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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

  For the fiscal year ended November 30, 2004

  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 28, 2004) was approximately $1,475,051,598. 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 February 9, 2005, there were 215,316,963 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the 2005 Annual Meeting of Stockholders to be held on April 21, 2005 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, 2004

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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, The Power of Now, TIBCO Rendezvous, TIBCO SmartSockets, TIBCO BusinessWorks, the Information Bus 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

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 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 process management, business integration and enterprise backbone software. The core elements of our strategy

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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.”

We operate through subsidiaries and offices throughout the Americas, Europe, Africa and the Pacific Rim. Where it is advantageous to us for business or other reasons, we conduct our business through wholly owned subsidiaries of TIBCO Software Inc.

Relationship with Reuters

We are the successor to a portion of the business of Teknekron Software Systems, Inc. (“Teknekron”). Teknekron was acquired by Reuters Group PLC, a global information company (“Reuters”), in 1994. In November 1996, we were incorporated in Delaware and 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.

Pursuant to an agreement relating to the licensing, distribution and maintenance of our products, Reuters will act as a non-exclusive reseller of our products to certain specified customers in the financial services market until March 2005 and 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 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 a few 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 will pay us minimum guaranteed fees in the amount of $5 million per quarter through March 2005. The quarterly minimum guaranteed fees are reduced by an amount equal to 10% of the license and maintenance revenues from our sales to financial services companies (and, until October 2004, were also reduced by 40% of our maintenance revenue from customers who were transitioned to us by Reuters). After March 2005, we will no longer receive such minimum guaranteed fees and will have to replace such revenue with direct sales either to financial services companies or increased sales in other sectors. Based upon our experience in selling directly into the financial services market since October 2003 and the recent increase in our revenues from other markets, we believe that we will be able to replace or reduce the impact of the cessation of the $5 million per quarter in revenue from Reuters after March 2005. Accordingly, while there can be no assurance, we do not believe that the elimination of the guaranteed fees from Reuters will have a material adverse impact on our business, financial condition or results of operations. Reuters has also been transitioning maintenance and support of our products for its customers, as well as associated revenue, since October 2003. As a result, we have been providing maintenance and support services directly to customers transitioned from Reuters since the fourth quarter of fiscal year 2003. In addition to acting as a reseller of our products in the financial services market, Reuters is 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.

TIBCO Products

We sell a wide range of products that address different elements of business process management, business integration, and business 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 enabling businesses to be more cost-effective, agile and efficient.

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Our products are marketed and sold as part of our TIBCO standards-based platform for real-time business. We have a comprehensive set of solutions comprised of four categories of software: business process management software, business optimization software, business integration software and enterprise backbone software.

Services

Professional Services

Our professional services offerings include a wide range of consulting services such as systems planning and design, installation 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 the Americas, Europe, Africa 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, 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.

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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 and Swindon, England; and Sydney, Australia. These centers, working in conjunction with several smaller support offices located throughout the United States and India, as well as additional support offices in Europe, the Pacific Rim and the Americas, 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. It also provides customers with information on generally known problems and suggested solutions or workarounds that may be available.

We use TIBCO^® BusinessFactor in conjunction with our Customer Relationship Management (“CRM”) system to provide real-time monitoring of service requests. Through the use of our CRM system, we are able to track high severity problems and latency, allowing us to enhance our responsiveness.

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 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 twenty-eight U.S. cities and in twenty-two countries across the Americas, Europe, Africa 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.

Pursuant to the terms of our agreement with Reuters, we are permitted to market and sell our products, other than risk management and market data distribution products, directly and through third party resellers (other than a few specified resellers) to customers in the financial services market. Reuters will 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 to embed our products in its solutions. The limitations on our ability to sell risk management and market data distribution products and on reselling through the specified resellers will expire in May 2008. The distribution relationship with Reuters accounted for 7%, 12% and 9% of our total revenue in each of fiscal years 2004, 2003 and 2002 respectively.

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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 software. License fees represented approximately 55%, 53% and 58% of our total revenue in 2004, 2003 and 2002, respectively. Revenue from services and maintenance represented approximately 45%, 47% and 42% of our total revenues in 2004, 2003 and 2002, respectively.

Sales to customers outside the United States totaled $201.5 million, representing 52% of our total revenue for the year ended November 30, 2004. For a geographic breakdown of our revenue and long-lived assets, see Note 12 to our Consolidated Financial Statements included 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 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 year 2004, 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, including stock-based compensation, were $61.1 million, $64.6 million and $72.3 million in 2004, 2003 and 2002, respectively. To date, all product development costs have been expensed as incurred since the time period between the achievement of technical feasibility for a product and the general availability of such product has typically been very short.

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, SAP, SeeBeyond, Vitria and webMethods. We believe that none of these companies has a suite of integration products as complete as ours, but IBM, Microsoft, SAP and BEA offer products outside our 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.

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Some of our current competitors have, and some of our potential competitors 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. In addition, under this license agreement, 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 a few 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 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 this 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 from Reuters on a royalty-free basis. We have several pending patent applications and five 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.

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.

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Employees

As of November 30, 2004, we employed 1,360 persons, including 417 in sales and marketing, 325 in research and development, 189 in finance and administration and 429 in professional services and technical support. Of our 1,360 employees, 413 were located in Europe, 146 in the Pacific Rim, 16 in Africa and 785 in the Americas. 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

We are subject to the informational requirements of the Securities Exchange Act of 1934. Therefore, we file periodic reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy statements and other information required that issuers file electronically.

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.

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 6 to our Consolidated Financial Statements included in this report.

In addition, we lease field support offices in 58 cities throughout the world. The field offices range from small executive offices to a 21,748 square foot facility, in Maidenhead, England, that serves as our European sales operations headquarters. Lease terms range from month-to-month on certain executive offices to ten 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. 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 certain facilities under lease that are 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 accrued excess facilities costs on the Consolidated Balance Sheet as of November 30, 2004 and 2003.

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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 (“Court”), 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 (“IPO”s) 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 stipulation of settlement for the claims against the issuer defendants, including the Company and Talarian, has been submitted to the Court for preliminary 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. The disposition of this matter is limited to our $0.5 million corporate insurance deductible. We completed payment of the insurance deductible in the third quarter of fiscal year 2003. Unlike most of the defendant issuers’ insurance policies, including ours, Talarian’s policy contains a specific self-insured retention in the amount of $0.5 million 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 $0.5 million of the self-insured retention remaining under its policy. The self insured retention of $0.5 million was accrued at the time of the acquisition.

No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2004.

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PART II

Market Information

Our common stock is quoted on the Nasdaq National Market (“Nasdaq”) under the symbol “TIBX”. The following table presents, for the periods indicated, the high and low intra-day sale prices per share of our common stock during the fiscal quarters indicated, as reported on Nasdaq.

Holders of Record

We had 1,033 stockholders of record as of November 30, 2004.

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.

Issuer Purchases of Equity Securities

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Equity Compensation Plan Information

The following table provides information as of November 30, 2004 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.

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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.

Executive 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.

On June 7, 2004, we acquired Staffware plc (“Staffware”), a provider of BPM solutions that enable businesses to automate, refine and manage their processes. The addition of Staffware’s BPM solutions enabled us to offer our combined customer base an expanded real-time business integration solution, by making it easier for our customers to utilize their existing systems through real-time information exchange and automation and management of enterprise business processes regardless of where such processes reside. BPM enables companies to save time and money by driving costs and time out of business processes (for example, reducing error rates or manual steps), while at the same time ensuring that business processes are compliant with internal procedures and external regulations. Our acquisition of Staffware also increased our distribution capabilities through the cross-selling of products into new geographic regions, as well as an expanded customer and partner base.

Our products are currently licensed by 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 years 2004, 2003 and 2002 consisted primarily of license, consulting 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 software. In addition, we receive fees from our customers for providing consulting 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.

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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 typically 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.

Our revenue is derived from a diverse customer base, and no single customer represented greater than 10% of total revenue during fiscal year 2002 or 2004. During fiscal year 2003, Reuters represented 12% of total revenue. There were no customers with a balance in excess of 10% of net accounts receivable at November 30, 2004. 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.

Relationship with Reuters

Reuters had been the primary distributor of our products to customers in the financial services segment from 1997 until October 2003. Through the third quarter of fiscal year 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.

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, until October 2003, we 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 current agreement, Reuters has continued and 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 pays 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. In particular, our current agreement (as did our original agreement) requires us to provide Reuters with internal maintenance and support for a fee of $2.0 million per year plus an annual CPI-based increase until December 2011. This amount was recognized ratably over the corresponding period as related party service and maintenance revenue. We 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 a few specified resellers) to customers in the financial services market. The limitations on our ability to sell risk management and market data distribution products and on reselling 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 are reduced by an amount equal to 10% of the license and maintenance revenues from our sales to financial services companies (and, until October 2004, were also reduced by 40% of our maintenance revenue from customers who were transitioned to us by Reuters). After March 2005, we will no longer receive such minimum guaranteed fees and will have to replace such revenue with direct sales either to financial services companies or increased sales in other sectors. Based upon our experience in selling directly into the financial services market since October 2003 and the recent increase in our revenues from other markets, we believe that we will be able to replace or reduce the impact of the cessation

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of the $5 million per quarter in revenue from Reuters after March 2005. Accordingly, while there can be no assurance, we do not believe that the elimination of the guaranteed fees from Reuters will have a material adverse impact on our business, financial condition or results of operations.

Reuters has been transitioning maintenance and support of our products for its customers, as well as associated revenue, since entering into this current agreement. As a result, we have been providing maintenance and support services directly to customers transitioned from Reuters since the fourth quarter of fiscal year 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 year 2003 and fiscal year 2004, and we expect these increases to continue through at least fiscal year 2005.

In addition to acting as a reseller of our products in the financial services market, Reuters is 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.

As of November 30, 2004, Reuters owned less than 10% of our outstanding capital stock.

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 our Consolidated Financial Statements as of and for the year ended November 30, 2004. 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 and is recorded net of related costs to the resellers.

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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.

First-year maintenance typically is sold with the related software license and renewed on an annual basis thereafter. For such arrangements with multiple elements, 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 1.0%, 0.8% and 1.2% in fiscal years 2004, 2003 and 2002, respectively. See Note 5 to our Consolidated Financial Statements for a summary of activities during the years reported. Based on our results for the year ended November 30, 2004, 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 $3.8 million.

Accounting for Stock-Based Compensation.    We account for stock-based compensation related to employee stock-based compensation plans using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25 and have adopted the disclosure provisions of the Statement of Financial Accounting Standard (“SFAS”) No. 123 “Accounting for Stock-Based Compensation” and SFAS 148 “Accounting for Stock-Based Compensation—Transition and Disclosure”—an amendment of SFAS 123. Had we accounted for stock-based compensation related to employee stock-based compensation plans using the fair value method as prescribed by SFAS 123, our net income would have been reduced by $38.0 million, $50.1 million and $108.5 million in fiscal years 2004, 2003 and 2002, respectively. Also see Note 2 to our Consolidated Financial Statements.

We account for stock-based compensation related to stock options granted to consultants based on the fair value estimate using the Black-Scholes option pricing model on the date of grant and as remeasured at each reporting date in compliance with Emerging Issues Task Force (“EITF’) Issue No. 96-18 “Accounting for Equity

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Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” As a result, stock based compensation expense fluctuates as the fair market value of our common stock fluctuates. Compensation expense is amortized using the multiple option approach in compliance with the Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 28. Pursuant to FIN 44 “Accounting for Certain Transactions involving Stock Compensation—an interpretation of APB Opinion No. 25”, options assumed in a purchase business combination are valued at the date of acquisition at their fair value calculated using the Black-Scholes option pricing model. The fair value of assumed options is included as a component of the purchase price. The intrinsic value attributable to unvested options is recorded as unearned stock based compensation and amortized over the remaining vesting period of the options.

In December 2004, FASB issued the SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS 123(R)”), which replaces SFAS 123 and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123(R) requires that compensation costs relating to share-based payment transactions be recognized in financial statements. The pro forma disclosure previously permitted under SFAS 123, which we have provided in Note 2 to the Consolidated Financial Statements, will no longer be an acceptable alternative to recognition of expenses in the financial statements. SFAS 123(R) is effective as of the beginning of the first reporting period that begins after June 15, 2005, with early adoption encouraged. We are required to adopt SFAS 123(R) starting from the fourth fiscal quarter of 2005. We expect the adoption of SFAS 123(R) will have a material adverse impact on our net income and net income per share. We are currently in the process of evaluating the extent of such impact.

Accounting for Restructuring Costs.    During fiscal year 2002, we implemented a restructuring plan 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. The estimated facility costs were based on the Company’s contractual obligations net of estimated sublease income based on current comparable market rates for leases. 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. Should facilities operating lease rental rates continue to decrease in these markets or should it take longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate by approximately $4.3 million.

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 the most recent 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 in a period, we must reflect the corresponding increase or decrease within the tax provision in the statement of operations. Based on the available evidence, which includes our historical levels of U.S. taxable income and stock option deductions, we have provided a valuation allowance against our U.S. net deferred tax assets. We evaluate the realizability of the deferred tax assets on a quarterly basis. 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.

U.S. income taxes and foreign withholding taxes have not been provided for on a cumulative total of $33.7 million of undistributed earnings for certain non-U.S. subsidiaries. We intend to reinvest these earnings indefinitely in operations outside the U.S.

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Significant management judgment is required in determining our future taxable income for purposes of assessing our ability to realize any 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 cumulative U.S. tax return loss position as of November 30, 2004, we have a valuation allowance in the amount of $232.2 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 $10.4 million would be credited to goodwill and approximately $187.9 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, 2004, 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 142, “Goodwill and Other Intangible Assets” as related to goodwill and intangibles acquired prior to July 1, 2002. In accordance with SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized but, instead, are tested for impairment annually or sooner if circumstances indicate that they might not be recoverable. Additionally, workforce no longer qualifies as a separately identifiable intangible and was reclassified as goodwill. The adoption of SFAS 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 the acquisition of Staffware, we have determined that we continued to operate as one reportable segment. Accordingly, we have performed the impairment assessment required under SFAS 142 at the enterprise level. We have used the Company’s total market capitalization to assess the fair value of the enterprise. As of November 30, 2004, we have $265.1 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.

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, 2004, $292.7 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)” in stockholders’ equity. Marketable securities are presented as current assets as they are subject to use within one year in current operations. Realized gains and losses are recognized based on the “specific identification method”. As of November 30, 2004, gross unrealized losses on our investment portfolio totaled $1.9 million. The decline in value of these investments is primarily related to changes in interest rates and is considered temporary in nature.

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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 is 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 years 2004 and 2003, we recognized impairment losses of $0.1 million and $0.3 million, respectively, relating to the other-than-temporary decline in value of certain equity investments. As of November 30, 2004, minority equity investments totaled $1.9 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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Results of Operations

The following table sets forth, for the fiscal years indicated, certain consolidated statement of income information as a percentage of total revenue:

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Total Revenue

Total revenue increased 47% for fiscal year 2004 compared to fiscal year 2003, primarily due to a general increase in information technology spending. In October 2003, pursuant to our agreement with Reuters, we obtained the right to market and sell our products directly to customers in the financial services market, which also contributed to our growth in revenue in 2004. Furthermore, our Staffware acquisition during fiscal year 2004 generated additional revenue. Due to fact that TIBCO and Staffware products are often combined in a single license transaction, we cannot separately report revenue related to the individual software components. Geographically, our total revenue increased by $51.0 million in the United States, $44.1 million in Europe and $25.0 million in the Pacific Rim in fiscal year 2004. See Note 12 to the Consolidated Financial Statements for further detail on total revenue by region.

Total revenue decreased 3% for fiscal year 2003 compared to fiscal year 2002, largely due to the global economic slowdown during that period and a resulting general reduction in information technology spending.

Revenue from Reuters was $28.3 million, $30.7 million and $25.3 million representing 7%, 12% and 9% of our total revenue in fiscal years 2004, 2003 and 2002, respectively. Our revenue from Reuters consisted primarily of fees under our license agreement, which includes minimum guaranteed fees of $5.0 million per quarter, reduced by an amount equal to 10% of the license and maintenance revenues from our sales to financial services companies (and, until October 2004, also reduced by 40% of our maintenance revenue from customers who were transitioned to us by Reuters), which Reuters has agreed to continue to pay through March 2005. After March 2005, we will no longer receive such minimum guaranteed fees and will have to replace such revenue with direct sales either to financial services companies or increased sales in other sectors. Based upon our experience in selling directly into the financial services market since October 2003 and the recent increase in our revenues from other markets, we believe that we will be able to replace or reduce the impact of the cessation of the $5.0 million per quarter in revenue from Reuters after March 2005. Accordingly, while there can be no assurance, we do not believe that the elimination of guaranteed fees from Reuters will have a material adverse impact on our business, financial condition or results of operations. If we are unable to replace the guaranteed revenue from Reuters, our results of operations will be negatively impacted.

License Revenue

License revenue increased 52% for fiscal year 2004 compared to fiscal year 2003. This increase was primarily due to increased revenue from the financial services, consumer packaged goods, telecommunications and manufacturing sectors, and also due to additional revenue generated from the Staffware acquisition. As mentioned above we cannot separately report incremental revenue solely attributable to the Staffware acquisition since TIBCO and Staffware products are often combined in a single sales transaction.

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The total number of license revenue transactions over $0.1 million increased to 260 in fiscal year 2004, from 225 in fiscal year 2003, and 206 in fiscal year 2002. The average deal size for transactions over $0.1 million was approximately $0.7 million, $0.4 million and $0.6 million in fiscal years 2004, 2003 and 2002, respectively.

License revenue decreased 12% for fiscal year 2003 compared to fiscal year 2002 largely due to the global economic slowdown during that period and a resulting general reduction in information technology spending.

We expect that license revenues will remain relatively constant as a percentage of total revenue in fiscal year 2005.

Service and Maintenance Revenue

Service and maintenance revenue increased 40% for fiscal year 2004 compared to fiscal year 2003, and increased 8% for fiscal 2003 compared to fiscal year 2002. The increase in fiscal year 2004 was comprised of $26.9 million, or a 71% increase in consulting and training services revenue, and $22.5 million, or a 26% increase in maintenance revenue, primarily due to additional growth in our installed software base, maintenance and support revenue related to financial service customers previously supported by Reuters, as well as additional revenue generated by the Staffware acquisition. In accordance with our agreement with Reuters, we began providing maintenance and support services directly to customers transitioned from Reuters in the fourth quarter of fiscal 2003, which contributed to our growth in service and maintenance revenue in fiscal year 2004.

Service and maintenance revenue increased 8% for fiscal year 2003 compared to fiscal year 2002, primarily as a result of additional maintenance revenue related to the growth in our installed software base.

We expect that service and maintenance revenue will remain relatively constant as a percentage of total revenue in fiscal year 2005.

Cost of Revenue

Cost of revenue consists primarily of compensation of professional services and customer support personnel and third-party contractors and associated expenses related to providing consulting services, the cost of providing maintenance and customer support services, royalties and product fees as well as the amortization of developed technologies acquired through corporate acquisitions. The majority of our cost of revenue is directly related to our maintenance and service revenue.

Cost of revenue remained relatively constant as a percentage of total revenue in fiscal years 2004, 2003 and 2002. The increase in absolute dollars of cost of revenue in fiscal year 2004 as compared to the prior year

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resulted primarily from an increase of approximately $14.8 million related to personnel compensation, $9.3 million for third-party contractor compensation and consulting fees, $3.8 million in travel costs and $1.9 million in amortization of developed technologies and maintenance agreements, offset by a decrease of $2.3 million in related parties costs, mainly due to our October 2003 agreement with Reuters. Increased compensation cost was primarily due to an increase in professional services and customer support staff in fiscal year 2004, and an increase in variable incentive compensation. Increased third-party contractor and consulting fees were directly related to increased service and maintenance revenues. Additional amortization of developed technologies was mainly due to the Staffware acquisition.

The decrease in absolute dollars in fiscal year 2003 as compared to fiscal year 2002 resulted primarily from lower compensation, royalties, and travel costs, partially offset by increased internal consulting costs. Compensation expenses decreased by $2.6 million in fiscal year 2003 as a result of a reduction in services and customer support staff. Savings in travel expenses were approximately $1.2 million. 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 year 2003 by $4.9 million.

We expect that cost of revenue will grow in absolute dollars but will remain relatively constant as a percentage of total revenue in fiscal year 2005.

Research and Development Expenses

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

The decrease in fiscal year 2004 compared to fiscal year 2003 was primarily due to a $1.1 million decrease in third-party contractor fees and a $4.3 million reduction of facility cost expenses, partially offset by a $2.8 million increase in personnel compensation. The reduction in third party contractor fees was largely the result of renegotiated agreements with various third party contractors. The purchase of our corporate headquarters in June 2003 has also contributed to the reduction of facility expenses in fiscal year 2004. Personnel compensation increased due to an increase in headcount primarily as a result of the Staffware acquisition, and an increase in variable incentive compensation.

The decrease in fiscal year 2003 compared to fiscal year 2002 was primarily due to a reduction in the cost of third-party contractors of $4.0 million, lower compensation costs of $1.4 million, and net savings of approximately $2.4 million resulting from the purchase of our corporate headquarters in June 2003.

We believe that continued investment in research and development is critical to attaining our strategic objectives and, as a result, we expect that spending on research and development will increase slightly in absolute dollars in fiscal year 2005.

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Sales and Marketing Expenses

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

The increase in fiscal year 2004 as compared to fiscal year 2003 was primarily due to a $7.2 million increase in personnel compensation, a $6.2 million increase in commission expense and a $2.4 million increase in travel expenses, partially offset by a $2.0 million decrease in marketing program costs and $1.0 million reduction of facility expenses. The increase in personnel compensation was related to an increase in headcount, most significantly in Europe, primarily as a result of the Staffware acquisition. The higher sales commission was a result of higher commissionable revenue. The reduction in marketing program costs was due to more specific and targeted advertising efforts. The reduction in facility expenses was attributable to the purchase of our corporate headquarters in June 2003.

The decrease in fiscal year 2003 as compared to fiscal year 2002 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 year 2002, which was not repeated in fiscal year 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 commission 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 more specific and targeted advertising campaigns.

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 in absolute dollars in fiscal year 2005.

General and Administrative Expenses

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

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The increase in fiscal year 2004 as compared to fiscal year 2003 was primarily due to an $8.0 million increase in personnel compensation, a $2.1 million increase in consulting and outside services and a $1.0 million increase in travel expenses, offset by a $0.9 million reduction in facility expenses, and reductions in other administrative costs. Increased headcount together with an increase in variable incentive compensation contributed to total higher personnel costs. Consulting and outside services increased substantially, due to the Sarbanes-Oxley Act (“Sarbanes-Oxley”) compliance initiative. The reduction in facility expenses was attributable to the purchase of our corporate headquarters in June 2003.

The decrease in fiscal year 2003 as compared to fiscal year 2002 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.

We believe that general and administrative expenses, exclusive of bad debt charges, will remain relatively stable as a percentage of total revenue and will increase slightly in absolute dollars in fiscal year 2005.

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 using the intrinsic value method prescribed by APB 25. See also 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 recorded 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 year 2004 as compared to fiscal year 2003 consisted of a $1.0 million decrease in employee- and acquisition-related stock-based compensation, partially offset by an increase of $0.2 million in stock-based compensation expense related to consultants. The decrease was mainly the result of continuous amortization of unearned stock-based compensation cost brought forward from prior years, with minimal additions in fiscal year 2004.

The decrease in stock-based compensation in fiscal year 2003 as compared to fiscal year 2002 was 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.

As prescribed by SFAS 123(R) issued in December 2004, we will be required to recognize the compensation costs relating to share-based payment transactions in our financial statements, using the fair value method, starting from our fourth fiscal quarter of 2005. We expect the adoption of SFAS 123(R) will have a material adverse impact on our net income and income per share, and we are currently in the process of evaluating the extent of such impact.

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Acquired In-Process Research and Development

In fiscal years 2004 and 2002, we estimated that $2.2 million and $2.4 million of the purchase prices of Staffware and Talarian, respectively, 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 Talarian projects were subsequently completed within management’s estimates. We expect to complete the Staffware projects in fiscal year 2005.

Restructuring Charge

During fiscal year 2004 we recorded $2.2 million in additional restructuring charges related to properties vacated in connection with facilities consolidation. The additional facilities charges resulted from revisions to our estimates of future sublease income due to further deterioration of real estate market conditions. The estimated facility costs were based on the Company’s contractual obligations, net of estimated sublease income, based on current comparable rates for leases in their respective markets. Should facilities rental rates continue to decrease in these markets or should it take longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate by up to $4.3 million.

During the first quarter of fiscal year 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. All severance actions were completed by August 31, 2003.

During fiscal year 2002, we recorded restructuring charges totaling $49.3 million, consisting of $1.7 million for headcount reductions and $47.6 million related to the consolidation of facilities. These restructuring charges were recorded to align our cost structure with changing market conditions. 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. Since then, we have subleased some of the unoccupied facilities.

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The following sets forth our accrued excess facilities costs and accrued severance costs as of November 30, 2004. These costs represent our estimated loss on abandoned facilities, net of sublease income, which we expect to pay over the next six years. Also see Note 3 “Business Combinations” and Note 13 “Restructuring Charge” to our Consolidated Financial Statements.