of each balance sheet date. As of November 30, 2003, $521.4 million of marketable securities have been classified as available-for-sale and are carried at fair value with unrealized gains and losses, if any, included as a component of “accumulated other comprehensive income (loss)” in stockholders’ equity. Marketable securities are presented as current assets as we expect to use them within one year in current operations even though some have scheduled maturities of greater than one year. Realized gains and losses are recognized based on the “specific identification method”.

Our investments also include minority equity investments in privately held companies that are generally carried at cost basis and included in other assets on the balance sheet. The fair value of these investments are dependent on the performance of the companies in which we invested, as well as the volatility inherent in external markets for these investments. In assessing potential impairment, we consider these factors as well as each of the companies’ cash position, earnings/revenue outlook, stock price performance, liquidity and management/ownership. If we believe that an other-than-temporary decline exists, we write down the investment to market value and record the related write-down as a loss on investments in our consolidated statement of operations. During fiscal 2003 and 2002, we recognized impairment losses of $0.3 million and $11.4 million, respectively, relating to the other-than-temporary decline in value of certain equity investments. As of November 30, 2003, minority equity investments totaled $1.5 million.

Significant management judgment is required in determining whether an other-than-temporary decline in the value of our investments exists. Estimating the fair value of non-marketable equity investments in early-stage technology companies is inherently subjective. Changes in our assessment of the valuation of our investments could materially impact our operating results and financial position in future periods if anticipated events and key assumptions do not materialize or change.

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The following table sets forth, for the periods indicated, certain financial information as a percentage of total revenue:

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Results of Operations

Total Revenue

Total revenue decreased 3.4% for the year ended November 30, 2003 compared to the prior year and 15.1% for the year ended November 30, 2002 compared to the year ended November 30, 2001. This decrease in total revenue was due primarily to the global economic slowdown and a reduction in information technology spending in general. Revenue from Reuters accounted for 12%, 9% and 8% of our total revenue in fiscal 2003, 2002 and 2001, respectively. In fiscal 2003, 2002 and 2001, revenue from Reuters was $30.7 million, $25.3 million and $25.6 million, respectively, consisting primarily of fees under our license agreement with Reuters. Revenue from Reuters includes minimum guaranteed fees of $5.0 million per quarter, which Reuters has agreed to continue to pay through March 2005, as discussed in “—Relationship with Reuters.”

License Revenue

License revenue decreased 11.7% for the year ended November 30, 2003 compared to the prior year. This decrease was due primarily to the global economic slowdown and a reduction in information technology spending in general. In particular, many telecommunication customers have reduced spending on deployments of our technology from 2002 levels. While the total number of license revenue transactions over $100,000 has increased from 206 to 225, the average deal size has decreased from approximately $604,000 in 2002 to approximately $440,000 in 2003.

License revenue decreased 26.6% for the year ended November 30, 2002 compared to the prior year. The decrease in license revenue was due to slowing sales in a weakened global economy. The total number of license revenue transactions over $100,000 has decreased from 234 in fiscal 2001 to 206 in fiscal 2002, and there was a corresponding decrease in average deal size from approximately $790,000 to $604,000.

We expect that license revenues will remain relatively constant as a percentage of total revenue in fiscal 2004.

Service and Maintenance Revenue

Service and maintenance revenue increased for the year ended November 30, 2003 compared to the prior year. This increase was primarily due to an increased installed software base, which resulted in increase

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maintenance revenue. During the year ended November 30, 2003, we added approximately 259 new customers to our customer base as existing at November 30, 2002.

Reuters began transitioning maintenance and support of our products for its customers, as well as associated revenue, to us upon entering into the new agreement. As a result, we began providing maintenance and support services directly to customers transitioned from Reuters in the fourth quarter of fiscal 2003. Consequently, service and maintenance revenue and associated costs increased as a result of our assumption of Reuters’ contracts in the fourth quarter of fiscal 2003 and we expect these increases to continue through at least fiscal 2004.

Service and maintenance revenue increased for the year ended November 30, 2002 compared to the prior year. This increase was primarily the result of additional maintenance revenue related to the growth in our installed software base, partially offset by a $1.3 million decrease in service revenue.

We expect that service and maintenance revenue will grow in absolute dollars and will remain relatively consistent as a percentage of total revenue in fiscal 2004.

Cost of Revenue, Excluding Stock-Based Compensation

Cost of revenue consists primarily of salaries, third party contractor and associated expenses related to providing project integration services, the cost of providing maintenance and customer support services, royalties and product fees as well as the amortization of technologies acquired through corporate acquisitions. The majority of our cost of revenue is directly related to our service revenue.

The decrease in absolute dollars in fiscal 2003 as compared to the prior year resulted primarily from lower compensation, royalties, and travel costs, which were partially offset by increased internal consulting costs. Compensation expenses decreased by $2.6 million as a result of a reduction in services and customer support staff. A decreased level of travel in addition to renegotiated arrangements with travel providers resulted in a savings of approximately $1.2 million in travel costs. The purchase of our corporate facilities resulted in a net savings of approximately $1.1 million. Royalty payments for licensed technologies embedded in our products decreased approximately $1.1 million primarily due to the mix of products sold during the period and renegotiated agreements with these suppliers. We periodically deploy consulting engineers for certain sales and marketing activities, the costs for which we then classify as sales and marketing expense. We utilized fewer engineers on sales and marketing activities, which offset the cost of revenue savings in fiscal 2003 by $4.9 million.

The decrease in cost of revenue in fiscal 2002 as compared to the prior year resulted primarily from a decrease in the use of third party contractors and lower commissions partially offset by an increase in internal consulting activities. Termination or renegotiation of agreements with third party contractors resulted in savings of approximately $4.1 million. Commissions decreased by approximately 3.7 million due to an overall lower level of sales upon which fees were payable. In 2002, certain development personnel were deployed to assist on consulting projects. The costs for these personnel were classified as cost of revenue and resulted in an offsetting $1.3 million increase in cost of revenue as compared to 2001.

We expect that cost of revenue will grow in absolute dollars and will remain relatively consistent as a percentage of total revenue in fiscal 2004.

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Research and Development Expenses, Excluding Stock-Based Compensation

Research and development expenses consist primarily of personnel, third party contractors and related costs associated with the development and enhancement of our suite of products.

The decrease in fiscal 2003 compared to the prior year was due primarily to a reduction in the cost of third-party contractors in the amount of $4.0 million and lower compensation costs of $1.4 million. In addition, the purchase of our corporate facilities resulted in a net savings of approximately $2.4 million for the fiscal year ended November 30, 2003.

The decrease in fiscal year 2002 compared to the prior year was primarily due to the termination or renegotiation of agreements with many of our third party contractors resulting in a savings of approximately $9.2 million.

We believe that continued investment in research and development is critical to attaining our strategic objectives and, as a result, expect that spending on research and development will remain relatively stable in absolute dollars in fiscal 2004.

Sales and Marketing Expenses, Excluding Stock-Based Compensation

Sales and marketing expenses consist primarily of personnel and related costs of our direct sales force and marketing staff and the cost of marketing programs, including customer conferences, promotional materials, trade shows and advertising.

The decrease in fiscal 2003 as compared to the prior year resulted primarily from lower internal consulting, travel, commission and promotion costs and referral payments to our integration partners. Several of our consulting engineers were utilized for sales and marketing activities in fiscal 2002, which was not repeated in fiscal 2003 resulting in approximately $4.1 million of cost savings. An increased emphasis on internally generated sales resulted in a decrease in referral fees to integration partners of $1.3 million. A $2.4 million decrease in commissions expense is mainly attributable to lower commissionable sales. A decreased level of travel in addition to renegotiated arrangements with travel providers resulted in a savings of approximately $2.8 million in travel costs. In addition, promotion costs decreased by approximately $2.4 million due to efficiencies gained from more specific and targeted advertising campaigns.

The decrease in fiscal 2002 as compared to the prior year was primarily due to decreases in sales commissions, travel and compensation costs. Sales commissions decreased approximately $7.3 million due to

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lower commissionable revenue. A decreased level of travel in addition to renegotiated arrangements with travel providers resulted in a savings of approximately $1.9 million in travel costs. In addition, compensation costs decreased by $1.7 million due to lower head count.

We intend to selectively increase staff in our direct sales organization and to create select product marketing programs and, accordingly, expect that sales and marketing expenditures will increase modestly in absolute dollars in fiscal 2004.

General and Administrative Expenses, Excluding Stock-Based Compensation

General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including executive, legal, finance, accounting and human resources.

The decrease in fiscal 2003 as compared to the prior year was primarily due to approximately $3.1 million in savings from the purchase of our corporate facilities partially offset by increased compensation in the amount of $2.3 million.

The decrease in fiscal 2002 as compared to the prior year was primarily due to a decrease in bad debt and compensation expense of approximately $0.8 million and $0.6 million, respectively.

We believe that general and administrative expenses, exclusive of bad debt charges, will remain relatively stable in absolute dollars in fiscal 2004.

Stock-Based Compensation

Stock-based compensation expense principally relates to stock options assumed in acquisitions, stock options granted to consultants and the employer portion of payroll taxes due as a result of employee exercises of stock options. We account for employee stock-based compensation as discussed in Note 2 to our consolidated financial statements. Stock-based compensation expense related to stock options granted to consultants is recognized as earned using the multiple option method and is shown by expense category. At each reporting date, we re-value consultant stock options using the Black-Scholes option-pricing model. As a result, stock-based compensation expense will fluctuate as the fair market value of our common stock fluctuates. The employer portion of payroll taxes due as a result of employee exercises of stock options is included as a part of stock-based compensation expense in the period the option is exercised.

The decrease in stock-based compensation in fiscal 2003 as compared to the prior year is primarily due to a $2.1 million decrease in employee- and acquisition-related stock-based compensation and a $1.3 million decrease in employer-required payroll taxes for stock option exercises.

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The decrease in stock-based compensation in fiscal 2002 as compared to the prior year is primarily due to a $23.2 million decrease in employee- and acquisition- related stock-based compensation.

Acquired In-Process Research and Development

We estimated that $2.4 million of the purchase price of Talarian in fiscal 2002 represented acquired in-process research and development (“IPRD”) that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately charged to expense upon consummation of the acquisition. We calculated the value of IPRD by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value and then applying a percentage of completion. In determining the value ultimately assigned to IPRD we considered the stage of completion, complexity of work to date, difficulty of completing the remaining development, costs already incurred and the expected cost to complete the project. The projects have subsequently been completed within management’s estimates.

Restructuring Charge

During fiscal 2002 and 2001, we recorded restructuring charges totaling $70.5 million, consisting of $4.5 million for headcount reductions, $54.3 million for consolidation of facilities, $11.1 million for related write-down of leasehold improvements and $0.6 million of other related restructuring charges. These restructuring charges were recorded to align our cost structure with changing market conditions. We expect to benefit from a decrease in operating costs of approximately $9 million annually through 2010 as a result of rent expense savings from the consolidation of our facilities. The severance related actions are expected to decrease our salaries and benefits expenses by approximately $30 million annually. We recorded an additional accrual of $7.4 million in fiscal 2002 for the estimated losses on facilities acquired in connection with the acquisition of Talarian as acquisition integration costs, which were included in the purchase price. We are currently working with corporate real estate brokers to sublease unoccupied facilities.

During the first quarter of fiscal 2003, we recorded a restructuring charge of $1.1 million related to a reduction in headcount to further align our cost structure with changing market conditions. This reduction of approximately 44 employees was comprised of 60% sales and marketing staff, 5% general and administrative staff, and 35% research and development staff. This severance action is expected to reduce our salaries and benefits expenses by approximately $6 million annually. We do not expect the staff reductions, particularly those related to sales and marketing, to have an adverse impact on future sales. All severance related actions were completed by August 31, 2003.

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The following sets forth our accrued excess facilities costs as of November 30, 2003. These costs represent our estimated loss on abandoned facilities, net of sublease income, which we expect to pay over the next seven years. See Notes 9 and 12 of our notes to consolidated financial statements.