douglas j. clark, state bar no. 171499 wilson sonsini...

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DECL. OF THOMPSON ISO DEFENDANTS’ MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT NO. C 05-02146 SBA

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DOUGLAS J. CLARK, State Bar No. 171499 ([email protected]) IGNACIO E. SALCEDA, State Bar No. 164017 ([email protected]) KYLE A. WOMBOLT, State Bar No. 224603 ([email protected]) WILSON SONSINI GOODRICH & ROSATI Professional Corporation 650 Page Mill Road Palo Alto, CA 94304-1050 Telephone: (650) 493-9300 Facsimile: (650) 565-5100 Attorneys for Defendants TIBCO SOFTWARE INC., VIVEK Y. RANADIVÉ, CHRISTOPHER G. O’MEARA, SYDNEY CAREY and RAJESH U. MASHRUWALA

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

In re TIBCO SOFTWARE, INC. SECURITIES LITIGATION ______________________________________ This Document Relates To: All Actions

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Master File No. C 05-02146 SBA CLASS ACTION DECLARATION OF REGINALD S. THOMPSON IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT Date: May 23, 2006 Time: 1:00 p.m. Place: Courtroom 3 Judge: Hon. Saundra B. Armstrong

Case 4:05-cv-02146-SBA Document 41 Filed 04/17/2006 of 4

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I, Reginald S. Thompson, declare as follows:

I am an attorney associated with the law firm of Wilson Sonsini Goodrich & Rosati,

Professional Corporation, attorneys for defendants TIBCO Software Inc. (“TIBCO”), Vivek Y.

Ranadivé, Christopher G. O’Meara, Sydney Carey and Rajesh U. Mashruwala (collectively

“Defendants”). I am admitted to practice before the courts of the State of California and before

this Court. I submit this declaration in support of Defendants’ Motion to Dismiss Consolidated

Amended Complaint and Defendants’ Request for Judicial Notice, filed concurrently herewith. I

have personal knowledge of the facts set forth in this declaration and can testify competently to

those facts.

PUBLIC FILINGS WITH THE SECURITIES & EXCHANGE COMMISSION (“SEC”).

1. A true and correct copy of excerpts from TIBCO’s Form 10-K for 2005, filed

with the SEC on February 10, 2006, is attached hereto as Exhibit A.

2. A true and correct copy of the order in In re Applied Signal Technology, Inc. Sec.

Litig., No. C-05-1027 (N.D. Cal. Feb. 8, 2006), is attached hereto as Exhibit B.

3. A true and correct copy of excerpts from TIBCO’s 2005 Revised Proxy Statement

on Schedule 14A, filed with the SEC on March 18, 2005, is attached hereto as Exhibit C

4. A true and correct copy of a Form 8-K and attached press release, filed by TIBCO

with the SEC on October 17, 2005, is attached hereto as Exhibit D.


with the SEC on April 23, 2004, is attached hereto as Exhibit E.


with the SEC on June 17, 2004, is attached hereto as Exhibit F.

7. A true and correct copy of excerpts from TIBCO’s Form 10-Q for the quarter

ended May 30, 2004, filed with the SEC on July 7, 2004, is attached hereto as Exhibit G.


with the SEC on September 21, 2004, is attached hereto as Exhibit H.


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ended August 29, 2004, filed with the SEC on October 13, 2004, is attached hereto as Exhibit I.


with the SEC on December 22, 2004, is attached hereto as Exhibit J.

11. A true and correct copy of excerpts from TIBCO’s Form 10-K for 2004, filed

with the SEC on February 14, 2005, is attached hereto as Exhibit K.


with the SEC on March 1, 2005, is attached hereto as Exhibit M.

13. True and correct copies of Forms 4 filed on behalf of Raj Mashruwala for the

period September 21, 2004 through March 1, 2005 are attached hereto as Exhibit P.

14. True and correct copies of Forms 4 filed on behalf of Raj Mashruwala between

September 2003 and March 2004 are attached hereto as Exhibit Q.


ended February 27, 2005, filed with the SEC on April 8, 2005, is attached hereto as Exhibit R.


with the SEC on March 24, 2005, is attached hereto as Exhibit S.

CONFERENCE CALL TRANSCRIPTS

17. A true and correct copy of the transcript of TIBCO’s quarterly earnings

conference call regarding its results for the quarter and fiscal year ended November 30, 2004 is

attached hereto as Exhibit L.

18. A true and correct copy of the transcript of TIBCO’s quarterly earnings

conference call regarding its preliminary results for the quarter ended February 27, 2005 is

attached hereto as Exhibit N.

MEDIA ARTICLE

19. A true and correct copy of a January 21, 2005 ComputerWire News article

entitled “TIBCO Says Staffware Personnel Integration Complete” is attached hereto as Exhibit

O.


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I declare under penalty of perjury that the foregoing is true and correct. Executed in Palo

Alto, California on April 15, 2006.

/s/ Reginald S. Thompson Reginald S. Thompson

I, Ignacio E. Salceda, am the ECF User whose identification and password are being used

to file this Declaration of Reginald S. Thompson in Support of Defendants Motion To Dismiss

Consolidated Amended Complaint. In compliance with General Order 45.X.B, I hereby attest

that Reginald S. Thompson has concurred in this filing.

Dated: April 15, 2006 WILSON SONSINI GOODRICH & ROSATI Professional Corporation By: /s/ Ignacio E. Salceda

Ignacio E. Salceda

Attorneys for Defendants TIBCO SOFTWARE INC., VIVEK Y. RANADIVÉ, CHRISTOPHER G. O’MEARA, SYDNEY CAREY and RAJESH U. MASHRUWALA


EXHIBIT A

10kWIZAR D

FORM 10- KTIBCO SOFTWARE INC - TIBX

Filed: February 10, 2006 (period: November 30, 2005 )

Annual report which provides a comprehensive overview of the company for the past year

Table of ContentsPART I

ITEM 1 . BUSINESS 3

PART I

ITEM 1. BUSINESS

ITEM IA . RISK FACTORS

ITEM 2 . PROPERTIES

ITEM 3. LEGAL PROCEEDINGS

PART I I

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY . RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF E

ITEM 6. SELECTED FINANCIAL DATA

ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATION S

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9A . CONTROLS AND PROCEDURES

PART II I

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11 . EXECUTIVE COMPENSATIO N

ITEM 1 2 . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMEN T

ITEM 13 . CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

PART I V

ITEM 15 . EXHIBITS FINANCIAL STATEMENT SCHEDULESSIGNATURES

EXHIBIT INDEXEX-3 .2. (By-laws)

EX-10 .19 (Material contracts )

EX-21 .1 (Subsidiaries of the registrant)

EX-23 . 1 (Consents of experts and counsel)

EX-31 .1

EX-31 .2

EX-32 . 1

EX-32 .2

Table of Contents

SECURITIES AND EXCHANGE COMMISSIONWashington , D.C . 2054 9

FORM 10-K(Mark One )

El ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 193 4

For the fiscal year ended November 30, 2005

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

For the transition period from to

Commission File Number : 000-2657 9

TIBCO SOFTWARE INC .(Exact name of registrant as specified in its charter )

Delaware 77-0449727(State or other jurisdiction of (I.R. S . Employer

incorporation or organization ) Identification No. )

3303 Hillview Avenue , Palo Alto, CA 94304(Address of principal executive offices) (Zip Code)

(650)846-1000(Registrant ' s telephone number, includ in g 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act . Yes x❑ No ❑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act . Yes ❑ No X❑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 filingrequirements for the past 90 days . Yes ❑ 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 thebest 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 thisForm 10-K . ❑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer . See definition of "accelerated filerand large accelerated filer" in Rule 12b-2 of the Exchange Act . (Check one) :

Large accelerated filer © Accelerated filer ❑ Non-accelerated filer ❑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) . Yes ❑ No 91The 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 29, 2005) was approximately $1,078,725,456 . Shares of common stock held by each executive officer and director and by each entitythat 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 affiliatestatus is not necessarily a conclusive determination for other purposes .

As of February 1, 2006, there were 211,136,985 shares of the registrant's common stock outstanding .

DOCUMENTS INCORPORATED BY REFERENC EPortions of the registrant's Proxy Statement for the 2006 Annual Meeting of Stockholders to be held on April 6, 2006 are incorporated by reference into

Part III of this Annual Report on Form 10-K to the extent stated herein .

Table of ContentsTIBCO SOFTWARE INC. FORM 10-K

For the Fiscal Year Ended November 30, 2005

TABLE OF CONTENTS

Page

PART]

ITEM 1 . BUSINESS 3

ITEM IA . RISK FACTORS 8

ITEM 2 . PROPERTIES 17

ITEM 3 . LEGAL PROCEEDINGS 1 7

PART 11

ITEM 5 . MARKET FOR REGISTRANT'S COMMON EQUITY . RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES 18

ITEM 6 . SELECTED FINANCIAL DATA 20

ITEM 7 . MANAGEMENT'S DISCUSSION AND ANAI..YSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21

ITEM 7A . QUANTITATIVE AND OUALITATIVE DISCLOSURES ABOUT MARKET RISK 41

ITEM 8 . FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 41

ITEM 9A . CONTROLS AND PROCEDURES 42

PARTI ll

ITEM 10 . DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 43

ITEM 11 . EXECUTIVE COMPENSATION 44

ITEM 12 . SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 44

ITEM 13 . CERTAIN RELATIONSHIPS AND RELATED TRANSACI`IONS 45

ITEM 14 . FRINCIPA1 ., ACCOUNTING FEES AND SERVICES 45

PART I V

ITEM 15 . EXHIBITS AND FINANCIAL STATEMENT SCIIED ILES 45

SIGNATURES 11-1

2

Table ContentsForward 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 SecuritiesExchange 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 . These forward-lookingstatements include, but are not limited to, statements related to our expected business, results of operations, future financial position, our ability to increase ourrevenues, the mix of our revenues between license, service and maintenance revenues, our financing plans and capital requirements, our costs of revenue, ourexpenses, our potential tax benefit or liabilities, the effect of recent accounting pronouncements, our investments, debt service and principal repaymentobligations, cash flows and our ability to finance operations from cash flows and similar matters and include statements based on current expectations, estimates,forecasts and projections about the economies and markets in which we operate and our beliefs and assumptions regarding these economies and markets .

These forward-looking statements are based on current expectations and involve known and unknown risks and uncertainties that may cause our actualresults, operating performance or achievements to be materially different from those expressed or implied by the forward-looking statements . We believe thatthe expectations reflected in the forward-looking statements are reasonable but we cannot assure you that those expectations will prove to be correct . Factors thatcould cause or contribute to such differences include but are not limited to our ability to address new markets and complex technologies by delivering successful,new products on a timely basis, the impact of competitive products and pricing, the success of our strategic relationships, charges for restructuring and optionexpenses and other costs and other risk factors detailed in this Annual Report on Form 10-K for the fiscal year ended November 30, 2005 and other periodicfilings with the Securities and Exchange Commission . All forward-looking statements are expressly qualified in their entirety by these factors and all relatedcautionary statements . We do not undertake any obligation to update any forward-looking statements .

Trademarks

TIBCO, TIBCO Software , the Information Bus and TIBCO BusinessFactor are the trademarks or registered trademarks of TIBCO Software Inc . in theUnited 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, process management and business optimization software solutions makes us a leading enabler of real-time business . Weuse the term "real-time business" to mean doing business in such a way that organizations can use current information to execute their critical business processesand make smarter decisions . We provide software that enables interoperability between applications and information sources, coordinates processes that spansystems and people, and helps companies sense and respond to events and opportunities more quickly and with more certainty and control .

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

Table of ContentsOur products are currently licensed by companies worldwide in diverse industries such as financial services, telecommunications, retail, healthcare,

manufacturing, energy, transportation, logistics, government and insurance . We sell our products through a direct sales force and through alliances with leading

software vendors and systems integrators .

To meet our goal of becoming the world's leading provider of business integration and process management software, we are providing our customerswith a comprehensive suite of products and services, promoting the widespread adoption of our technology, leveraging our vertical market expertise and pursuingstrategic acquisitions to expand and strengthen our offerings . We believe we are the market leader among independent integration software companies . See

"-Competition . "

We are the successor to a portion of the business of Teknekron Software Systems, Inc . ("Teknekron") . Teknekron was founded in 1985 and was acquired

by Reuters Group PLC ("Reuters"), a global information company, in 1994 . In November 1996, we were incorporated in Delaware and in January 1997, we were

established as an entity separate from Teknekron .

TIBCO Product s

We offer a wide range of products that can be sold individually to solve specific technical challenges, but the emphasis of our product development andsales efforts is to create products that interoperate seamlessly and that can be sold together as a suite to enable businesses to be more cost-effective, agile andefficient. These products can help organizations achieve success in three areas: Service-Oriented Architecture ("SOA"), Business Process Management (`BPM")

and Business Optimization .

• SOA: Our software enables organizations to migrate their IT infrastructure to SOA by turning information and functions into discrete and reusablecomponents that can be invoked from across the business and aggregated with other such services to create "composite applications ." This helps

companies streamline the integration and orchestration of assets across technological, organizational, and geographical boundaries . Our products givecompanies the flexibility to do these things using the standards or technologies that best meet their needs in specific situations (such as HTTP, e-mail,J2EE, EDI, Messaging, Net or Web Services) without replacing existing technologies or committing to any one technology across their enterprise .

Our SOA offerings encompass our traditional messaging and integration products .

• BPM: Our software enables the automation and coordination of the assets and tasks that make up business processes . This software can coordinatethe human and electronic resources inside a business and their network of customers and partners . Our products not only automate routine tasks and

exception handling, but orchestrate long-lived activities and transactions that cut across organizational and geographical boundaries . Our software

enables organizations to provide a higher level of customer satisfaction, retain customers, maximize partnerships with other businesses, andout-execute their competitors .

• Business Optimization : Our software automatically routes information to appropriate recipients, lets users access up-to-date information whenever

they need it, and provides users with the ability to analyze and act on information . This helps line-level employees perform their jobs, helps managersidentify and analyze problems and opportunities, and gives customers the ability to get accurate and consistent information directly or through

salespeople, service personnel or customer care representatives .

Services

Professional Service s

Our professional services offerings include a wide range of consulting services such as systems planning and design, installation and systems integrationfor 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 toaddress the

Tile of Contentscontinuing needs of our customers . Our professional services staff is located throughout the Americas, Europe, Africa and the Pacific Rim, enabling us toperform installations and respond to customer demands rapidly across our global customer base . Many of our professional services employees have advanceddegrees, substantial TIBCO experience and industry expertise in systems architecture and design and also have domain expertise in financial services,telecommunications, manufacturing, energy, logistics, healthcare and other industries .

We also have relationships with resellers, professional service organizations and system integrators including Accenture, Cap Gemini, Deloitte Consulting,Atos Origin and BearingPoint, to participate in the deployment of our products to customers . These relationships help promote TIBCO products and provideadditional 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 and Swindon, England ; and WoyWoy, Australia. These centers, working in conjunction with several smaller support offices located throughout the United States and India, as well as additionalsupport 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 servicerequests, receive confirmation that a service request has been opened and to obtain current status on these requests . Additionally, the Customer Support Websiteprovides access to our support procedures, escalation numbers and late breaking news ("LBN") . LBN is used to provide updates and new information about ourproducts . It also provides customers with information on generally known problems and suggested solutions or workarounds that may be available .

We use TIBCO BusinessFactorTM in conjunction with our Customer Relationship Management ("CRM") system to provide real-time monitoring of servicerequests . 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, California andat major training centers in Houston, Texas ; Munich, Germany; and Tokyo, Japan . We also deliver training on-site at customer locations . We provide specializedtraining for our professional services partners to enhance their effectiveness in integrating our products . Our Educational Services group has the capability todevelop solutions to address the specific needs of individual customers and partners . Our curriculum leads to an industry recognized technical certification inhigh visibility TIBCO technologies.

Sales and MarketingSales

We currently market our software and services primarily through a direct sales organization complemented by indirect sales channels . Our direct salesforce is located across the U .S . and throughout the Americas, Europe, Africa and the Pacific Rim and operates globally through our foreign subsidiaries . We haveestablished distribution and licensing relationships with several strategic hardware vendors, database providers, software and toolset developers and systemsintegrators . We have also developed alliances with key solution providers to target vertical industry sectors, including energy, telecommunications andmanufacturing .

Table of Content sPursuant to the terms of our license, maintenance and distribution 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 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 5%, 7% and 12% of our total revenue in each of fiscal years 2005, 2004 and 2003 respectively .

Our revenue consists primarily of license, service and maintenance fees from our customers and distributors which were primarily attributable to sales of

our software. License fees represented approximately 46%, 55% and 53% of our total revenue in 2005, 2004 and 2003, respectively. Revenue from services and

maintenance represented approximately 54%, 45% and 47% of our total revenues in 2005, 2004 and 2003, respectively .

Sales to customers outside the United States totaled $219 .9 million, representing 49% of our total revenue for the year ended November 30, 2005 . For a

geographic breakdown of our revenue and long-lived assets, see Note 13 to our Consolidated Financial Statements included in this report .

MarketingWe 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 DevelopmentReuters 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 messaging 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 2005, 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 $73 .1 million, $61 .1 million and $64.6 million in 2005, 2004 and 2003, 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 .

CompetitionThe market for our products and services is extremely competitive, continually evolving and subject to rapid change . While we offer a comprehensiv e

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 and webMethods . We believe that none of these companies has a suite of integration products as

complete as ours, but BEA, IBM, Microsoft, Oracle and SAP 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

Table of Contentsand 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, customertraining 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 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 distributionproducts, 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 . Although Reuters currently does not create TIB-based products designed for general use in all markets, if Reuters were to decide to begin providinginformation 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 oursoftware 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 thetechnological and creative skills of our personnel, product enhancements and new product developments are essential to establishing and maintaining atechnology 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 ourtechnology, 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 claimsagainst our customers or us in the future . Furthermore, we may initiate claims or litigation against third parties for infringement of our proprietary rights or toestablish the validity of our proprietary rights . Litigation, whether resolved in our favor or not, would cause us to incur substantial costs and divert ourmanagement 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,

Table of Content swhich 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 .

Employees

As of November 30, 2005, we employed 1,505 persons, including 437 in sales and marketing, 422 in research and development, 191 in finance an dadministration and 455 in professional services and technical support . Of our 1,505 employees, 380 were located in Europe and Africa, 245 in the Pacific Rim

and 880 in the Americas . Our success is highly dependent on our ability to attract and retain qualified employees . Competition for employees is intense in thesoftware 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 beas successful in the future .

Available InformationWe 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 PublicReference 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 quarterlyreports 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 suchmaterial 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 IA . RISK FACTORS

The, following risk factors could materially and adversely affect our future operating results and could cause actual events to differ materially .from thosepredicted in the forward-looking statements we make about our business .

Our future revenue is unpredictable and we expect our quarterly operating results to fluctuate, which may cause our stock price to decline .Period-to-period comparisons of our operating results may not be a good indication of our future performance . Moreover, our operating results in som e

quarters have not in the past, and may not in the future, meet the expectations of stock market analysts and investors . This has in the past and may in the futurecause our stock price to decline . As a result of the evolving nature of the markets in which we compete and the size of our customer agreements, we havedifficulty accurately forecasting our revenue in any given period . In addition to the factors discussed elsewhere in this section, a number of factors may cause ourrevenue to fall short of our expectations, or those of stock market analysts and investors, or cause fluctuations in our operating results, including :

• the announcement or introduction of new or enhanced products or services by our competitors ;

• the relatively long sales cycles for many of our products ;

• the tendency of some of our customers to wait until the end of a fiscal quarter or our fiscal year in the hope of obtaining more favorable terms ;

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• the timing of our new products or product enhancements or any delays in such introductions ;

• the delay or deferral of customer implementations of our products ;

• changes in customer budgets and decision making processes that could affect both the timing and size of any transaction ;

• our dependence on large deals, which if not closed, can greatly impact revenues for a particular quarter ;

• the impact of our provision of services on our recognition of license revenue;

• any difficulty we encounter in integrating acquired businesses , products or technologies;

• the amount and timing of operating costs and capital expenditures relating to the expansion of our operations ;

• the impact of employee stock-based compensation expenses on our earnings per share ; and

• changes in local, national and international regulatory requirements .

In addition, while we may in future years record positive net income and/or increases in net income over prior periods, we may not showperiod-over-period earnings per share growth or earnings per share growth that meets the expectations of stock market analysts or investors, as a result of the

number of our shares outstanding during such periods . In such case, our stock price may decline .

Our stock price may be volatile , which could cause investors to lose all or part of their investments in our stock or negatively impact the effectiveness of

our equity incentive plans.The stock market in general and the stock prices of technology companies in particular, have experienced volatility which has often been unrelated to the

operating performance of any particular company or companies . During fiscal year 2005, for example, our stock price fluctuated between a high of $13 .50 and a

low of $5 .60. If market or industry-based fluctuations continue, our stock price could decline in the future regardless of our actual operating performance and

investors could lose all or part of their investments .

Increases in services revenues as a percentage of total revenues may decrease overall margins .

We have in the past realized and may continue in the future realize a higher percentage of revenues from services and maintenance . For example, for the

fiscal year ended November 30, 2005 a substantial increase in our service and maintenance revenue and a decrease in our license revenue meant approximately54% of our total revenue for the year was derived from service and maintenance revenue . We realize lower profit margins on our services and maintenance

revenues than on our software license revenues . In addition, we may contract with certain third parties to supplement the services we provide to customers, which

generally yields lower margins than our internal services business . As a result, if services and maintenance revenues continue to increase as a percentage of total

revenues or if we increase our use of third parties to provide services, our profit margins may decrease which could impact our stock price .

We must overcome significant competition in order to succeed .

The market for our products and services is extremely competitive and subject to rapid change . We compete with various providers of enterprise

application integration solutions, including webMethods . We also compete with various providers of web services such as Microsoft, BEA, SAP and IBM . We

believe that of these companies, IBM has the potential to offer the most complete competitive set of products for enterprise application integration . As a result of

our acquisition of Staffware, we now also compete with various providers of BPM solutions . In addition, some of our competitors are expanding thei r

competitive product offerings and market position through acquisitions . For example, Sun Microsystems acquired SeeBeyond in August 2005, potentiallymaking Sun Microsystems a direct competitor of ours as well . We expect additional competition from

Table of Contentsother established and emerging companies . We also face competition for certain aspects of our product and service offerings from major systems integratorsFurther, we may face increasing competition from open source software initiatives, in which competitors provide software and intellectual property withoutcharging license fees . If customers choose such open source products over our proprietary software, our revenues and earnings could be adversely affected .

Many of our current and potential competitors have longer operating histories ; significantly greater financial, technical, product development andmarketing 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 devotegreater 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 enhancements to existing products and newproducts in a timely manner, achieving customer acceptance or generating higher average selling prices, our gross margins may decline, and our business andoperating results may suffer .

Future changes in financial accounting standards may adversely affect our reported results of operations .

A change in accounting standards can have a significant effect on our reported results . New accounting pronouncements and varying interpretations ofaccounting pronouncements have occurred and may occur in the future . These new accounting pronouncements may adversely affect our reported financialresults.

For example, currently we calculate employee stock-based compensation expenses using the intrinsic value method, and recorded less than $0 .1 million inemployee compensation expense in each of fiscal years 2005 and 2004 . We provided disclosure on pro forma net income and net income per share as if we hadapplied the fair value method of accounting only in the notes to our financial statements . Under Statement of Financial Accounting Standards No . 123(R), "ShareBased Payment" ("SFAS 123(R)"), we will be required, starting from our first quarter of fiscal year 2006, to calculate compensation expense related to allshare-based awards and recognize the expense in our financial statements . We expect such compensation expenses to be significant, and will cause our netincome and net income per share to be significantly reduced .

Our strategy contemplates possible future acquisitions which may result in us incurring unanticipated expenses or additional debt , difficulty inintegrating our operations , dilution to our stockholders and may harm our operating results .

Our success depends in part on our ability to continually enhance and broaden our product offerings in response to changing technologies, customerdemands and competitive pressures . We have in the past and may in the future, acquire complementary businesses, products or technologies . In this regard, wehave made strategic acquisitions, including the acquisition of certain assets of Velosel Corporation and ObjectStar International in 2005, and the acquisition ofStaffware PLC and General Interface Corporation in 2004 . We do not know if we will be able to complete any subsequent acquisition or that we will be able tosuccessfully integrate any acquired business, operate it profitably, or retain its key employees . Integrating any newly acquired business, product or technologycould be expensive and time-consuming, could disrupt our ongoing business and could distract our management . In particular, integrating sales forces andstrategies for marketing and sales has in the past required and will likely require in the future, much time, effort and expense, especially from our managementteam. Therefore, we might not be able, either immediately post-acquisition or ever, to replicate the pre-acquisition revenues achieved by companies that weacquire or achieve the benefits of the acquisition we anticipated in valuing the businesses, products or technologies we acquire. Furthermore, the costs ofintegrating acquired companies in international transactions can be particularly high, due to local laws and regulations . If we are unable to integrate any newlyacquired entity, products or technology effectively, our business, financial condition and operating results would suffer . In addition, any amortization orimpairment of acquired intangible assets, stock-based compensation or other charges resulting from the costs of acquisitions could harm our operating results .

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Table of ContentsIn addition, we may face competition for acquisition targets from larger and more established companies with greater financial resources . Also, in order to

finance any acquisition, we might need to raise additional funds through public or private financings or use our cash reserves . In that event, we could be forced toobtain equity or debt financing on terms that are not favorable to us and, in the case of equity financing, that may result in dilution to our stockholders . Use of our

cash reserves for acquisitions could limit our financial flexibility in the future . Moreover, the terms of existing loan agreements may prohibit certain acquisitionsor may place limits on our ability to incur additional indebtedness or issue additional equity securities to finance acquisitions . If we are not able to acquire

strategically attractive businesses, products or technologies we may not be able to remain competitive in our industry .

The past slowdown in the market for infrastructure software and its protracted recovery have caused our revenue to decline in the past and could causeour revenue or results of operations to fall below expectations in the future .

The market for infrastructure software is relatively new and evolving . We earn a substantial portion of our revenue from licenses of our infrastructure

software, including application integration software, and sales of related services . We expect to earn substantially all of our revenue in the foreseeable futurefrom sales of these products and services . Our future financial performance will depend on continued growth in the number of organizations demanding softwareand services for application integration and information delivery and companies seeking outside vendors to develop, manage and maintain this software for theircritical applications . Lower spending by corporate and governmental customers around the world, which has had a disproportionate impact on informationtechnology spending, has led to areduction in sales in the past and may continue to do so in the future. Many of our potential customers have made significantinvestments in internally developed systems and would incur significant costs in switching to third-party products, which may substantially inhibit the growth ofthe market for infrastructure software . If the market fails to grow, or grows more slowly than we expect, our sales will be adversely affected . Also, even ascorporate and governmental spending increases and companies make greater investments in information technology and infrastructure software, our revenue maynot grow at the same pace .

Our business is subject to seasonal variations which make quarter-to-quarter comparisons diffi cult .

Our business is subject to variations throughout the year due to seasonal factors in the U .S . and worldwide . These factors include fewer selling days inEurope during the summer vacation season which has a disproportionate effect on sales in Europe, the impact of the holidays and a slow down in capitalexpenditures by our customers at calendar year-end (during our first fiscal quarter). These factors typically result in lower sales activity in our first and thirdfiscal quarters compared to the rest of the year and they make quarter-to-quarter comparisons of our operating results less meaningful .

Any failure by us to meet the requirements of current or newly-targeted customers may have a detrimental impact on our business or operating results .If we fail to meet the expectations or product and service requirements of our current customers, our reputation and business may be harmed . In addition ,

we may wish to expand our customer base into markets in which we have limited experience . In some cases, customers in different markets, such as financialservices or government, have specific regulatory or other requirements which we must meet. For example, in order to maintain contracts with the U .S .Government, we must comply with specific rules and regulations relating to and that govern such contracts . While we have historically met the requirements ofour customers, if we fail to meet such requirements in the future, we could be subject to civil or criminal liability or a reduction of revenue which could harm ourbusiness, operating results and financial condition .

Table of ContentsAny losses we incur as a result of our exposure to the credit risk of our customers could harm our results of operations.

Most of our licenses are sold on an "open credit" basis . We monitor individual customer payment capability in granting such open credit arrangements,seek to limit credit to amounts we believe the customers can pay, and maintain reserves we believe are adequate to cover exposure for doubtful accounts . As we

have grown our revenue and customer base, our exposure to credit risk has increased . Although we have not had material losses to date as a result of customer

defaults, future defaults, if incurred, could harm our business and have an adverse effect on our business, operating results and financial condition .

We are required to undertake an annual evaluation of our internal control over fi nancial reporting ("ICFR") that may identify internal control

weaknesses requiring remediation , which could harm our reputation and confidence in our financial reporting .

Sarbanes-Oxley imposes duties on us, our executives, and directors . We completed our fiscal year 2005 evaluation of the design, remediation and testing

of effectiveness of our internal control over financial reporting required to comply with the management certification and attestation by our independentregistered public accounting firm as required by Section 404 of Sarbanes-Oxley ("Section 404") . While our assessment, testing and evaluation of the design and

operating effectiveness of our internal control over financial reporting resulted in our conclusion that as of November 30, 2005, our ICFR were effective, we

cannot predict the outcome of our testing in future periods . If we conclude in future periods that our ICFR is not effective, we may be required to change our

ICFR to remediate deficiencies, investors may lose confidence in the reliability of our financial statements, and we may be subject to investigation and/or

sanctions by regulatory authorities . Also, if we identify areas of our ICFR that require improvement, we could incur additional expenses to implement enhanced

processes and controls to address such issues . Any such events could adversely affect our financial results and/or may result in a negative reaction in the stock

market.

Regulatory requirements have caused us to incur incre as ed costs and operating expenses, may limit our ability to obtain director and officer liabilityinsurance and may make it more difficult for us to attract and retain qualified officers and directors .

Sarbanes-Oxley and rules enacted by the SEC and Nasdaq have caused us, and we expect will continue to cause us, to incur significant costs as a result ofthese regulatory requirements . In this regard, achieving and maintaining compliance with Sarbanes-Oxley and other rules and regulations, have caused us to hireadditional personnel and use additional outside legal, accounting and advisory services and may require us to do so in the future .

Failure to satisfy the rules could make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and wemay be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage . The impact of these events

could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, or as executive officers .

We may incur significant expenses in both hiring new employees and reducing or re-aligning our headcount in response to changing market conditions .

We have increased the scope of our operations both domestically and internationally . Our success is dependent on successfully managing our workforce .

As we grow, we must invest significantly in building our sales, marketing and engineering groups . Competition for these people in the software industries is

intense, and we may not be able to successfully recruit, train or retain qualified personnel . In addition, we must successfully integrate new employees into our

operations and generate sufficient revenues to justify the costs associated with these employees . If we fail to successfully integrate employees or to generate therevenue necessary to offset employee-related expenses, we may be forced to reduce our headcount, which would force us to incur significant expenses and

would harm our business and operating results . For example, in the year ended November 30, 2005, we recorded a $3 .9 million restructuring charge for aworkforce reduction to re-align our resources and cost structure. Failure to manage our operations effectively could interfere with the growth of our business as awhole.

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Table of ContentsIf we do not retain our key management personnel and attract , hire and retain other highly skilled employees , we may not be able to execute our

business strategy effectively .If we fail to retain and recruit key management and other skilled employees, our business and our ability to obtain new customers, develop new products

and provide acceptable levels of customer service could suffer . The success of our business is heavily dependent on the leadership of our key management

personnel, including Vivek Ranadiv€, our President and Chief Executive Officer . The loss of one or more key employees could adversely affect our continued

operations . We have experienced changes in our management organization over the past several years and may experience additional management changes in the

future . Uncertainty created by turnover of key employees could also result in reduced confidence in our financial performance which could cause fluctuations in

our stock price and result in further turnover of our employees .

The value of our equity incentive programs may diminish as a retention tool as a result of the changes in the fi nancial accounting standards and our

stock price volatility .We have historically used equity incentive programs, such as employee stock options and stock purchase plans, as a part of overall employee

compensation arrangements . As a result of changes in the financial accounting standards, we have changed our stock purchase plan and may reduce the size and

number of stock option grants we give to our employees, both of which may decrease the effectiveness of our plans as employee retention tools . In addition, the

volatility of our stock price may negatively impact the value of such equity incentives, thereby diminishing the value of such incentive programs to employees

and decreasing the effectiveness of such programs as retention tools .

The inability to upsell to our current customers or the loss of any significant customer could harm our business and cause our stock price to decline .

We do not have long-term sales contracts with any of our customers . Our customers may choose not to purchase our products in the future . As a result, a

customer that generates substantial revenue for us in one period may not be a source of revenue in subsequent periods . Any inability on our part to upsell to and

generate revenues from our existing customers could adversely affect our business and operating results .

Our products may infringe the intellectual property rights of others , which may cause us to incur unexpected costs or prevent us from selling our

products .We cannot be certain that our products do not infringe issued patents or other intellectual property rights of others . In addition, our use of Open Source

components in our products may make us increasingly vulnerable to claims that our products infringe third-party intellectual property rights, in particular

because many of the Open Source components we may incorporate with our products are developed by numerous independent parties over whom we exercise nosupervision or control . Further, because patent applications in the United States and many other countries are not publicly disclosed until a patent is issued,

applications covering technology used in our software products may have been filed without our knowledge. While no claims have been filed against us to date,

we may be subject to legal proceedings and claims from time to time, including claims of alleged infringement of the patents, trademarks and other intellectual

property rights of third parties by us or our licensees in connection with their use of our products. Although no claims have been made in the past, our software

license agreements typically provide for indemnification of our customers for intellectual property infringement claims . Intellectual property litigation is

expensive and time-consuming and could divert our management's attention away from running our business and seriously harm our business . If we were to

discover that our products violated the intellectual property rights of others, we would have to obtain licenses from these parties in order to continue marketing

our products without substantial reengineering . We might not be able to obtain the necessary licenses on acceptable terms or at all, and if we could not obtain

such licenses, we might not be able to reengineer our products successfully or in a timely fashion . If we fail to address any infringement issues successfully, wewould be forced to incur significant costs, including damages and potentially satisfying indemnification obligations that we have with our customers, and we

could be prevented from selling certain of our products .

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Table of ContentsOur intellectual property or proprietary rights could be misappropriated , which could force us to become involved in expensive and time-consuming

litigation .We regard our copyrights, service marks, trademarks, trade secrets, patents (licensed or others) and similar intellectual property as critical to our success .

Any misappropriation of our proprietary information by third parties could harm our business, financial condition and operating results . In addition, the laws of

some countries do not provide the same level of protection of our proprietary information as do the laws of the United States . If our proprietary information or

material were misappropriated, we might have to engage in litigation to protect it . We might not succeed in protecting our proprietary information if we initiate

intellectual property litigation, and, in any event, such litigation would be expensive and time-consuming, could divert our management's attention away from

running our business and could seriously harm our business .

Market acceptance of new platforms and web services standards may require us to undergo the expense of developing and maintaining compatible

product lines.Our software products can be licensed for use with a variety of platforms . There may be future or existing platforms that achieve popularity in the

marketplace which may not be architecturally compatible with our software products . In addition, the effort and expense of developing, testing and maintaining

software products will increase as more platforms achieve market acceptance within our target markets . Moreover, future or existing user interfaces that achieve

popularity within the enterprise application integration marketplace may not be compatible with our current software products . If we are unable to achieve market

acceptance of our software products or adapt to new platforms, our sales and revenues will be adversely affected .

Developing and maintaining different software products could place a significant strain on our resources and software product release schedules, which

could harm our revenue and financial condition . If we are not able to develop software for accepted platforms or fail to adopt webservices standards, our license

and service revenues and our gross margins could be adversely affected . In addition, if the platforms we have developed software for are not accepted, our

license and service revenues and our gross margins could be adversely affected .

We may experience foreign currency gains and losses .Our operating results are subject to fluctuations in foreign currency exchange rates . We attempt to mitigate a portion of these risks through foreign

currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense . We have established a hedging program designed to

partially hedge our exposure to foreign currency exchange rate fluctuations, primarily the Euro and the British Pound . We regularly review our hedging program

and will make adjustments based on our judgment. Although our hedging activities are designed to offset a portion of the financial impact resulting from themovement in foreign currency exchange rates, if we are unable to offset the effects of currency fluctuation, our operating results could be adversely affected.

Our agreement with Reuters places certain limitations on our ability to conduct our business .

Pursuant to the terms of our agreement with Reuters, we ar e 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 . The limitations

on our ability to sell risk management and market data distribution products and on reselling through the specified resellers will continue through May 2008 .

While we currently do not offer any risk management and market data distribution solutions as part of our product offerings, if we were to develop any suchproducts, we would have to rely on Reuters to sell those products in the financial services market until these restrictions end . Reuters is not required to help us

sell any of these products in those markets and Reuters may choose not to sell our products over our competitors' products .

In addition, we license from Reuters the intellectual property that was incorporated into early versions of some of our software products . We do not own

this licensed technology . Because Reuters has access to

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tentsTable of Contentsintellectual property used in our products, it could use this intellectual property to compete with us . Reuters is not restricted from using the licensed technology it

has licensed to us to produce products that compete with our products, and it can grant limited licenses to the licensed technology to others who may compete

with us . In addition, we must license to Reuters all of the products we own, and the source code for one of our messaging products, through December 2012 . This

may place Reuters in a position to more easily develop products that compete with ours .

Natural or other disasters could disrupt our business and result in loss of revenue or in higher expenses .

Natural disasters, terrorist activities and other business disruptions could seriously harm our revenue and financial condition and increase our costs and

expenses . Our corporate headquarters and many of our operations are located in California, a seismically active region . In addition, many of our current and

potential customers are concentrated in a few geographic areas . A natural disaster in one of these regions could have a material adverse impact on our U .S . and

foreign operations, operating results and financial condition . Further, although we have not experienced a disruption to date, any unanticipated businessdisruption caused by Internet security threats, damage to global communication networks or otherwise could have a material adverse impact on our operating

results .

The outcome of litigation pending against us could require us to expend significant resources and could harm our business and financial resources .

In May 2005, three purported shareholder class action complaints were filed against us and several of our officers in the U .S . District Court for the

Northern District of California. The plaintiffs in such actions are seeking to represent a class of purchasers of TIBCO's common stock from September 21, 2004

through March 1, 2005 . The complaints generally allege that we made false or misleading statements concerning our operating results, our business and internal

controls and the integration of Staffware . The complaints seek unspecified monetary damages . We intend to defend ourselves vigorously ; however, we expect to

incur significant costs in mounting such defense .

In September 2005, a shareholder derivative complaint was filed against certain of our officers and directors in the Superior Court of the State ofCalifornia, Santa Clara County . The complaint is based on substantially similar facts and circumstances as the class actions and generally alleged that the named

directors and officers breached their fiduciary duties to TIBCO . The complaint seeks unspecified monetary damages . Given the nature of derivative litigation,

any recovery in a derivative suit would be to the benefit of TIBCO .

In addition, 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 of more than 300 companies, which have beencoordinated 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-offeringpurchases 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 IPOand secondary public offering and seeks unspecified damages on behalf of a purported class of persons who purchased our securities or sold put options duringthe 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, 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 theregistration statement for Talarian's IPO and seeks unspecified damages on behalf of a purported class of persons who purchased Talarian securities during thetime period from July 20, 2000 to December 6, 2000 .

Table of Content sA proposal to settle the claims against all of the issuers and individual defendants in the coordinated litigation was accepted by us and given preliminary

Court approval . The completion of the settlement is subject to a number of conditions, including final approval by the Court . 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 collectivelyresponsible 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 $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, our subsidiary, 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 uncertainty associated with substantial unresolved lawsuits could harm our business, financial condition and reputation . The defense of the lawsuits

could result in the diversion of our management's time and attention away from business operations, which could harm our business . Negative developments

with respect to the lawsuits could cause our stock price to decline. In addition, although we are unable to determine the amount, if any, that we may be requiredto pay in connection with the resolution of the lawsuits by settlement or otherwise, any such payment could seriously harm our financial condition and liquidity .

The use of Open Source Software in our products may expose us to additional risks ."Open Source Software" is software that is covered by a license agreement which permits the user to liberally copy, modify and distribute the software for

free . Certain Open Source Software is licensed pursuant to license agreements that require a user who intends to distribute the Open Source Software as acomponent of the user's software to disclose publicly part or all of the source code to the user's software . This effectively renders what was previously

proprietary software Open Source Software . As competition in our markets increases, we must reduce our product development costs . Many features we may

wish to add to our products in the future may be available as Open Source Software and our development team may wish to make use of this software to reducedevelopment costs and speed up the development process . While we monitor the use of all Open Source Software and try to ensure that no Open Source Software

is used in such a way as to require us to disclose the source code to the related product, such use could inadvertently occur . Additionally, if a third party hasincorporated certain types of Open Source Software into its software, has not disclosed the presence of such Open Source Software and we embed that third partysoftware into one or more of our products, we could, under certain circumstances, be required to disclose the source code to our product . This could have a

material adverse effect on our business .

Some provisions in our certificate of incorporation and bylaws , as well as a stockholder rights plan, may have anti-takeover effects .

We have a stockholder rights plan providing for one right for each outstanding share of our common stock . Each right, when exercisable, entitles theregistered holder to purchase certain securities at a specified purchase price. The rights plan may have the anti-takeover effect of causing substantial dilution to aperson or group that attempts to acquire TIBCO on terms not approved by our Board of Directors . The existence of the rights plan could limit the price that

certain investors might be willing to pay in the future for shares of our common stock and could discourage, delay or prevent a merger or acquisition thatstockholders may consider favorable . In addition, provisions of our current certificate of incorporation and bylaws, as well as Delaware corporate law, couldmake it more difficult for a third party to acquire us without the support of our Board of Directors, even if doing so would be beneficial to our stockholders .

Table of Content s

ITEM 2 . PROPERTIES

Our principal administrative, sales, marketing, service and research and development facilities are located in a four building campus totalingapproximately 292,000 square feet in Palo Alto, California . We purchased these buildings in June 2003 . In connection with the purchase, we entered into a51-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'sDiscussion 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 61 cities throughout the world . The field offices range from small executive offices to a 22,000 square foot

facility, in Maidenhead, England, that serves as our European sales operations headquarters . Lease terms range from month-to-month on certain 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

sales offices, development centers or customer support sites, and are used for periodic meetings, training and administration . 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 that we no longer occupy, do not intend to occupy, and have either subleasedor plan to sublease . The estimated loss on excess facilities net of sublease income has been included in the accrued excess facilities costs on the ConsolidatedBalance Sheet as of November 30, 2005 and 2004 .

ITEM 3 . LEGAL PROCEEDING S

Securities Class Action and Shareholder Derivative Suits

In May 2005, three purported shareholder class action complaints were filed against us and several of our officers in the U . S . District Court for theNorthern District of California . The plaintiffs in such actions are seeking to represent a class of purchasers of our common stock from September 21, 2004through March 1, 2005 . The complaints generally allege that we made false or misleading statements conce rn ing our operating results, our business and intern alcontrols , and the integration of Staffware and seek unspecified monetary damages . Because the outcome of this litigation is undetermined and we cannotreasonably estimate the possible loss or range of loss which may ari se from the litigation , we have not recorded an accrual for possible damages .

In September 2005, a shareholder derivative complaint was filed against certain of our officers and directors in the Superior Court of the State ofCalifornia, Santa Clara County . The complaint is based on substantially similar facts and circumstances as the class actions and generally alleged that the nameddirectors and officers breached their fiduciary duties to the Company . The complaint seeks unspecified monetary damages . Given the nature of derivativelitigation, any recovery in a derivative suit would be to the benefit of the Company .

IPO Allocation Suit

We, certain of our directors and officers and certain investment bank underwriters have been named in a putative class action for violation of the federalsecurities laws in the U .S . District Court for the Southern District of New York ("Court"), captioned "In re TIBCO Software Inc . Initial Public OfferingSecurities 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 regardingpost-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 statementsfor

Table of Contentsour 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 againstTalarian 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 activitieswere not disclosed in the registration statement for Talarian's IPO and seeks unspecified damages on behalf of a purported class of persons who purchasedTalarian 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 accepted by us and given preliminaryCourt approval . The completion of the settlement is subject to a number of conditions, including final approval by the Court . Under the settlement, the plaintiffswill dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectivelyresponsible 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 $0.5 million for IPO "laddering" claims, including those alleged in this matter . Thus, under the proposed settlement, ifany payment is required under the insurers' guaranty, our subsidiary, Talarian, would be responsible for paying its pro rata share of the shortfall, up to $0 .5million of the self-insured retention remaining under its policy .

PART II

ITEM 5 . MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIE S

Market Informatio n

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

Fiscal Year 2004

First Quarter (from December 1, 2003 to February 29, 2004)Second Qua rter (from March 1, 2004 to May 30, 2004)Third Quarter (from May 31, 2004 to August 29, 2004)Fourth Quarter (from August 30, 2004 to November 30, 2004 )

Fiscal Year 2005

High Low

$ 8 .79 $ 5 .48$ 9.75 $ 6 .5 5$ 8.75 $ 5 .5 3$ 11 .72 $ 6 .1 1

High Lo w

First Quarter (from December 1, 2004to February 27, 2005)Second Quarter (from February 28, 2005 to May 29, 2005)Third Quarter (from May 30, 2005 to August 28, 2005)Fourth Quarter (from August 29, 2005 to November 30, 2005)

Holders of Recor d

We had 949 stockholders of record as of November 30, 2005 .

$13.50 $10.51$10.75 $ 6.10$ 8.00 $ 5.60$ 8.63 $ 6.8 6

18

Tile of ContentsDividends

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 SecuritiesIn September 2004, our Board of Directors authorized a stock repurchase program for the repurchase of up to $50 .0 million of common stock under this

program. The remaining authorized amount for stock repurchases under this program as of November 30, 2005 was approximately $1 .0 million . Subsequently, in

December 2005, our Board of Directors authorized a new stock repurchase plan for the repurchase of up to $100 .0 million of our common stock .

Total Number of

(In thousands, except per-share amounts) Shares Purchased

August 29, 2005 to September 28, 2005 -September 29, 2005 to October 28, 2005 1,000

October 29, 2005 to November 30, 2005 90 0

Total 1,900

Approximate DollarValue of Share sThat May Ye t

Be

Total Number of Shares PurchasedPurchased as Part of unde r

Average Price Publicly Announced the Plans or

Paid per Share Plans or Programs Programs

$ - - $ 15,8767 .94 1,000 7,93 9

7 .71 900 1,00 0

$ 7.83 1,900 $ 1,000

Equity Compensation Plan InformationThe following table sets forth information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our

existing equity compensation plans as of November 30, 2005 .

Number of SecuritiesRemaining Available fo r

Number of Securities to be Weighted-Average Future Issuance UnderIssued Upon Exercise of Exercise Price of Equity Compensation Plan s

Outstanding Options, Outstanding Options, (Excluding Securities Reflected

Warrants and Rights Warrants and Rights in Column (a) )

Plan Category (a) (b) (c )

Equity compensation plans approved bysecurity holders 46,203,131 $ 7.00 31,493,584

Equity compensation plans not approved by

security holders(1) 62,886 $ 14.50 167,06 1

Total 46,266,017 $ 7.01 31,660,64 5

(1) Represents options assumed in connection with our acquisition of Talarian in 2002 and of Extensibility in 2000 .

19

Table of Contents

ITEM 6 . SELECTED FINANCIAL DAT A

The selected consolidated financial data below have been derived from our audited financial statements. The following table should be read 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 .

Year Ended November 30,

2005

Statement of Operations :Revenue $ 445,91 0Cost of revenue 124,19 3

Gross profit 321,71 7Operating expenses 263,64 3

Income ( loss) from operations 58,07 4Interest and other income, net 11,71 8Interest expense (2,711 )

Income (loss) before income taxes 67,08 1Provision for (benefit from) income taxes (5,474)

Net income (loss) $'< 72,555

Total stock based compensation included in cost of revenue and opera tingexpenses $ 12 9

Net income ( loss) per share-Basic $ 0.3 4

Net income (loss) per share-Diluted $ 0.3 2

Shares used to compute net income (loss) per share-Basic 213,26 3

Shares used to compute net income ( loss) per share-Diluted 223,977

2004 2003 2002 2001

(in thousands, except per share amounts)

$ 387,220 $264,210 $273,393 $322,09 193,197 63,485 65,672 71,01 2

294,023 200,725 207,721 251,079223,273 198,249 294,403 305,83 0

70,750 2,476 (86,682) (54,751 )5,736 16,212 16,264 31,04 0

(2,771) (1,205) - -

73,715 17,483 (70,418) (23,711 )28,795 6,043 24,162 (10,469 )

$ 44,920 $ 11,440 $(94,580) $(13,242 )

$ 243 $ 1,063 $ 4,050 $ 26,965

$ 0.22 $ 0.05 $ (0.46) $ (0.07 )

$ 0.20 $ 0.05 $ (0.46) $ (0.07)

207,506 211,555 205,821 195,00 1

220,927 221,519 205,821 195,001

As of November 30 ,

200 5

Balance Sheet Data :Cash, cash equivalents and short-term investments $ 477,63 8Working capital 458,685Total assets 1,122,424Long-term debt 50,143Stockholders' equity 873,619

2004 2003 2002 2001

(in thousands)

$ 473,535 $604,669 $637,853 $677,34 0439,090 549,719 563,732 638,803

1,082,811 943,259 894,588 892,12 751,851 53,477 -

820,482 762,794 744,727 771,27 9

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Table of Contents

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION S

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. 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 .

These forward-looking statements include, but are not limited to, statements related to our expected business, results of operations, future financial position, ourability to increase our revenues, the mix of our revenues between license, service and maintenance revenues, our, financing plans and capital requirements, our

costs of revenue, our expenses, our potential tax benefit or liabilities, the effect of recent accounting pronouncements, our investments, debt service and principalrepayment obligations, cash flows and our ability to finance operations from cashflows and similar matters and include statements based on curren t

expectations, estimates, forecasts and projections about the economies and markets in which we operate and our beliefs and assumptions regarding theseeconomies and markets.

These forward-looking statements are based on current expectations and involve known and unknown risks and uncertainties that may cause our actualresults, operating performance or achievements to be materially different from those expressed or implied by the forward-looking statements . We believe thatthe expectations reflected in the forward-looking statements are reasonable but we cannot assure you that those expectations will prove to be correct . Factors

that could cause or contribute to such differences include but are not limited to our ability to address new markets and complex technologies by deliveringsuccessful, new products on a timely basis, the impact of competitive products and pricing, the success of our strategic relationships, charges for restructuringand option expenses and other costs and other risk factors detailed in this Annual Report on Form 10-K for the fiscal year ended November 30, 2005 and otherperiodic . flings with the Securities and Exchange Commission . All forward-looking statements are expressly qualified in their entirety by these factors and allrelated cautionary statements. We do not undertake any obligation to update any forward-looking statements .

Executive Overvie w

Our suite of business integration and process management software solutions makes us a leading enabler of real-time business . We use the term"real-time business" to mean doing business in such a way that organizations can use current information to execute their critical business processes and make

smarter decisions . We are the successor to a portion of the business of Teknekron Software Systems, Inc . Teknekron developed software, known as the TIBtechnology, for the integration and delivery of market data, such as stock quotes, news and other financial information, in trading rooms of large banks andfinancial services institutions . In 1992, Teknekron expanded its development efforts to include solutions designed to enable complex and disparate manufacturingequipment 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 wasundertaken 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 marketsoftware solutions for use in the integration of business information, processes and applications . 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 someof our messaging software products originated .

In June 2004, we acquired Staffware plc, a provider of BPM solutions that enable businesses to automate, refine and manage their processes . The additionof Staffware's BPM solutions enabled us to offer our combined customer base an expanded real-time business integration solution, by making it easier for ourcustomers to utilize their existing systems through real-time information exchange and automation and management of enterprise business processes regardlessof where such processes reside . BPM enables companies to save time

21

Table of Content sand 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 financial services, telecommunications, retail, healthcare,manufacturing, energy, transportation, logistics, government and insurance . We sell our products through a direct sales force and through alliances with leading

software vendors and systems integrators .

Our revenue consists primarily of license and maintenance fees from our customers and distributors . 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 andnetworking 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 ("VSOE") of fair value and amortized over the term of the maintenance contract, typically twelve months .

Consulting and training revenues are typically recognized as the services are performed, which services are usually performed 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 ordevelopment of the underlying software code .

Our revenue is generally derived from a diverse customer base . No single customer represented greater than 10% of total revenue for the year endedNovember 30, 2005 or 2004 . As of November 30, 2005, no single customer had a balance in excess of 10% of our net accounts receivable . We establish

allowances for doubtful accounts based on our evaluation of collectibility and an allowance for returns and discounts based on specifically identified credits andhistorical experience .

Relationship with Reuters

Reuters is a distributor of our products to customers in the financial services segment . Pursuant to the terms of our license, maintenance and distributionagreement with Reuters, Reuters has the right to distribute certain of our products in conjunction with the sale by Reuters to end users of its market data deliverysolutions for a specified period of time . 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 sellrisk management and market data distribution products and on reselling through the specified resellers will expire in May 2008 . In addition, Reuters may embedour products in its solutions .

As of November 30, 2004, Reuters owned less than 10% of our outstanding common stock . During fiscal year 2005, Reuters reduced its holdings such that

as of November 30, 2005, Reuters owned less than 1% of our outstanding common stock. Revenue from Reuters was $23 .0 million, or 5% of our total revenue,in fiscal year 2005 .

Critical Accounting Policies, Judgments and Estimate s

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

22

Table of ContentsOur significant accounting policies are described in Note 2 to our Consolidated Financial Statements as of and for the year ended November 30, 2005 . We

believe our most critical accounting policies and estimates include the following :

• revenue recognition;

• allowances for doubtful accounts, returns and discounts;

• stock-based compensation ;

• valuation and impairment of investments ;

• goodwill and other intangible assets ;

• impairment of long-lived assets ;

• restructuring and integration costs; an d

• accounting for income taxes .

Revenue Recognition . We recognize license revenue when a signed contract or other persuasive evidence of an arrangement exists, the software has beenshipped 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 accordancewith 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 rightsof 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 . Providing all other revenue criteria are met, non-refundable, prepaid fees from OEM customers are generally recognized upon delivery and on goingroyalty fees are generally recognized upon receipt of royalty reports of units shipped .

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 isfixed 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 normalpayment terms, we account for the fee as not being fixed or determinable and recognize revenue as the payments become due . We assess whether collection isreasonably 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 becomesreasonably 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 aredeemed 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 or daily ratesand revenues are generally recognized as the services are performed . Consulting services primarily consist of implementation services related to the installationof our products and generally do not include significant customization to or development of the underlying software code . The determination as to whetherservices involve significant production, modification or customization of the underlying software code is a matter of judgment and can materially impact thetiming of revenue recognition .

Many customers who license our softw are also enter into separate professional services arrangements with us . In determining whether professionalservices revenue should be accounted for separately from license revenue, we evaluate, among other factors , the nature of our so ftware products, whether theyare ready for use by

23

Table of Content sthe customer upon receipt, the nature of our implementation services, which typically do not involve significant customization to or development of theunderlying software code, the availability of services from other vendors, whether the timing of payments for license revenue is coincident with performance ofservices and whether milestones or acceptance criteria exist that affect the realizability of the software license fee . Substantially all of our professional services

arrangements are billed on a time and materials basis and accordingly, are recognized as the services are performed . Contracts with fixed or not to exceed fees

are recognized on a proportional performance basis. If there is significant uncertainty about the project completion or receipt of payment for professionalservices, revenue is deferred until the uncertainty is sufficiently resolved . Training revenue is recognized as training services are delivered .

For arrangements that do not qualify for separate accounting for the license and professional services revenues, including arrangements that involvesignificant modification or customization of the software, that include milestones or customer specific acceptance criteria that may affect collection of thesoftware license fees, or where payment for the software license is tied to the performance of professional services, software license revenue is generallyrecognized together with the professional services revenue using either the percentage-of-completion or completed-contract method . Under th e

percentage-of-completion method, revenue recognized is equal to the ratio of costs expended to date to the anticipated total contract costs, based on current

estimates of costs to complete the project. If the total estimated costs to complete a project exceed the total contract amount, indicating a loss, the entireanticipated loss would be recognized currently .

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 couldresult .

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 expenserecognized could result. Our allowances for doubtful accounts, returns and discounts as a percentage of net revenues were 1 .0%, 1 .0% and 0.8% in fiscal years

2005, 2004 and 2003, respectively . See Note 5 to our Consolidated Financial Statements for a summary of activities during the years reported . Based on ourresults for the year ended November 30, 2005, a one-percentage point deviation in our allowances for doubtful accounts, returns and discounts as a percentage ofnet revenues would have resulted in an increase or decrease in expense of approximately $4 .5 million .

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-Transitionand Disclosure"-an amendment of SFAS 123 . Had we accounted for stock-based compensation related to employee stock-based compensation plans using thefair value method as prescribed by SFAS 123, our net income would have been reduced by $23 .0 million, $38 .0 million and $50 .1 million in fiscal years 2005,

2004 and 2003, 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 optionpricing 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 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

24

Table of Content sFinancial Accounting Standards Board ("FASB") Interpretation ("FIN") No . 28. Pursuant to F IN 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 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 ConsolidatedFinancial Statements, will no longer be an acceptable alternative to recognition of expenses in the financial statements . Due to the Amendment to Rule 4-01(a)

issued in April 2005, SFAS 123(R) must be adopted by the first interim reporting period of the fiscal year that begins on or after June 15, 2005 . Accordingly, we

are required to adopt SFAS 123(R) starting in our first quarter of fiscal year 2006 . We expect the adoption of SFAS 123(R) will have a material adverse impacton our net income and our net income per share by decreasing our net income by the additional amount of such stock-based compensation charges, net of taxes .

We cannot quantify the amount of such impact at this time .

Valuation and Impairment of 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, 2005, $268 .9 million of marketable securities have been classified as available-for-sale and arecarried 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, 2005, gross unrealized losses on our investment portfolio totaled $2 .0 million . The decline in

value of these investments is primarily related to changes in interest rates and is considered temporary in nature .

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 volatilityinherent 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, liquidity and management/ownership . If we believe that an other-than-temporary decline exists, we write down the investment tomarket value and record the related write-down as a loss on investments in our consolidated statement of operations . In fiscal year 2005, we did not recognizeany impairment loss, while in fiscal years 2004 and 2003, we recognized impairment losses of $0 .1 million and $0 .3 million, respectively, relating to theother-than-temporary decline in value of certain equity investments . As of November 30, 2005, the net carrying value of our minority equity investments totaled$2.3 million .

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

Goodwill and Other Intangible Assets . Our goodwill and intangible assets result from our corporate acquisition transactions . In accordance with SFAS142, "Goodwill and Other Intangible Assets," which we adopted on December 1, 2002, goodwill and intangible assets with indefinite useful lives are no longeramortized, but are instead tested for impairment at least annually or as circumstances indicate their value may no longer be recoverable . We generally perform

our annual impairment test at the end of the fiscal year. As we

25

Table of Contentsoperate our business in one reporting segment, our goodwill is tested for impairment at the enterp ri se level . Goodwill impairment testing is a two-step process .For the first step , we screen for impairment , and if any possible impairment exists , we undertake a second step of measuring such impairment . Other purchasedintangible assets with definite useful lives are amo rtized on a straight line basis over their useful lives, and pe ri odically tested for impairment. As o fNovember 30, 2005 , we had $261 . 1 million of goodwill and $64 .7 million of intangible assets , and had not recorded an y impairment charges . If our estimates orthe related assumptions change in the future , we may be required to record impairment charges to reduce the carrying value of these assets . Changes in thevaluation of goodwill and intangible assets could be substantial .

Impairment of Long-Lived Assets . We evaluate the recoverability of our long -lived assets in accordance with SFAS 144, "Accounting for theImpairment or Disposal of Long-Lived Assets ." When events or changes in circumstances indicate that the car rying amount of long-lived assets may not berecoverable , we recognize such impairment in the event the net book value of such assets exceeds the future undiscounted cash flows att ri butable to such assets .We have not recorded any impairment losses to date . If our es timates or the related assumptions ch ange in the future, we may be required to record impairmentcharges to reduce the carrying value of these assets . Changes in the valuation of long-lived assets could be subst an tial .

Restructuring and Integration Costs . Our restructuring charges are compri sed primarily of costs related to properties abandoned in connection withfacilities consolida ti on , related write-down of leasehold improvements and severance and associated employee termina tion costs related to headcount reduc tions .For restructuring acti ons initiated pri or to December 31, 2002, we followed the guidance provided by EITF 94-3 "Liabili ty Recognition for Certain EmployeeTermination Benefi ts and Other Costs to Exit an Activity" . We recorded the liabili ty related to these termination costs when the plan was approved ; thetermination benefits were determined and communicated to the employees ; the number of employees to be terminated , their locations and job were specificallyidentified ; and the period of time to implement the plan was set. For restructu ri ng actions initiated after Janua ry 1, 2003, we adopted SFAS 146, "Accounting forCosts Associated with Exit or Disposal Activities" which requires that a liabili ty for costs associated with an exit or disposal activi ty be recognized and measuredini ti ally at fair value only when the liability is incurred .

Our restructuring charges included accruals for estimated losses on facility costs based on our contractual obligations net of estimated sublease incomebased on current comparable market rates for leases . We reassess this liability periodically 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 ofsublease rental income, either change or do not materialize . Should facilities operating lease rental rates continue to decrease in these markets or should it takelonger than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed this estimate by approximately $2 .8 million .

Accounting,jbr Income Taxes. We make certain estimates and judgments in determining income tax expense for financial statement purposes . Theseestimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue andexpense for tax and financial statement purposes .

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions inwhich we operate. This process involves us estimating our current tax exposure under the most recent tax laws and assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes . These differences result in deferred tax assets and liabilities, which are included in ourConsolidated Balance Sheet .

We assess the likelihood that we will be able to recover our deferred tax assets . We consider all available evidence, both positive and negative, includinghistorical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies inassessing the need

26

Table of Contentsfor the valuation allowance . If recovery is not likely, we increase our provision for taxes by recording a valuation allowance against the deferred tax assets that

we estimate will not ultimately be recoverable . The available positive evidence at November 30, 2005 included three years of historical operating profits and aprojection of future income limited to three years which coincides with the period over which we recorded historical operating profits, due to our lack ofvisibility into earnings further into the future . As a result of our analysis of all available evidence, both positive and negative, we recorded a partial release ofvaluation allowance during fiscal year 2005 . We continue to closely monitor available evidence and may adjust our valuation allowance in future periods .

As of November 30, 2005, we believed that the amount of the deferred tax assets recorded on our balance sheet as a result of the partial release ofvaluation allowance would ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets, our tax provision wouldincrease in the period in which we determine that the recovery is not probable. If we have to re-establish the full valuation allowance, it may result in a charge of$19 .6 million to the tax provision .

Of the remaining valuation allowance of approximately $219 .3 million as of November 30, 2005, we estimate that when released, approximately $21 .7

million will result in an income tax benefit, approximately $7 .7 million will be credited to goodwill and approximately $189 .9 million relating to stock option

exercises and related tax credits will be credited directly to additional paid-in capital .

We have completed an R&D Credit study for fiscal years 1999 through 2003 . As a result, additional credits have been identified and included in thedeferred tax assets as of November 30, 2005 . R&D credit carryforwards are approximately $25 .3 million and $20 .0 million, for federal and California,respectively .

U.S . income taxes and foreign withholding taxes have not been provided for on a cumulative total of $20 .8 million of undistributed earnings for certainnon-U .S . subsidiaries . With the exception of our subsidiaries in the United Kingdom, net undistributed earnings of our foreign subsidiaries are generallyconsidered to be indefinitely reinvested, and accordingly, no provision for U .S . income taxes has been provided thereon . Upon distribution of these earnings inthe form of dividends or otherwise, the company will be subject to U .S . income taxes net of available foreign tax credits associated with these earnings .

27

Table of ContentsResults of Operations

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

Year EndedNovember 30,

200 5

Revenue :License revenue :Non-related partiesRelated parties

Total license revenue

Service and maintenance revenue :Non-related partie sRelated partiesReimbursable expense s

Total service and maintenance revenue

Total revenue

Cost of revenue :Cost of license revenueCost of service and maintenanceCost paid to related parties

Total cost of revenu e

Gross profi t

Operating expenses :Research and developmentSales and marketingGeneral and administrativeAcquired in-process research and developmentRestructuring chargeAmortization of acquired intangible assets

Total operating expense s

Income from operationsInterest incomeInterest expenseOther income (expense), net

Income before income taxesProvision for (benefit from) income taxes

Net income

42%4

46

5121

54

100

325

28

72

16328

1

2

59

133(1)

15(1)

16%

2004 2003

51% 46%4 7

55 53

41 4031

61

45 47

100 100

3 321 20

1

24 24

76 76

16 2432 42

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1

58 75

18 12 5

(1) -

19 67 2

12% 4%

28

Table of ContentsTotal Revenue


2005 2004 2003

% Change

Year 2004 Year 2003to 2005 to 2004

(in thousands , except percentages)

Total revenue $445,910 $387,220 $264,210 15% 47%

Total revenue increased 15% for fiscal year 2005 compared to fiscal year 2004, primarily due to a 40% increase in service and maintenance revenue, offsetby a 5% decrease in license revenue . Geographically, our total revenue increased by $35 .0 million or 18% in the United States, $16 .2 million or 11% in Europeand $5 .5 million or 13% in the Pacific Rim in fiscal year 2005 . See Note 13 to the Consolidated Financial Statements for further detail on total revenue by region .

Since June 2004, our consolidated results of operations have included incremental revenue (and costs) related to the former Staffware operations .Consequently, such incremental revenue has been included in our results for the second half of fiscal year 2004 and fiscal year 2005 . Pro forma results as if wehad acquired Staffware at the beginning of fiscal year 2003 are provided in Note 3 to our Consolidated Financial Statement . Due to the structure of ourmulti-product Enterprise License Agreements, which often combine TIBCO and Staffware products, we are not able to separately report the portion of revenueattributable solely to the Staffware components .

Total revenue increased 47% for fiscal year 2004 compared to fiscal year 2003, primarily due to incremental revenue from Staffware during fiscal year2004, our direct sales to customers in the financial services market beginning in October 2003 (pursuant to our agreement with Reuters) and a general increase ininformation technology spending by our customers .

Revenue from Reuters was $23 .0 million, $28 .3 million and $30 .7 million representing 5%, 7% and 12% of our total revenue in fiscal years 2005, 2004and 2003, respectively . Until March 2005, our revenue from Reuters consisted primarily of fees under our license agreement, which includes minimumguaranteed 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 servicescompanies (and, until October 2004, also reduced by 40% of our maintenance revenue from customers who were transitioned to us by Reuters) .

License Revenue and Costs

Year Ended November 30, % Change

Year 2004 Year 20032005 2004 2003 to 2005 to 2004

(in thousands , except percentages)License revenue $203,888 $214,086 $140,509 (5)% 52%As a percentage of total revenue 46% 55% 53 %

Cost of license revenue $ 12,694 $ 11,586 $ 8,835 10% 31%As a percentage of total revenue 3% 3% 3 %As a percentage of license revenue 6% 5% 6 %

We license a wide range of products to customers in various industries and geographic regions . Cost of license revenue mainly consisted of royalties andamortization of developed technology acquired through corporate acquisitions .

License revenue decreased by $10 .2 million or 5% for fiscal year 2005 compared to fiscal year 2004, primarily due to a decrease in revenue from thetelecommunications, consumer packaged goods and manufacturing sectors, partially offset by an increase in license revenue from the financial services market .License revenue increased 52% for fiscal year 2004 compared to fiscal year 2003, primarily due to increased revenue from the financial services, consumerpackaged goods, telecommunications and manufacturing sectors, and also due to additional revenue generated from the Staffware acquisition .

29

Table of Content sThe total number of license revenue transactions over $100,000 increased to 316 in fiscal year 2005, from 260 in fiscal year 2004, and 225 in fiscal year

2003 . The average deal size for transactions over $100,000 was approximately $0 .6 million, $0.7 million, and $0 .4 million in fiscal years 2005, 2004 and 2003,

respectively . The number of transactions equal to or greater than $1 million was 42, 40 and 18 transactions in fiscal years 2005, 2004 and 2003, respectively . Our

total license revenue in any particular period is to a certain extent, dependant on the size and timing of larger license deals . We expect the number of license

transactions over $100,000 to increase in fiscal year 2006, while the size and timing of any particular multi-million dollar deal is, more difficult to forecast .

Cost of license revenue mainly consisted of royalty costs and amortization of developed technology acquired through corporate acquisitions . Cost of

license revenue remained approximately 3% of total revenue and 5% to 6% of license revenue in each of fiscal years 2005, 2004 and 2003 . As stated above, our

fiscal year 2005 financial results include incremental revenue and costs attributable to former Staffware operations ; whereas, our fiscal year 2004 financial results

only include such revenue and costs from June 2004 .

We expect license revenues to be approximately 45% to 55% of our total revenue and cost of license revenue to remain approximately 5% to 7% of license

revenue in fiscal year 2006 .

Service and Maintenance Revenue and Costs


Year 2004 Year 20032005 2004 2003 to 2005 to 2004


Service and maintenance revenue $242,022 $173,134 $123,701 40% 40%

As a percentage of total revenue 54% 45% 47 %Cost of service and maintenance revenue $111,499 $ 81,611 $ 52,370 37% 56%As a percentage of total revenue 25% 21% 20%

As a percentage of service and maintenance revenue 46% 47% 42%

Service and maintenance revenue increased $68 .9 million or 40% for fiscal year 2005 compared to fiscal year 2004, and increased 40% for fiscal year2004 compared to fiscal year 2003 . The increase in fiscal year 2005 was comprised of $33 .6 million, or a 52% increase in consulting and training servicesrevenue, and $35 .3 million, or a 33% increase in maintenance revenue . The increase in fiscal year 2004 compared to fiscal year 2003 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 . Consulting revenue

increased due to more comprehensive and larger engagements with respect to a number of accounts and an increased focus on providing more services tocustomers . Maintenance revenue increased primarily due to growth in our installed software base and our acquisition of Staffware in third quarter of fiscal year2004 and ObjectStar in the second quarter of fiscal year 2005 . Also, in accordance with our agreement with Reuters, we began providing maintenance andsupport services directly to customers transitioned from Reuters in the fourth quarter of fiscal year 2003, which contributed to our growth in service and

maintenance revenue in fiscal year 2004 .

Cost of service and maintenance revenue consists primarily of compensation of professional services and customer support personnel and third-partycontractors, and associated expenses related to providing consulting services .

The cost of service and maintenance revenue increased as a percentage of total revenue throughout the three years ended November 30, 2005, as therelative proportion of consulting revenue increased. The increase in absolute dollars in fiscal year 2005 as compared to the prior year resulted primarily from an

increase of approximately $13 .6 million related to personnel compensation, $12 .7 million for third-party contractor compensation and consulting fees, and $2 .4

million in travel costs . Increased compensation cost was primarily

30

Table of Content sdue to an increase in professional services and customer support staff during the year . Increased third-party contractor and consulting fees were also directlyrelated to increased service revenues .

The increase in absolute dollars of cost of service and maintenance revenue in fiscal year 2004 as compared to fiscal year 2003 resulted primarily from anincrease of approximately $14 .8 million related to personnel compensation, $9 .2 million for third-party contractor compensation and consulting fees, and $3 .8million in travel costs .

We expect service and maintenance revenue to be approximately 45% to 55% of total revenue in fiscal year 2006 . We expect the cost of service andmaintenance revenue to increase in absolute dollars and in line with increasing service and maintenance revenue . Beginning in the first quarter of fiscal year2006, our cost of service and maintenance will include significant share-based compensation expense calculated using the fair value method as required bySFAS 123(R), however, we cannot quantify the amount of such increase at this time .

Research and Development Expenses

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

Year Ended November 30, % Chang e

Year 2004 Year 20032005 2004 2003 to 2005 to 2004

(in thousands, except percentages)

Research and development expenses $73,136 $61,100 $64,588 20% (5)%As a percentage of total revenue 16% 16% 24%

The increase in fiscal year 2005 compared to fiscal year 2004 was primarily due to a $9 .5 million increase in personnel compensation as a result ofheadcount increases both from our acquisitions and our establishment of a new research and development center in India . The remainder of the increase inresearch and development expenses included increased travel expenses, depreciation of equipment and software and various license fees . Our fiscal year 2005financial results include incremental costs attributable to former Staffware operations ; whereas, our fiscal year 2004 financial results only include such costs fromJune 2004 .

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 .3million reduction of facility cost expenses, partially offset by a $2 .8 million increase in personnel compensation . The reduction in third party contractor fees waslargely the result of renegotiated agreements with various third party contractors . The purchase of our corporate headquarters in June 2003 also contributed to thereduction of facility expenses in fiscal year 2004 . Personnel compensation increased in fiscal year 2004 due to an increase in headcount primarily as a result ofthe Staffware acquisition, and an increase in variable incentive compensation.

We believe that continued investment in research and development is critical to attaining our strategic objectives and, as a result, we expect that spendingon research and development will increase in absolute dollars in fiscal year 2006 . Beginning in the first quarter of fiscal year 2006, our research and developmentexpenses will include significant share-based compensation expense calculated using the fair value method as required by SFAS 123(R), however, we cannotquantify the amount of such increase at this time .

Table of Content sSales 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 .


Year 2004 Year 20032005 2004 2003 to 2005 to 2004


Sales and marketing expenses $140,370 $123,486 $110,230 14% 12%As a percentage of total revenue 32% 32% 42%

The increase in fiscal year 2005 as compared to fiscal year 2004 was primarily due to a $9 .5 million increase in personnel compensation, a $2 .0 millionincrease in travel expenses, a $3 .6 million increase in facility expenses, partially offset by a $2 .1 million reduction in commission expenses and a $1 .7 milliondecrease in sales referral fees . The increase in personnel compensation was due to an increase in headcount. The lower sales commission resulted from a lowereffective rate on commissionable revenue and lower license revenue . Our fiscal year 2005 financial results include incremental costs attributable to formerStaffware operations ; whereas, our fiscal year 2004 financial results only include such costs from June 2004.

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 millionincrease 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 a $1 .0million reduction of facility expenses . The increase in personnel compensation was due to an increase in headcount, most significantly in Europe, primarily as aresult of the Staffware acquisition . The higher sales commission was a result of higher conunissionable revenue . The reduction in marketing program costs wasdue to more specific and targeted advertising efforts . The reduction in facility expenses was attributable to the purchase of our corporate headquarters in June2003 .

We intend to selectively increase staff in our direct sales organization and to increase our marketing efforts in the coming year and, accordingly, expectthat sales and marketing expenditures will increase in absolute dollars in fiscal year 2006 . Beginning in the first quarter of fiscal year 2006, our sales andmarketing expenses will include significant share-based compensation expense calculated using the fair value method as required by SFAS 123(R), however, wecannot quantify the amount of such increase at this time .

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 .


Year 2004 Year 20032005 2004 2003 to 2005 to 2004

(in thousands , except percentages)General and administrative expenses $37,320 $29,048 $20,334 28% 43%As a percentage of total revenue 8% 7% 8 %

The increase in fiscal year 2005 as compared to fiscal year 2004 was primarily due to a $1 .8 million increase in personnel compensation and an $8 .9million increase in consulting and outside services, offset by reductions in other administrative costs . Increased headcount contributed to total higher personnelcosts . Consulting and outside services increased substantially, due to our continuous effort to comply with the requirements of the Sarbanes-Oxley Act("Sarbanes-Oxley"), and increased legal, tax consulting and other professional fees . Our fiscal year 2005 financial results include the incremental costsattributable to former Staffware operations; whereas, our fiscal year 2004 financial results only include such costs from June 2004 .

32

Table of ContentsThe 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 inother administrative costs . Increased headcount together with an increase in variable incentive compensation contributed to total higher personnel costs .Consulting and outside services increased due to our initiatives to comply with Sarbanes-Oxley . The reduction in facility expenses was attributable to thepurchase of our corporate headquarters in June 2003 .

We will continue to invest in improving our corporate infrastructure to enhance effective management and internal controls and therefore expect thatgeneral and administrative spending will increase in absolute dollars in fiscal year 2006 . Beginning in the first quarter of fiscal year 2006, our general andadministrative expenses will include significant share-based compensation expense calculated using the fair value method as required by SFAS 123(R),however, we cannot quantify the amount of such increase at this time .

Stock-Based Compensatio n

We accounted for employee stock-based compensation using the intrinsic value method prescribed by APB 25 as discussed in Note 2 to our ConsolidatedFinancial Statements . Stock-based compensation expense principally relates to employee stock options assumed in acquisitions and stock options granted toconsultants . Stock-based compensation expense related to stock options granted to consultants is recognized as earned using the multiple option method and isrecorded by expense category. At each reporting date, we re-measure consultant stock options using the Black-Scholes option-pricing model . As a result,stock-based compensation expense will fluctuate .

The stock-based compensation expenses have been incorporated into the respective cost or expense lines in the Consolidated Income Statement, and arenot separately shown on the Consolidated Income Statement because such amounts were insignificant in fiscal year 2005 and 2004 . The following tablesummarizes the expenses :


Year 2004 Year 20032005 2004 2003 to 2005 to 2004

(in thousands , except percentages)Stock-based compensation expenses :In cost of revenue $ 14 $ 34 $ 201In operating expenses 115 209 862

Total stock-based compensa tion expenses $129 $ 243 $1,063 (47)% (77)%

As a percentage of total revenue - % - % - %

The decrease in stock-based compensation was mainly the result of continuous amortization of unearned stock-based compensation cost brought forwardfrom prior years, with minimal additions .

As prescribed by SFAS 123(R) issued in December 2004, we will be required to recognize the compensation costs relating to share-based paymenttransactions in our financial statements, using the fair value method, starting from our first fiscal quarter of 2006 . We expect the adoption of SFAS 123(R) willincrease our share-based compensation expense significantly, however we cannot quantify the amount of such increase at this time .

Acquired In-Process Research and Development

Year Ended November 30 ,

2005 2004 2003

(in thousands, except percentages)Acquired in-process research and development expenses $ - $2,200 $ -As a percentage of total revenue - % 1 % - %

% Change

Year 2004 Year 2003to 2005 to 2004

(100)% N/A

33

Table of Content sIn fiscal year 2004, we estimated that $2.2 million of the purchase price of Staffware 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 uponconsummation 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 w econsidered the stage of completion, complexity of work to date, difficulty of completing the remaining development, costs already incurred and the expected costto complete the project. As of November 30, 2005, we had substantially completed the Staffware projects that were in process at the date of the acquisition.

Restructuring Charge


Year 2004 Year 20032005 2004 2003 to 2005 to 2004


Restructuring charge $3,905 $2,186 $1,100 79% 99%As a percentage of total revenue 1% 1 % - %

During fiscal year 2005, we initiated a restructuring plan designed to re-align our resources and cost structure, and accordingly recognized a restructuringcharge of approximately $3 .9 million for the resulting workforce reduction . The restructuring plan eliminated 49 employees, across all functions and primarily inour European operations . As of November 30, 2005, all such employees have been terminated and of the $3 .9 million restructuring charge, $3 .2 million was paid,and the remaining $0 .7 million accrual is expected to be utilized in fiscal year 2006 .

During fiscal year 2004, we recorded $2 .2 million in restructuring charges related to properties vacated in connection with facilities consolidation . Theadditional facilities charges resulted from revisions to our estimates of future sublease income due to further deterioration of real estate market conditions . Theestimated facility costs were based on our contractual obligations, net of estimated sublease income, based on current comparable rates for leases in theirrespective markets . Should facilities rental rates continue to decrease in these markets or should it take longer than expected to find a suitable tenant to subleasethese facilities, the actual loss could exceed this estimate by up to $2 .8 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 align our cost structurewith changing market conditions. This reduction of approximately 44 employees was comprised of 60% sales and marketing staff, 5% general and administrativestaff, and 35% research and development staff . All severance actions were completed by August 31, 2003 .

Also see Note 8 "Accrued Restructuring and Integration Costs" to our Consolidated Financial Statements .

Amortization ofAcquired Intangible Assets

Int angible assets acquired through corporate acquisitions are comp ri sed of the estimated value of developed technologies , patents, trademarks, establishedcustomer bases, non-compete agreements , as well as maintenance and OEM customer royalty agreements . Amo rt ization of developed technologies is recordedas a cost of revenue, and amortiza ti on of other acquired intangibles is included in operating expenses .


Year 2004 Year 20032005 2004 2003 to 2005 to 2004

(in thousands, except percentages )Amortization of acquired intangible assets:In cost of revenue $ 5,958 $ 6,702 $4,767In operating expenses 8,912 5,253 1,997

Total amortization expenses $14,870 $11,955 $6,764 24% 77%

As a percentage of total revenue 3% 3% 3%

34

Table of Content sThe increase in amortization expense in fiscal year 2005 as compared to fiscal year 2004 was primarily due to a full year of amortization related to

intangible assets acquired from Staffware, and additional amortization related to intangible assets acquired from ObjectStar in second quarter of fiscal year 2005 .The increase in amortization expense in fiscal year 2004 as compared to fiscal year 2003 was primarily due to the amortization of acquired intangible assets fromour acquisitions of Staffware and General Interface Corp . ("General Interface") in the second half of fiscal ye ar 2004 .

We expect the amortization of acquired intangible assets to be approximately $14 .8 million for fiscal year 2006, provided that there are no newacquisitions .

Interest Income


Year 2004 Year 20032005 2004 2003 to 2005 to 2004

(in thousands, except percentages )

Interest income $13,318 $8,436 $12,536 58% (33)%As a percentage of total revenue 3% 2% 5%

The increase in interest income in fiscal year 2005 compared to fiscal year 2004 was primarily due to the effect of rising interest rates on our investments .

The decrease in interest income in fiscal year 2004 compared to fiscal year 2003 was primarily due to the decline in interest rates on our investmentscombined with a decrease in our investment asset base as a result of our repurchase and retirement of $115 .0 million of our common stock from Reuters, as wellas the net cash outlay of $115 .0 million for the Staffware and General Interface acquisitions .

Interest Expens e


Interest expens e

As a percentage of total revenue


2005 2004 2003

$2,711 $2,771 $1,2051% 1% - %

% Change

Year 2004 Year 2003to 2005 to 2004

(2)% 130%

Interest expense is related to the mortgage note payable for the purchase of our corporate headquarters in June 2003 . We recorded a $54 .0 millionmortgage note payable to a financial institution collateralized by the commercial real property acquired . The balance of the mortgage note payable as ofNovember 30, 2005 was $50 .1 million . The mortgage note payable carries a fixed annual interest rate of 5 .09% and a 20-year amortization . The principalbalance that will be remaining at the end of the 10-year term of $33 .9 million will be due as a final balloon payment on July 1, 2013 .

Interest expense declined slightly for fiscal year 2005 compared to fiscal year 2004 due to principal amortization .

Interest expense increased for fiscal year 2004 compared to fiscal year 2003 due to the fact that the mortgage note was entered into in June 2003, sointerest expense was incurred only for part of fiscal year 2003, as compared to the entire year for fiscal year 2004 .

35

Table of ContentsOther Income (Expenses), net

Other income (expenses ), net, includes realized gains and losses on investments, foreign exchange gain (loss) and other miscellaneous income and expenseitems .

(in thousands , except percentages)Other income (expenses):Foreign exchange gain (loss )Realized gain (loss) on short-term investmentsRealized gain (loss) on long-term investmentsOther income (expense), net

Total other income (expenses), net

As a percentage of total revenue


2005 2004

$(1,445) $(2,326)(275) (416)- 14120 28

$(1,600) $(2,700)

- % (1)%

% Change

Year 2004 Year 20032003 to 2005 to 2004

$ 73 82,924

84(70)

$3,676 41% (173)%

1%

Foreign exchange loss in fiscal year 2005 and 2004 was primarily attributable to the volatility of the U .S . dollar against the Euro and the British pound .Realized gain (loss) on short-term investments represents gains or losses realized when such short-term investments are sold and when other-than-temporaryimpairment on individual securities is recorded . The difference between the realized gain in fiscal year 2003 compared to the realized loss in fiscal year 2004 wasprimarily due to a rising interest rate environment in 2004 compared to 2003 .

Income Taxes


Provision for (benefit from) income taxEffective tax rate


2005 2004 2003

$(5,474) $28,795 $6,043(8.2)% 39.1% 34.6%

% Change

Year 2004 Year 2003to 2005 to 2004

(119)% 377%

Our effective tax rate was (8 .2)%, 39 .1 % and 34.6% for the fiscal years ended November 30, 2005, 2004 and 2003, respectively . For fiscal year 2005, thedecrease in the effective tax rate is primarily due to the tax benefit from the partial release of the valuation allowance .

We make certain estimates and judgments in determining income tax expense for financial statement purposes . These estimates and judgments occur in thecalculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statementpurposes .

As part of the process of preparing our Consolidated Financial Statements, we are required to estimate our income taxes in each of the jurisdictions inwhich we operate . This process involves us estimating our current tax exposure under the most recent tax laws and assessing temporary differences resultingfrom differing treatment of items for tax and accounting purposes . These differences result in deferred tax assets and liabilities, which are included in ourConsolidated Balance Sheet .

We assess the likelihood that we will be able to recover our deferred tax assets . We consider all available evidence, both positive and negative, includinghistorical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies inassessing the need for the valuation allowance . If recovery is not likely, we increase our provision for taxes by recording a valuation allowance against thedeferred tax assets that we estimate will not ultimately be recoverable . The available positive evidence at November 30, 2005 included three years of historicaloperating profits and a projection of future income limited to three years which coincides with the period over which we recorded historical operating

36

EXHIBIT B

Case 4 :05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 1 of 3 4

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IN THE UNITED STATES DISTRICT COUR T

FOR THE NORTHERN DISTRICT OF CALIFORNI A

In re APPLIED SIGNAL TECHNOLOGY, Master File No. C 05-1027 SBA

INC. SECURITIES LITIGATION CLASS ACTION

ORDER

[Docket Nos . 25, 35, 36]

This Document Relates To: All Actions .

This matter comes before the Court on the Motion to Dismiss Plaintiffs Consolidated Amended

Class Action Complaint (the "Consolidated Amended Complaint") [Docket No . 35] filed by Defendants

Applied Signal Technology, Inc ., Gary Yancey, and James Doyle (collectively "Defendants") and

Plaintiffs Motion for Class Certification [Docket No . 25]. Having read and considered the papers

presented by the parties, the Court finds this matter appropriate for disposition without a hearing . The

Court hereby GRANTS Defendants' Motion to Dismiss [Docket No . 35] and DISMISSES Plaintiffs

Consolidated Amended Class Action Complaint WITH PREJUDICE . Accordingly, the Court DENIES

Plaintiffs Motion for Class Certification [Docket No . 25] AS MOOT .

BACKGROUND

A. Background Regarding the Partie s

1 . Applied Signal Technology, Inc.

Defendant Applied Signal Technology, Inc . ("Applied Signal" or the "Company") is a California

corporation and a publicly traded company with over 11 million shares of stock outstanding . CAC' at

¶ 15. The Company's financial year is not concurrent with the calendar year . Instead, it ends on the las t

`The Consolidated Amended Complaint is referred to herein as "CAC ."

Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 2 of 34

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day of October of each calendar year and commences on the first day of November for that calendar

year . See Harris-Sutton Decl. at Ex. H (FY04 Form 10-K) . 2

Applied Signal's corporate headquarters are located in Sunnyvale , California . CAC at ¶¶ 7, 23-

24; Harris-Sutton Decl . at Ex. H. The Company also maintains engineering offices in Annapolis

Junction, Maryland; Salt Lake City, Utah; Herndon, Virginia ; and Hillsboro, Oregon. Harris-Sutton

Decl . at Ex . H. As of January 24, 2004, the Company had 425 employees . CAC at ¶¶ 27, 38(a) . This

number increased to 450 in February 2004, and to 480 employees in May 2004 . Id. As of December

17, 2004, the Company had a total of 498 employees . Harris-Sutton Decl . at Ex. H . Of these 498

employees, 290 employees worked within the Company's engineering organizations . Id.

Applied Signal is in the business of supplying various United States government agencies with

customized communications signal processing systems, which it designs, develops, and installs . CAC

at ¶ 27 . Since 1984, the United States government and various governmental agencies have accounted

for almost all of the Company's revenues . Id. Although the government agencies are the Company's

primary customer, purchases occur in two ways : (1) contracts directly with the government, and (2)

subcontracts to prime contractors . See Harris-Sutton Decl . at Ex . H. Within the Company's primary

customer agencies, the Company has contracts with approximately twenty different offices, each with

separate budgets and contracting authority . Id.

In the past two fiscal years, just under three quarters of the Company's contracts were "cos t

reimbursement" contracts , including contracts for the design , installation, and/or servicing of customized

products . CAC at ¶ 25. Under these contracts, the Company is reimbursed for direct and indirect costs

and paid a negotiated profit . Id. However, the Company is not entitled to payment until after its

employees provide the services delineated in the contract . Id. Further , most of the Company' s contracts

contain a provision that allows the Company ' s customers to force Applied Signal to stop work on all o r

2For example, for fiscal year 2004, the first quarter consisted of the months of November 2003,December 2003, and January 2004 ; the second quarter consisted of the months of February 2004, March2004, and April 2004 ; the third quarter consisted of the months of May 2004, June 2004, and July 2004 ;and the fourth quarter consisted of the months of August 2004, September 2004, and October 2004 .

2


any part of a contract at any time through what is referred to as a "stop-work order " ("SWO") . Id.

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The federal regulations governing stop-work orders further describe the applicable process a s

(a) The Contracting Officer may, at any time, by written order to theContractor, require the Contractor to stop all, or any part, of the workcalled for by this contract for a period of [up to]' 90 days after the orderis delivered to the Contractor, and for any further period to which theparties may agree . The order shall be specifically identified as astop-work order issued under this clause . Upon receipt of the order, theContractor shall immediately comply with its terms and take allreasonable steps to minimize the incurrence of costs allocable to thework covered by the order during the period of work stoppage . Withina period of 90 days after a stop-work order is delivered to theContractor, or within any extension of that period to which the partiesshall have agreed, the Contracting Officer shall either -

(1) Cancel the stop-work order ; or

(2) Terminate the work covered by the order as provided inthe Default, or the Termination for Convenience of theGovernment, clause of this contract.

(b) If a stop-work order issued under this clause is canceled or the periodof the order or any extension thereof expires, the Contractor shallresume work . The Contracting Officer shall make an equitableadjustment in the delivery schedule or contract price, or both, and thecontract shall be modified, in writing, accordingly, if -

(1) The stop-work order results in an increase in the timerequired for, or in the Contractor's cost properlyallocable to, the performance of any part of thiscontract ; and

(2) The Contractor asserts its right to the adjustment within30 days after the end of the period of work stoppage ;provided, that, if the Contracting Officer decides thefacts justify the action, the Contracting Officer mayreceive and act upon a proposal submitted at any timebefore final payment under this contract .

(c) If a stop-work order is not canceled and the work covered by the orderis terminated for the convenience of the Government, the ContractingOfficer shall allow reasonable costs resulting from the stop-work orderin arriving at the termination settlement .

'Revisions to the regulations provide that the 90-day period may be reduced to less than 90 days .See 48 C.F .R. 52 .242-15 .

3

Case 4:05-cv-01 027-SBA Document 61 Filed 02/08/2006 Page 4 of 3 4

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(d) If a stop-work order is not canceled and the work covered by the orderis terminated for default, the Contracting Officer shall allow, byequitable adjustment or otherwise, reasonable costs resulting from thestop-work order.

48 C.F.R. 52 .242-15. Thus, when a SWO is issued, it is possible, but not necessarily definite , that future

revenues may be affected . Id. ; CAC at ¶ 26 .

As such, the Company does not recognize revenue on its cost-reimbursement contracts unti l

costs - including labor, materials, and other direct costs and estimated direct costs - are incurred . CAC

at ¶ 26 . The Company refers to future revenues relating to uncompleted portions of existing contracts

as its "backlog ." Id. The Company's backlog is discussed in Company press releases, conference calls,

and formal Securities Exchange Commission ("SEC") filings . Id. However, in each of the Company's

public filings, with respect to future revenues, and other contingent events, the investing public is

expressly warned that any statements regarding future events are "not guarantees of future performance

and are subject to certain risks ." See Harris-Sutton Decl . at Ex . A (FY03 Form 10-K) . For example,

the Form 10-K for Fiscal Year 2003 states the following :

This Annual Report on Form 10-K contains forward-looking statements madepursuant to the provisions of Section 21E of the Securities Exchange Act of1934. These forward-looking statements are based on management's currentexpectations and beliefs, including estimates and projections about ourindustry. Forward-looking statements may be identified by the use of termssuch as "anticipates," "expects," "intends," "plans," "seeks," "estimates,""believes," and similar expressions, although some forward-looking statementsare expressed differently . Statements concerning financial position, businessstrategy and plans or objectives for future operations are forward-lookingstatements . These statements are not guarantees of future performance andare subject to certain risks, uncertainties, and assumptions that aredifficult to predict and may cause actual results to differ materially frommanagement 's current expectations . Such risks and uncertainties includethose set forth herein under "Summary of Business Considerations and CertainFactors that May Affect Future Operating Results and/or Stock Price" and"Management's Discussion and Analysis of Financial Condition and Resultsof Operations ." The forward-looking statements in this report speak only as ofthe time they are made and do not necessarily reflect management's outlook atany other point in time . We undertake no obligation to update publicly anyforward-looking statements , whether as a result of new information, futureevents, or for any other reason . However, readers should carefully reviewthe risk factors set forth in other reports or documents we file from timeto time with the Securities and Exchange Commission (SEC) after the date ofthe Annual Report . These SEC filings, as well as our latest annual report, can

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be obtained through our website at www .appsig .com. In addition, hard copiescan be obtained free of charge through our investor relations department .

Id. (emphasis added) .

Further, the Company provides the following explanation regarding its backlog to the investin g

public :

Our backlog . . . consists of anticipated revenues from the uncompletedportions of existing contracts [ .] . . . Anticipated revenues included in backlogmay be realized over a multi -year period . We include a contract in backlogwhen the contract is signed by us and by our customer . We believe the backlogfigures are firm, subject only to the cancellation and modification provisionscontained in our contracts . (See Item 7 : "Management's Discussion andAnalysis of Financial Condition and Results of Operations-Backlog .") Becauseof possible future changes in delivery schedules and cancellations oforders, backlog at any particular date is not necessarily representative ofactual sales to be expected for any succeeding period , and actual sales forthe year may not meet or exceed the backlog represented . We mayexperience significant contract cancellations that were previously bookedand included in backlog .

Id. (emphasis added) .

2 . The Individual Defendant s

At all times relevant to this action, defendant Gary Yancey ("Yancey") was the Chairman,

President, and Chief Executive Officer ("CEO") of Applied Signal . CAC at ¶ 8 . As the CEO, Yancey

signed and certified all SEC quarterly and annual reports . Id. Additionally, he owned shares of the

Company's stock ; although, during the period between January 3, 2005 and January 18, 2005, he sold

over forty percent of his holdings . Id. Also during this period of time, defendant James Doyle

("Doyle") was the Company's Chief Financial Officer ("CFO") and Vice President of Finance . Id. at

¶ 9. As the CFO, Doyle participated in quarterly earnings report conference calls for the quarters ending

in July and October 2004 and January and April 2005 . Id. Doyle also signed and certified all SEC

quarterly and annual reports . Id.

3 . Plaintiffs

Lead Plaintiff Frank Whiting ("Plaintiff'), is a common stock purchaser who purchased share s

of Applied Signal during the relevant time period, August 24, 2004 and February 22, 2005 (the "Clas s

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Period") . CAC at ¶¶ 6, 14 . The other members of the proposed class are persons or entities - other than

the Company, its officers, directors, employees, affiliates, legal representatives, heirs, predecessors,

successors and assigns, and any entity in which the Company has a controlling interest or of which the

Company is a parent or subsidiary - who purchased Applied Signal common stock during the Class

Period . Id. at ¶ 14 .

B. Background Regarding the Confidential Witnesses

The allegations contained in the Consolidated Amended Complaint are based, in part, on certai n

information obtained from the following Confidential Witnesses :

(a) Confidential Witness No . 1 . Confidential Witness No. 1 ("CW1 ") was employed as asoftware engineer during the beginning of the Class Period up until November, 2004 .Id. at ¶ 22(a) . He worked in Applied Signal ' s Annapolis Junction, Mary land Office . Id.His duties included system and process design, . implementation, testing, life cycledocumentation, design and code review, team tasking , and scheduling . Id.

(b) Confidential Witness No . 2 . Confidential Witness No. 2 ("CW2 ") was employed as asoftware engineer in Applied Signal's Maryland office until some months before thebeginning of the Class Period . Id. at ¶ 22(b) .

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(c) Confidential Witness No . 3 . Confidential Witness No. 3 ("CW3") was employed as asoftware engineer at Applied Signal's Utah office from well before the Class Period untilJanuary 2005 . Id. at ¶ 22(c) . CW3's duties included the design and implementation ofsoftware .

(d) Confidential Witness No . 4 . Confidential Witness No. 4 ("CW4") was employed as atechnical editor at Applied Signal's Sunnyvale office from before the beginning of theClass Period until November 2004 . Id. at ¶ 22(d) . He was responsible for editing andproofreading technical manuals, proposals, presentations, brochures, newsletters, andother technical and marketing material . Id. He was also responsible for creatingprocesses and flowcharts for the Finance Department in accordance with Sarbanes-Oxleyrequirements . Id.

C. The Factual Allegations

This action is premised on Plaintiffs theory that Applied Signal and two of its individua l

officers, Yancey and Doyle, (collectively, "Defendants"), knowingly issued a series of false and

misleading statements regarding Applied Signal in order to artificially inflate Applied Signal's stock

price throughout the Class Period. In particular, the Consolidated Amended Complaint is premised on

certain representations Defendants made regarding the Company's "backlog" and certain SWOs tha t

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were purportedly received by the Company during the relevant period .' The Consolidated Amende d

Complaint is also premised on certain statements made by the Company concerning the hiring o f

personnel . The pertinent facts are set forth below .

1 . The Third Quarter of Fiscal Year 200 4

Applied Signal's third quarter for fiscal year 2004 ("FY04") commenced on May 1, 2004 .

During that quarter, at some point in June 2004, Applied Signal received a stop-work order ("SWO V),

which instructed the Company to stop work on a portion of the Company's largest single contract . CAC

at ¶ 29(a) . In accordance with the instructions provided by the customer, the Company prepared a

proposal that detailed the tasks that were stopped and estimated the reduction in contract costs . Id.

Also in June 2004 or possibly in May 2004, according to CW1, the Wireless Communication s

System Division of Applied Signal received another stop-work order ("SWO2") on a project for the

United States military that was referred to as "Cowbird ." Id. at ¶ 30 . CW 1 knew about SWO2 because

it required employees at the Company's Maryland facility, where he worked, to stop performing services

for the government agency related to the contract. Id. at ¶¶ 22(a), 30(b) . According to CW2, who

worked at Applied Signal up until a few months before August 2004, the contract implicated by SWO2

was worth about $8 million . Id. at ¶¶ 22(b), 30(b) .

On August 24, 2004, Applied Signal issued a press release and hosted a conference call ("Augus t

Conference Call") to discuss financial results for the third qua rter ofFY04. CAC at ¶ 28. Yancey and

Doyle represented the Company during the August Conference Call . Id. In the course of that call,

Doyle reported that the Company's backlog was approximately $111 million .' Id.

Additionally, in the August 24, 2004 press release ("August 2004 Press Release" ), Yancey wa s

quoted as saying that he was "pleased" that Applied Signal had "met the challenge" of meetin g

"aggressive hiring requirements ." Id. at ¶ 39 . During the August Conference Call, he also stated tha t

4Specifically, the following four SWOs are relevant to the instant discussion : (1) a June 2004SWO ("SWOT"), (2) a May or June 2004 SWO ("SWO2"), (3) an August or September 2004 SWO("SWO3"), and (4) a December 2004 SWO ("SWO4"). CAC at ¶¶ 29, 30, 35 .

'Defendants did not discuss SWO1 or SWO2 during the call . CAC at ¶ 29 .

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the Company had "been able to stay up with a fairly aggressive growth requirement, and in particular,

hiring of staff and staff that we can get cleared . . . ." Id. at ¶ 39 . In response to an inquiry from an

analyst regarding the amount of engineers that had been added during the third quarter, Doyle stated that

they had hired about 100 people "year-to-date" and approximately 30 people during the third quarter .

Id. Yancey then stated that the number for the quarter might be lower - possibly as low as twenty - but

that analysts could "go ahead and use 30 . . . and kind of assume we've been close to linear in our

increase ." Id.

On September 9, 2004, Defendants filed a Form 10-Q ("Third QuarterForm 10-Q") with th e

SEC, which reported the $ 111 million backlog amount that was disclosed during the August 2004

Conference Call . Id. at ¶ 29(a) . The Third Quarter Form 10-Q also reported that the Company had

received SWO1 and that, pursuant to SWO 1, the Company was instructed to stop work on a po rtion of

its largest single contract . Id. Additionally, the report stated that "new orders and backlog [were]

expected to be reduced by approximately $11 to $13 million " after the completion of negotiations

relating to SWO1 and that the Company "anticipate [d] the completion of these negotiations during the

first or second quarter of fiscal 2005.i6 Id.

2 . The Fourth Quarter of Fiscal Year 2004 and Disclosures Concerning the ThirdQuarter of Fiscal Year 2004

According to CW3, who was employed as a software engineer at Applied Signal 's Utah office

at the time, the Company also received another stop -work order ("SWO3") in August or September

2004 . Id. at ¶¶ 22(c), 35(b) . SWO3 was purportedly related to a contract with one of the Company's

largest customers that was wo rth more than $20 million . Id. at ¶¶ 35(b). CW3 was aware of SWO3

because he had been working on the project , which was known as "Excelsior ." Id. at ¶ 35(b) . SWO3

affected the Multichannel Systems Division ("MSD") at the Utah facility, as well as the MSD group in

the Company 's Sunnyvale, Californ ia facility . Id. At the Sunnyvale facility, approximately 50 to 75

workers were involved in the project . Id. CW4, who was employed as a technical editor at Applie d

'The Third Quarter Form 10-Q did not mention SWO2 . CAC at ¶ 30. In fact , to date, SWO2 hasnot been mentioned in any Company public filings . Id. at ¶ 32 .

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Signal 's Sunnyvale office during August and September 2004, was aware of SWO3 . Id. at ¶¶ 22(d),

35(b). According to CW3, after the Company received SWO3, work on "Excelsior" stopped for

approximately one week . Id. at ¶ 43 . The MSD project then resumed working on the project for the

remainder of the calendar year. Id. The project was abandoned in January 2005 , leaving the Sunnyvale

office a "ghost town ." Id.

On September 13, 2004, following the issuance of the Third Quarter Form 10-Q, a securitie s

I analyst covering Applied Signal's stock informed investors that he was changing the rating of th e

Company's stock from "buy" to "neutral ." Id. at ¶ 31 . The price of Applied Signal's stock dropped fro m

$37 .64, when the market opened , to $31 .78 at the close of market on September 15, 2004 . Id.

3 . The First Quarter of Fiscal Year 2005 and Disclosures Regarding Fiscal Year 2004

According to CW3, the software engineer who worked in the Company's Utah office during thi s

time, the Company also received a stop-work order in December 2004 ("SWO4") . Id. at ¶¶ 22(c), 35(c) .

SW04 involved a gove rnment agency that had cancelled other large contracts with Applied Signal in

the past . Id. at ¶ 35(c) .

On December 21, 2004, Applied Signal issued a press release (the December 2004 Pres s

Release") and hosted a conference call ("December 2004 Conference Call") to discuss financial results

for the fourth quarter of FY04 . CAC at ¶ 33 . Yancey and Doyle represented the Company during the

December Conference Call and reported that the backlog for the fourth quarter was $143 million . Id.

The December 2004 Press Release reported that the Company earned 21 cents per share during the

fourth quarter of FY04, which was below the analysts' consensus estimate of 29 cents per share . Id. at

¶ 42 . Defendants did not mention SWO2, SWO3 or SWO4 during the call or in the press release . Id.

at ¶ 35(a)-(c) .

Additionally, Doyle reported, during the December 2004 Conference Call, that the Company ha d

I added a "net" of 20 employees during the fourth quarter of FY04 . Id. at ¶ 40(a) . Doyle then stated that

the Company had "about " 500 employees . Id. at ¶ 40 (a) . According to the Form 10-K for FY04, th e

exact number was 498 employees . Id.

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Case 4 :05-cv-0 1 027-S BA Document 61 Filed 02/08/2006 Page 10 of 34

The December 2004 Press Release also disclosed that revenue had only increased by 3% sinc e

the previous quarter . Id. During the December Conference Call, an analyst, Jay Meier ("Meier"), asked

whether anything unusual had occurred during the fourth qua rter since the Company had not

experienced its usual increase in revenues . Id. at ¶ 42. Doyle and Yancey responded that Meier was

reading too much into the numbers and that nothing unusual had occurred . Id. After the December

2004 Conference Call, the price of the Company's stock declined from $37 .22 on December 21, 2004

to $35.74 at the market 's close on December 22, 2004 . Id.

Beginning on January 3, 2005, and continuing through January 18, 2005, during an open tradin g

I window, Yancey sold 141,400 shares of Company stock, which represented 43% of his total stock

holdings, at prices ranging from $31 .40 to $34 per share . Id. at ¶ 48 .

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On January 14, 2005 , Defendants filed a its Form 10-K for FY04. CAC at ¶ 34 . The Form 10-K

indicated that the backlog at the end of FY04 was $143 million but that the $143 million could b e

reduced by $ 11 million to $ 13 million in future quarters once negotiations relating to SWO1 concluded.

See Harris-Sutton Decl. at Ex . H .

On February 22, 2005, the Company issued a press release (the "February 2005 Press Release" )

and hosted a conference call (the "February 2005 Conference Call") conce rn ing the Company's financial

results for the first quarter of-FY05, which ended on January 31, 2005 . CAC at ¶ 44 . During the

February 2005 Conference Call, the Company reported that revenue declined almost 25 % from the

preceding qua rter , with net income and earnings per share declining as well . Id. To explain these

financial results, Yancey stated :

[W]e are a bit behind on execution on our contracts . Part of this is for a bit ofhealthy reason. We've seen higher-than-anticipated proposal activity in the firstquarter, which has diverted some of our labor resources to proposal activity .The other phenomena that we're experiencing is, as we become more anintegrating contractor on some of our programs, as we've stated before we areevolving to, we find that invoicing from our subcontractors can have someimpact on the revenue . And we saw that some of the invoicing was laggingbehind a bit compared to the work that they were putting in . So we feel that wewill be back on our track of our projected revenue as we build up our own staffand as the invoicing comes about .

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See Applied Signal Form 8-K, dated February 22, 2005 at Ex . 99 .2 . '

The Company's stock price subsequently dropped from $27 .52 per share on February 22, 200 5

to $23 .24 at the close of the market on February 23, 2005 . Id. at ¶ 45 .

D. Procedural Histor y

On March 11, 2005, plaintiff Brent Berson ("Berson") filed a complaint in this district o n

behalf of himself and on behalf of all persons who purchased the securities of Applied Signal

between May 25, 2004 and February 22, 2005 (the "Berson complaint") . In the Berson complaint,

Berson alleged, inter alia, that Applied Signal and certain of its officers and directors violated

Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule I Ob-5

promulgated thereunder, and Section 20(a) of the Exchange Act, by issuing materially false and

misleading statements .

The proposed class period for the Berson complaint was May 25, 2004 through February 22 ,1 2

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2005 and the complaint was premised on the following allegedly false and misleading statements : (1)

the Company's May 25, 2004 press release concerning the Company's operating results for the second

quarter of FY04; (2) the Company's second quarter FY04 Form 10-Q ; (3) the Company's August 24,

2004 press release concerning the Company's operating results for the third quarter of FY04 ; (4) the

Company's third quarter FY04 Form 10-Q; (5) the Company's December 12, 2004 press release

concerning the Company's operating results for the fourth quarter of FY04 and year-end results for

FY04 ; and (6) the Company's FY04 Form 10-K . In the complaint, Berson alleged that the statements

were materially false and misleading because Defendants failed to disclose or indicate the following :

(1) that the Company lacked the staffing necessary to execute on current projects while bidding for new

business ; and (2) that the Company "struggled to maintain adequate levels of backlog ." The Berson

complaint further alleged that the aforementioned false and misleading statements were proven fals e

'Although this SEC filing was not provided to the Court by the parties, since the ConsolidatedAmended Complaint necessarily relies on it, the Court has taken judicial notice of it pursuant to FederalRule of Evidence 201 . See Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir . 1994) ; Steckman v . HartBrewing, Inc. 143 F.3d 1293, 1295 (9th Cir . 1998) .

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when the Company announced its operating results for the first quarter of FY05 on February 22, 2005 .

On April 19, 2005, plaintiff Shalomah Sameyah ("Sameyah") filed a complaint in this district

on behalf of himself and on behalf of all persons who purchased the securities of Applied Signal

between May 25, 2004 and February 22, 2005 (the "Sameyah complaint") . With the exception of the

name of the plaintiff, the Sameyah complaint - which was drafted by the same counsel representing

Berson - was identical to the Berson complaint .

On May 10, 2005, this Court ordered that the Berson case and the Sameyah case be deeme d

related .

On May 10, 2005, plaintiff Frank Whiting filed a Motion for Appointment of Lead Plaintiff and

Approval of Lead Plaintiffs Selection of Counsel ("Motion for Appointment of Lead Plaintiff' )

On July 1, 2005, Defendants submitted a Statement of Non-Opposition to the Motion fo r

Appointment of Lead Plaintiff . Defendants also requested that the Berson case and Sameyah case be

consolidated by order of this Court pursuant to Federal Rule of Civil Procedure 42(a) .

On July 13, 2005, the Court consolidated the Berson and Sameyah cases. Also on that date, the

Court granted the Motion for Appointment of Lead Plaintiff. Accordingly, Frank Whiting was

appointed to serve as Lead Plaintiff. Plaintiffs choice of counsel was also approved .

On August 12, 2005, the instant Consolidated Amended Complaint was filed. In the

Consolidated Amended Complaint, Plaintiff asserts that defendants Applied Signal, Yancey, and Doyle

("Defendants") made untrue statements of material fact and/or omitted statements of material fact in

violation of Section 10(b) of the Exchange Act and Rule 1 Ob-5 . Plaintiff also contends that Yancey and

Doyle directly or indirectly influenced and controlled the alleged fraudulent conduct of Applied Signal,

and, therefore, are also liable under Section 20(a) of the Exchange Act . Unlike the prior Berson and

Sameyah complaints, the proposed class period for the Consolidated Amended Complaint is August 24,

2004 through February 22, 2005 . The Consolidated Amended Complaint also differs from the prior

complaints in that it now alleges that Defendants' statements regarding the Company's backlog were

materially false and misleading because they failed to mention certain stop-work orders purportedly

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issued during May 2004 through December 2004 .

LEGAL STANDARD

A. Federal Rule of Civil Procedure 12(b)(6)

Under Federal Rule of Civil Procedure 12(b)(6), a motion to dismiss should be granted if i t

appears beyond a doubt that the plaintiff "can prove no set of facts in support of his claim which would

entitle him to relief." Conley v . Gibson, 355 U.S. 41, 45-46 (1957) . For purposes of such a motion, the

complaint is construed in a light most favorable to the plaintiff and all properly pleaded factual

allegations are taken as true . Jenkins v . McKeithen, 395 U.S . 411, 421 (1969) ; Everest and Jennings,

Inc . v. American Motorists Ins . Co., 23 F.3d 226, 228 (9th Cir . 1994). All reasonable inferences are to

be drawn in favor of the plaintiff. In re Silicon Graphics Inc . Sec. Litig., 183 F.3d 970, 983 (9th Cir .

1999) . The court does not accept as true unreasonable inferences or conclusory legal allegations cast

in the form of factual allegations . Western Mining Council v. Watt, 643 F.2d 618, 624 (9th Cir . 1981) ;

see Miranda v. Clark County, Nev., 279 F.3d 1102, 1106 (9th Cir . 2002) .

Although the court is generally confined to consideration of the allegations in the pleadings,

when the complaint incorporates documents or alleges the contents of documents, and no party

questions the authenticity of such documents, a court may also consider such documents when

evaluating the merits of a Rule 12(b)(6) motion . See In re Stac Electronics Sec. Lit., 89 F.3d 1399, 1405

(9th Cir . 1996) .

When the complaint is dismissed for failure to state a claim, "leave to amend should be granted

unless the court determines that the allegation of other facts consistent with the challenged pleading

could not possibly cure the deficiency." Schreiber Distrib . Co. v. Serv- Well Furniture Co ., 806 F .2d

1393, 1401 (9th Cir . 1986) . The Court should consider factors such as "the presence or absence of undue

delay, bad faith, dilatory motive, repeated failure to cure deficiencies by previous amendments, undue

prejudice to the opposing party and futility of the proposed amendment ." Moore v. Kayport Package

Express, 885 F.2d 531, 538 (9th Cir . 1989). Of these factors, prejudice to the opposing party is the most

important . See Jackson v . Bank of Hawaii, 902 F.2d 1385, 1387 (9th Cir . 1990) (citing Zenith Radio

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Corp. v. Hazeltine Research , Inc., 401 U.S. 321, 330-31 (1971)) . Leave to amend is properly denied

"where the amendment would be futile ." DeSoto v . Yellow Freight Sys., 957 F.2d 655, 685 (9th Cir .

1 1992) .

B. Federal Rule of Civil Procedure 9(b )

Federal Rule of Civil Procedure 9(b) provides as follows :

In all averments of fraud or mistake, the circumstances constitutingfraud or mistake shall be stated with particularity . Malice, intent,knowledge, and other condition of mind of a person may be averredgenerally .

Fed. R. Civ. P. 9(b) .

"[The Ninth Circuit] has interpreted Rule 9(b) to require that 'allegations of fraud are specific

enough to give defendants notice of the particular misconduct which is alleged to constitute the frau d

charged so that they can defend against the charge and not just deny that they have done anything

wrong ."' Neubronner v. Milken, 6 F .3d 666,671 (9th Cir . 1993) (quoting Semegen v . Weidner, 780 F .2d

727, 731 (9th Cir . 1985)) . "The pleader must state the time, place, and specific content of the false

representations as well as the identities of the parties to the misrepresentation ." Schreiber Distributing

Co. v . Serv- Well Furniture Co ., 806 F.2d 1393, 1401 (9th Cir . 1986) (citing Semegen, 780 F.2d at 731) .

C. Pleading Requirements in Securities Fraud Action s

Section 10(b) of the Exchange Act makes it unlawful "for any person . . . to use or employ, in

connection with the purchase or sale of any security . . . any manipulative or deceptive device or

contrivance in contravention of such rules and regulations as the Commission may prescribe[ .]" 1 5

U.S .C. § 78j(b) .

Rule lOb-5 , promulgated under the authority of Section 10(b), in turn, provides that "[i]t shall

be unlawful for any person . . . (a) To employ any device , scheme, or art ifice to defraud, (b) To make

any untrue statement of a material fact or to omit to state a material fact necessary in order to make th e

statements made, in light of the circumstances under which they were made, not misleading , or (c) To

engage in any act, practice , or course of business which operates or would operate as a fraud or deceit

upon any person, in connection with the purchase or sale of any security ." 17 C.F.R. § 240 .1 Ob-5 . Thus ,

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I the basic elements of a Rule lOb-5 claim are : (1) a material misrepresentation or omission of fact, (2 )

I scienter, (3) a connection with the purchase or sale of a security, (4) transaction and loss causation, an d

(5) economic loss . In re Daou Systems, Inc. 411 F.3d 1006, 1014 (9th Cir . 2005) .

In order to survive a motion to dismiss, a Section 10(b) claim must satisfy three pleadin g

standards . First, it must meet the general requirements established by Federal Rule of Civil Procedure

8(a) that complaints give a short and plain statement of the claim . Second, it must conform with the

particularity requirements of Rule 9(b) . Neubronner v. Milken, 6 F.3d 666, 671 (9th Cir . 1993) (quoting

Semegen, 780 F.2d at 731) . Third, it must satisfy the requirements of the Private Securities Litigation

Reform Act ("PSLRA") .

The PSLRA employs heightened pleading standards for claims brought under Section 10 (b) and,

similar to Rule 9(b), requires pleading with particularity for two elements in a Section 10(b) claim : (1)

falsity and (2) scienter . See Gompper v. VISX, Inc ., 298 F.3d 893, 895 (9th Cir . 2002) (citing Ronconi

v. Larkin, 253 F .3d 423, 429 (9th Cir . 2001)). "If a plaintiff fails to plead either the alleged misleading

statements or scienter with particularity, the court must dismiss the complaint ." Carol Gamble Trust 86

v. E-Rex, Inc., 84 Fed.Appx. 975, 977 (9th Cir . 2004) .

Thus, under both the PSLRA and Rule 9(b), a plaintiff must specify each statement alleged t o

have been misleading and the specific reason or reasons why such statement is misleading . See 15

U.S .C. § 78u-4(b)(1) ; Fed. R. Civ. P . 9(b) . This is accomplished by identifying either (1) inconsistent

contemporaneous statements ; or (2) inconsistent contemporaneous information (such as an internal

document) that was made by or available to the defendants . In re Splash Technology Holdings, Inc. Sec.

Litig., 2000 WL 1727377, * 13 (N.D. Cal . 1997) ; see also Nursing Home Pension Fund, Local 144 v.

Oracle Corp., 380 F.3d 1226, 1230 (9th Cir. 2004). "A plaintiff may satisfy [Rule 9(b)] through reliance

upon a presumption that the allegedly false and misleading 'group published information' complained

of is the collective action ofofficers and directors ." In re GlenFed, Inc . Sec. Litig., 60 F.3d 591, 593 (9th

Cir . 1995) . In cases where the falsities are conveyed in "group-published information," for example,

in press releases and annual report s , " it is reasonable to presume that these are the collective actions of

15

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the officers ." Id. In such a case, a plaintiff satisfies Rule 9(b) "by pleading the misrepresentations with

particularity and where possible the roles of the individual defendants in the misrepresentations ." Id. ;

see also In re Cornerstone Propane Partners, L .P. Sec. Litig., 2005 U.S. Dist . LEXIS 21469 (N .D. Cal .

2005) .

The "recent trend among the Ninth Circuit district courts is that plaintiffs must state wit h

particularity facts indicating that an individual defendant was directly involved in the preparation of

allegedly misleading statements published by an organization ." Cornerstone, 2005 U.S. Dist . LEXIS

at *21 ; see also In re ESS Tech ., Inc . Sec. Litig ., 2004 U.S. Dist . LEXIS 27203 (N .D . Cal . 2004) .

However, "where the pleading gives some basis for ascribing knowledge, participation or authorship,

and/or control of the published information to an individual defendant" the doctrine may be applied .

Cornerstone, 2005 U.S .Dist . LEXIS at *22 .

When dealing with allegations based on information and belief, and not plaintiffs persona l

knowledge, the PSLRA imposes further pleading requirements . "Allegations are deemed to be held on

information and belief, and thus subject to the particularity requirements, unless plaintiffs have personal

knowledge of the facts ." Cornerstone, 2005 U .S .Dist . LEXIS at *8 (citing In re Vantive Corp. Sec .

Litig., 283 F .3d 1079, 1085 n.3 (9th Cir . 2002)) . Any allegation that is made on information and belief,

must "state with particularity all facts on which that belief is formed ." 15 U.S .C. § 78u-4(b)(1) . "Naming

sources is unnecessary so long as the sources are described with sufficient particularity to support the

probability that a person in the position occupied by the source would possess the information alleged

and the complaint contains adequate corroborating details ." Daou, 411 F .3d at 1015 (citing Nursing

Home, 380 F.3d at 1233) . Therefore, to sufficiently plead falsity, a plaintiff must : (1) identify each

alleged misstatement, and in the case of group published information, ascribe some authorship or control

over the documents to the individual defendants ; (2) state the reasons why the statement is misleading ;

and (3) in the case of confidential source information, supply an adequate factual basis to support the

source's basis of knowledge with regard to the information provided . See 15 U.S .C. § 78u-4(b)(1) .

With respect to scienter, the PSLRA also requires that the plaintiff "state with particularity fact s

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giving rise to a strong inference that the defendant[s] acted with the required state of mind " for each

alleged act or omission . 15 U.S.C. § 78u-4 (b)(2) . "Deliberate recklessness" is the required state of mind

and will satisfy scienter if it "reflects some degree of intentional or conscious misconduct ." Nursing

Home, 380 F.3d at 1230 (citing Silicon Graphics, 183 F.3d at 977 ) . A complaint will not survive if it

just relies on generic allegations . See Silicon Graphics, 183 F .3d at 974, 985 . To assess whether a

plaintiff has sufficiently pled scienter , a court must consider "whether the total of plaintiffs allegations,

even though individually lacking, are sufficient to create a strong inference that defendants acted with

deliberate or conscious recklessness ." Nursing Home, 380 F .3d at 1230 . Additionally, a court must

consider "all reasonable inferences, whether or not favorable to the plaintiff ." Id. (citing Gompper, 29 8

F.3d at 897) .

ANALYSIS

1 . Defendants ' Request for Judicial Notice

As a preliminary matter, the Court notes that Defendants have requested that the Court take

judicial notice of the following documents, each of which is attached to the accompanying Declaratio n

of Tiffany Harris-Sutton ("Harris-Sutton Declaration") :

(1) Applied Signal's Form 10-K for FY03, filed on January 27, 2004 ;

(2) Applied Signal's Form 10-Q for the second quarter of FY04, filed June 9, 2004 ;

(3) Applied Signal's Form 10-Q for the third quarter of FY04, filed on September 9, 2004 ;

(4) Applied Signal's Form 10-K for FY04, filed on January 14, 2005 ;

(5) Applied Signal's Form 8-K, filed on August 26, 2004 ;

(6) Applied Signal's Form 8-K, filed on December 23, 2004 ;

(7) A chart listing the closing stock prices of Applied Signal during the Class Period ;

(10) A copy of 48 C.F.R. 52 .242-15 .

Pursuant to Federal Rule of Evidence Rule 201, documents that are alleged in a complaint and

are essential to plaintiffs allegations may be judicially noticed . See Branch v. Tunnell, 14 F . 3d 449, 454

(9th Cir. 1994) ; Steckman v. Hart Brewing, Inc. 143 F.3d 1293, 1295 (9th Cir . 1998) . A court may als o

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take judicial notice of "well-publicized stock prices " on a motion to dismiss . Ganino v. Citizens Utilities

Co., 228 F.3d 154, 167 n .8 (2nd Cir . 2000 ) . Additionally , a court may take judicial notice of regulations

issued by federal agencies . Citizens for a Better Env 't-Cal. v. Union Oil Co ., 861 F . Supp. 889, 897

(N.D . Cal . 1994) (citing Mark v . South Bay Beer Distributors, Inc ., 798 F .2d 1279, 1282 (9th Cir .

1986)) .

Since Plaintiff does not oppose the taking of judicial notice of any of these documents, and sinc e

judicial notice is proper, the Court hereby GRANTS Defendants' Request for Judicial Notice [Docke t

No. 36] .

II. Defendants' Motion to Dismis s

In Defendants' Motion to Dismiss, Defendants argue that Plaintiffs Consolidated Amended

Complaint must be dismissed because: (1) the PSLRA's safe harbor provision precludes liability for any

of the purportedly false or misleading statements related to the Company's backlog ; and (2) Plaintiff has

not stated, and cannot state, a cause of action under Section 10(b) of the Exchange Act or Rule IOb-5

for any of the allegedly false or misleading statements because the elements of falsity, scienter, and loss

causation are not supported by Plaintiffs allegations . Since Defendants assert that no liability can be

established under Section 10(b) and Rule lob-5, Defendants also argue that the Section 20(a) claim

against Yancey and Doyle must be dismissed .

A. The Safe Harbor Provision

The first issue that must be addressed is whether the allegedly false and misleading statement s

concerning the Company's backlog are rendered non-actionable because they are forward-looking

statements falling within the PSLRA's safe harbor provision . The PSLRA carves out a safe harbor from

liability for forward-looking statements that prove false if the statement "is identified as a

forward-looking statement and is accompanied by meaningful cautionary statements identifying

important factors that could cause actual results to differ materially from those in the forward-looking

statement ." 15 U.S.C. § 78u-5(c)(1)(A)(i) ; Harris v. Ivax Corp., 182 F.3d 799, 803 (11th Cir . 1999) . The

purpose behind this safe harbor is to encourage the disclosure of forward-looking information . See H.R.

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Conf. Rep. No. 104-369, 104th Cong . 1st Sess ., at 53 (1995) . Whether a statement qualifies for the safe

harbor is an appropriate inquiry on a motion to dismiss . So long as the safe harbor requirements are

met, liability cannot exist as a matter of law, regardless of the mind of the person making the statement .

Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. Clorox, 353 F.3d 1125, 1133 (9th

Cir . 2004) .

Forward-looking statements include statements containing a projection of revenues, income, o r

earnings per share, management's plans or objectives for future operations, or a prediction of future

economic performance . 15 U .S .C . § 78u-5(i)(1)(A)-(C) . In addition, any statement of "the assumptions

underlying or relating to" these sorts of statements fall within the meaning of a forward-looking

statement. 15 U.S .C. § 78u-5(i)(1)(D) . A present-tense statement can qualify as a forward-looking

statement as long as the truth or falsity of the statement cannot be discerned until some point in time

after the statement is made . See Harris, 182 F.3d at 805 . Statements concerning historical or current

facts are not forward-looking . See Gross v. Medaphis Corp ., 977 F. Supp . 1463, 1473 (N .D . Ga.1997) ;

In re Valujet, Inc. Sec. Litig., 984 F .Supp. 1472, 1479 (N.D. Ga. 1997) .

With respect to statements regarding backlog, only four purportedly false and misleading

statements are identified : (1) that the backlog as of the third quarter of FY04 was "[a]pproximately 11

million," made during the August 2004 Conference Call ; (2) that the backlog at the end of the fourth

quarter was about $143 million, made during the December 2004 Conference Call ; (3) that the backlog

at the end of the fourth quarter was $143 million, set forth in the December 2004 Press Release ; and (4)

that the backlog at fiscal year-end was $143 million, set forth in the FY04 Form 10-K .

The Court finds that each of these statements is a forward-looking statement that wa s

I accompanied by the appropriate cautionary language . Specifically, for both the August 2004

23 II Conference Call and the December 2004 Conference Call, Doyle stated the following :

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I'll review our financial performance, but let me begin with the obligatory safeharbor statement . Our presentation today may contain forward-lookingstatements which reflect the Company's current judgment on future events .Because these statements deal with future events, they are subject to risks anduncertainties that could cause the actual results to differ materially . In additionto the factors that may be discussed in this call, important factors which coul d

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cause actual results to differ materially are contained in the Company's recent10-Qs and 10-K.

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See Harris-Sutton Decl . at Ex. C (August 24, 2004 Form 8-K) ; see also id. at Ex. F (December 21, 200 4

Form 8-K) (stating same) .

The Company's Form 10-Q filing, issued with respect to the previous quarter, provided the

following additional cautionary language :

Forward-looking statements may be identified by the use of terms such as"anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes,"and similar expressions, although some forward-looking statements areexpressed differently . Statements concerning financial position, businessstrategy, and plans or objectives for future operations are forward-lookingstatements . These statements are not guarantees of future performance and aresubject to certain risks, uncertainties, and assumptions that are difficult topredict and may cause actual results to differ materially from management'scurrent expectations . Such risks and uncertainties include those set forth in thisdocument under "Summary of Business Considerations and Certain Factors thatMay Affect Future Operating Results and/or Stock Price ." The forward-lookingstatements in this report speak only as of the time they are made and do notnecessarily reflect management's outlook at any other point in time . Weundertake no obligation to update publicly any forward-looking statements,whether as a result of new information, future events, or for any other reason .However, readers should carefully review the risk factors set forth in otherreports or documents we file from time to time with the Securities andExchange Commission (SEC) .

See Harris-Sutton Decl. at Ex . B . 8

In the section entitled "Summary of Business Considerations and Certain Factors that Ma y

Affect Future Operating Results and/or Stock Price ," the Company also noted that Applied Signa l

"depend[s] on revenues from a few significant contracts, and any loss, cancellation, reduction, or delay

in these contracts could harm our business ." Id.

Additionally, the Form 10-Q for the third quarter of FY04, which was filed on September 9 ,

2004, specifically stated :

Stop-work orders could negatively impact our operating results and financialcondition. Almost all of our contracts contain stop-work clauses that permitthe other contracting party, at any time, by written order, to stop work on all orany part of the work called for by the contract for a period of ninety days .Within the ninety-day period, the other contracting party may cancel th e

'This same language was set forth in the FY04 Form 10-K . See id at Ex. H .

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stop-work order and resume work or terminate all or part of the work coveredby the stop-work order . During June 2004, we received a stop-work orderinstructing us to stop work on a portion of our largest single contract . Inaccordance with the instructions received from the other contracting party, weprepared a proposal that detailed the tasks that were stopped and estimated thereduction in contract costs . If all the stopped tasks are terminated, the resultcould be a significant reduction in orders and backlog in the period in which itoccurs. There can be no assurance that stop-work orders will not be receivedin future periods .

See Harris-Sutton Decl. at Ex. E (emphasis in original) .

Further, the December 2004 Press Release included the following language :

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Except for historical information contained herein, matters discussed in thisnews release may contain forward-looking statements that involve risks anduncertainties that could cause actual results to differ materially .Forward-looking statements discussed in this release include statements as tothe Company's continued growth throughout the year and into the foreseeablefuture ; the future spending by the U .S. Government on intelligence gathering ;the Company's ability to hire qualified personnel and such personnel's abilityto obtain security clearances ; the Company's plans for the future, including thesteps it may take and the programs it will emphasize ; the Company's beliefsconcerning marketplace opportunities for its products and services ; and beliefsconcerning contractual opportunities for orders . The risks and uncertaintiesassociated with these statements include whether orders will be issued byprocurers, including the U . S . Government ; the timing of any orders placed byprocurers ; whether the Company will be successful in obtaining contracts forthese orders if they are forthcoming; whether any contracts obtained by theCompany will be profitable and whether any such contracts might beterminated prior to completion ; whether the Company will be able to hireadditional qualified staff as needed ; the ability to successfully enter newmarketplaces ; the Company's ability to maintain profitability ; and other risksdetailed from time to time in the Company's SEC reports including its latestForm 10-K filed for the fiscal year ended October 31, 2003 . The Companyassumes no obligation to update the information provided in this news release .

See id. at Ex. F (December 21, 2004 Form 8-K) .

Plaintiff does not dispute that these cautionary statements were made, but attempts to dismis s

the language as mere "boilerplate " language, devoid of any meaning . In the context of this litigation,

however, Plaintiffs argument is unavailing . Indeed, in addition to all ofthe disclosures setforth above,

the Company consistently described the contingent nature of the Company's backlog figures in all of

its public filings . For example, the following statement was set fo rth in the FY03 Form 10-K and thus

preceded all of the aforementioned cautionary language :

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Our backlog . . . consists of anticipated revenues from the uncompletedportions of existing contracts[ .] . . . Anticipated revenues included in backlogmay be realized over a multi-year period . We include a contract in backlogwhen the contract is signed by us and by our customer . We believe the backlogfigures are firm, subject only to the cancellation and modification provisionscontained in our contracts . (See Item 7: "Management's Discussion andAnalysis of Financial Condition and Results of Operations-Backlog .") Becauseof possible future changes in delivery schedules and cancellations oforders, backlog at any particular date is not necessarily representative ofactual sales to be expected for any succeeding period, and actual sales forthe year may not meet or exceed the backlog represented . We mayexperience significant contract cancellations that were previously bookedand included in backlog .

See Harris - Sutton Decl . at Ex. A (FY03 Form 10-K) (emphasis added) . Given the complete and

thorough nature of the Company ' s disclosures regarding the unique structure of its business model, and

the attendant risks, Plaintiffs bare and unsupported conclusion that the Company's cautionary statements

" lacked meaning" is completely disingenuous .

Plaintiffs alternative argument that the allegedly false and misleading statements do not qualify

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for safe harbor protection because the statements were not, in fact, forward-looking is equally without

merit . Indeed, for the Court to accept Plaintiffs argument, it would have to completely ignore the fact

that Plaintiffs Consolidated Amended Complaint expressly identifies the allegedly false and misleading

statements as statements concerning the Company's backlog . See, e.g., CAC at ¶ 29 ("The amounts

reported as 'backlog' by the Defendants on August 24, 2004 . . . were materially false and misleading

because the Defendants failed to disclose that the Company had received a 'stop-work order' in June

2004") and ¶ 35 ("The amounts reported as 'backlog' by the Defendants on December 21, 2004, and

January 14, 2005, . . . were materially false and misleading") . The Court would also have to ignore the

fact that Plaintiff admits, in the Consolidated Amended Complaint, that it was widely understood that

the term "backlog" relates tofuture revenues . See, e.g., CAC at ¶ 26 . Thus, according to Plaintiffs own

allegations, which are based on Plaintiffs own information and belief, the Company's backlog is, by

definition, merely a "projection of revenue" or a "prediction of future economic performance," thus

falling squarely within the safe harbor . See 15 U.S.C . § 78u-5(i)(1)(A)-(C) . Id. at ¶ 26 .

Further, contrary to Plaintiffs current assertion, the fact that the Company used the word "firm "

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to describe its backlog figures in the FY03 Form 10-K is not sufficient to equate the Company's

"backlog" with "historical data," such as the Company's actual, recognized quarterly revenue .' Indeed,

even the passage in the FY03 Form 10-K that Plaintiff relies on makes clear that "backlog at any

particular date is not necessarily representative of actual sales to be expected for any succeeding period,

and actual sales for the year may not meet or exceed the backlog represented ." See Harris-Sutton Decl.

at Ex. A. Additionally, the Company's quarterly filings continuously reiterated the fact that the

"backlog" consisted of the uncompleted portions of existing contracts .

Finally, Plaintiffs argument that the safe harbor is inapplicable because the Company did no t

adequately inform investors with regard to certain events in the "past" - i .e . "that the government had

already issued 'stop-work orders,"' - is unpersuasive because it is premised on Plaintiffs own failure to

understand the inherently contingent nature of a stop-work order . Indeed, Plaintiffs entire securities

fraud theory relating to backlog is based on Plaintiffs belief that "the receipt of a 'stop-work order'

means that any previously reported 'backlog' amounts attributable to revenue within the scope of the

'stop-work' order are no longer valid ." See CAC at ¶ 26 . However, this statement is not supported by

the applicable regulations or the Company's actual manner of accounting for its backlog . See 48 C.F.R .

52.242-15 (describing how the receipt of a stop-work begins the negotiation process and how a stop-

work order is subject to cancellation at any time during this negotiation period) ; see also Harris-Sutton

Decl . at Ex. E (Third Quarter FY04 Form 10-Q) (stating that the Company's backlog would not be

reduced until the negotiations relating to SWOI were completed and the Company was able to ascertain

whether parts of the applicable contract would actually be terminated) . Even under the lenient pleading

standard afforded to a plaintiff on a 12(b)(6) motion, this Court "need not accept as true allegations that

contradict facts which may be judicially noticed." Mullis v. United States Bankruptcy Ct ., 828 F .2d

1385, 1388 (9th Cir .1987), cert. denied, 486 U.S . 1040 (1988) . Accordingly, Defendants have

'This is a distinction with a significant difference in the context of a publicly traded company .See, e .g., Release No. SAB - 101, 1999 WL 1100908 (SEC bulletin providing guidance with respect torevenue recognition) . Ironically, had the Company actually characterized its potential revenue as "real"revenue in the manner that Plaintiff suggests is appropriate, the ramifications under the applicable SECrules and regulations would have likely been catastrophic .

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persuasively shown that the safe harbor precludes liability for all of the allegedly false and misleading

I statements relating to the Company's backlog . Therefore, Plaintiffs claims pertaining to the backlog

are hereby DISMISSED WITH PREJUDICE .

B. Plaintiffs Failure to State a Claim under Section 10(b) of the Exchange Act or Rule10b-5

Additionally, Defendants have also shown that Plaintiff has not stated a claim under Sectio n

10(b) the Exchange Act or Rule lOb-5 with respect to both : (1) the allegedly false and misleading

statements pertaining to the Company's backlog ; and (2) the allegedly false and misleading statements

pertaining to the Company's hiring of personnel . The sufficiency of Plaintiffs claims regarding the

Company's backlog will be discussed first .

1. Statements Regarding the Company' s Backlog

a. The False and/or Misleading Element

As noted in the previous discussion of the safe harbor provision, supra, Plaintiffs Consolidated

Amended Complaint is premised on the following four allegedly false and/or misleading statements

concerning the Company's backlog: (1) the August 2004 Conference Call ; (2) the December 2004

Conference Call ; (3) the December 2004 Press Release ; and (4) the FY04 Form 10-K. Plaintiff alleges

that the statement concerning the Company's backlog made during the August 2004 Conference Call

was materially false and/or misleading because Defendants failed to disclose that, prior to the time the

call took place, the Company had received two stop-work orders, SWO1 and SWO2 . Plaintiff alleges

that statements concerning the Company's backlog made during the December 2004 Conference Call,

the December 2004 Press Release, and the FY04 Form 10-K were materially false and/or misleading

because Defendants failed to disclose that, at the time the statements were made, the Company had

received SWO2, SWO3, and SWO4 .

As an initial matter, the Court notes that Plaintiff has not alleged any facts sufficient to show that

any of the statements concerning the Company's backlog were actually false when made . Indeed, th e

theory set forth in Plaintiffs Consolidated Amended Complaint is that : (1) the statement made in Augus t

2004 regarding the $111 million backlog was false because the $111 million backlog figure did not

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account for SWO1 and SWO2; (2) the statements made in December 2004 and January 2005 regarding

the $143 million backlog was false because the $143 million backlog figure did not account for SWO2 ,

SWO3, or SWO4 . However, the Company's public statements make clear that anticipated revenues are

not "debooked" from the total backlog figure until the contract affected by the stop-work order is

actually terminated. See Harris-Sutton Decl . at Ex. E (Third Quarter FY04 Form 10-Q) (confirming that

the backlog for the third quarter of FY04 was $111 million, but indicating that it might be reduced i n

FY05 ifthe "stopped tasks are [actually ] terminated .") .

For example , during the December 2004 Conference Call, an analyst specifically asked whethe r

I the $143 million included any potential "debookings," and Yancey replied as follows :

Q: And does the - one more question for you, or two more questions, please . Does the $143million include - is that net of any potential debooking ?

A: That includes the $12 million that has not been debooked .

Q: So it's not net ofany potential debooking? Includes ?

A: That's right .

See Harris-Sutton Decl . at Ex . F (December 2004 Form 8-K) (emphasis added) .

Again, on February 22, 2005, Yancey responded to the following questions regarding backlog :

Q: Okay. During the last quarter, you had a nice - Q4 of 2004 was a big bookings quarterand also backlog came in pretty robust . Can you give us an idea of where your backlogis right now ?

A: Sure, at the end of the first quarter, Jay, it's a little over $ 124 million .

Q : And that is not net of any potential debooking , correct ?

A: Well, that's correct .

A : Yes. We had to - we had to figure out how many negatives was in there, but you'recorrect . You're correct.

A: So it still includes the $12 million - the 11 to 13 million in that range - $12 millionof anticipated debooking .

See SEC Form 8-K, filed on February 22, 2005, at Ex. 99 .2 (transcript of February 22, 2005 Conference

Call) .

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Thus, with respect to SWO2, SWO3, and SWO4,1° Plaintiff would have to prove both: (1) that

the stop-work orders actually resulted in a termination of all or a portion of the relevant contracts ; and

(2) that the effect of the termination was immediately calculable in the third or fourth quarters of FY04

or the first quarter of FY05 . Even construed in the light most favorable to Plaintiff, Plaintiffs

Consolidated Amended Complaint does not contain any allegations sufficient to meet these

requirements .

Additionally, in order for Plaintiff to prove that Defendants' statements were misleading, Plaintiff

would have to show that the Company had a duty to disclose SWO1 prior to September 9, 2004 ; that

the Company had a duty to disclose SWO2 during the August 2004 Conference Call or thereafter ; and

that the Company had a duty to disclose SWO3 and SWO4 as of the time of the December 2004

Conference Call or thereafter . See Gallagher v . Abbott Labs., Inc., 269 F.3d 806, 809 (7th Cir . 2001)

("Much of plaintiffs' argument reads as if firms have an absolute duty to disclose all information

material to stock prices as soon as news comes into their possession . Yet that is not the way the

securities laws work . We do not have a system of continuous disclosure . Instead firms are entitled to

keep silent (about good news as well as bad news) unless positive law creates a duty to disclose .") . As

Defendants point out, however, Plaintiff has not affirmatively alleged such duty, and it clear to the

Court, based on the applicable facts and the law that has been presented, that no such duty existed . For

example, as to the pertinent facts, the allegations in the Consolidated Amended Complaint are

ambiguous, at best, as to the : (1) dates the stop-work orders were issued ; (2) the dates the stop-work

orders were to expire ; (3) whether the stop-work orders affected all or part of the relevant contracts ; (4)

whether the stop-work orders were subject to any extensions; (5) whether the stop-work orders actually

resulted in any contract terminations ; and (6) the amount of future revenues affected by the contract

terminations, if such terminations occurred .

"Plaintiffs argument that the August 2004 Conference Call statement was false is foreclosedby the fact that Plaintiff admits that the statement that backlog was "approximately $111 million" was,in fact, correct . See CAC at ¶ 29(a) ("The Third Quarter Form 10-Q reported the same 'backlog' numberthat the Defendants had announced in the August Conference Call .") .

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Case 4:05-cv-0 1 027-S BA Document 61 Filed 02/08/2006 Page 27 of 34

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Further, in his opposition, Plaintiff does not identify a single statute or regulation that require s

a company to disclose either the possibility that contracts with customers may be terminated or the

actual termination of the customer contract . Indeed, as Defendants aptly note, although the SEC

considered proposing such a regulation, it ultimately decided against it . See SEC, Final Rule :

Additional Form 8-K Disclosure Requirements and Acceleration of Filing Date, Release Nos . 33-8400,

34-49424 (Mar . 16, 2004) (declining to adopt Proposed Item 1 .03, "Termination or Reduction of a

Business Relationship with a Customer ."). Where, as here, a plaintiffs complaint is devoid of the

pertinent details and fails to otherwise affirmatively plead the basis for the duty of disclosure, the Court

must dismiss the claim . See, e .g., In re Digital Island Sec . Litig., 357 F.3d 322, 329 n . 10 (3rd Cir .

2004) .

b. Scienter

Plaintiffs Consolidated Amended Complaint also fails to sufficiently establish scienter . Under

the PSLRA, Plaintiff must allege particular facts giving rise to a strong inference of scienter. 15 U. S .C .

sec 78u -4(b)(2) . With respect to SWO1 , the Consolidated Amended Complaint does not plead any facts

showing that the decision to disclose the stop-work order on September 9th, rather than August 24th,

was the product of fraud or even the product of recklessness . In fact, the Consolidated Amended

Complaint does not say anything at all with regard to Doyle or Yancey's state of mind as of August 24,

2004 , other than the conclusory assertion that Doyle and Yancey "did not deny " in the Form 10-Q that

they "knew about [SWO1 ] at the time that it was first issued by the gove rnment contractor ." See CAC

at ¶ 29(b). Not only is this insufficient, but the fact that Defendants disclosed the SWO1 in the

Company's Form 10-Q only two weeks later cuts heavily against an inference of scienter . See, e.g., In

re Segue Software, Inc. Sec . Litig., 106 F . Supp. 2d 161, 170 (D. Mass . 2000 ) . The inference of scienter

is further negated by the fact that neither Yancey nor Doyle sold any stock during this two-week period.

With respect to SWO2, SWO3, and SWO4, the Consolidated Amended Complaint also fails to

set forth any allegations sufficient to show that Yancey or Doyle even knew of the stop-work orders ,

much less that Yancey and Doyle deliberately attempted to deceive stockholders by providing false o r

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misleading information pertaining to the Company's backlog . To the contrary, as noted previously,

Yancey and Doyle candidly disclosed during the relevant period that potential debookings affecting

future revenue were not excluded from the Company's backlog . See Harris-Sutton Decl . at Ex. F

(December 2004 Form 8-K) . The Company also repeatedly warned shareholders in its public filings

that the Company's backlog was not necessarily representative of actual future sales or revenue .

Further, with respect to Doyle, there is no allegation that he sold any stock during the Clas s

Period. As to Yancey, it has not been sufficiently shown that his stock sales - which occurred during

January 2005 - were "dramatically out of line with prior trading practices" or that they took place during

a time specifically "calculated to maximize the personal benefit from undisclosed inside information ."

See Ronconi v. Larkin, 253 F.3d 423, 435 (9th Cir . 2001). To the contrary, the allegations in the

Consolidated Amended Complaint plainly state that Yancey - like most of the other shareholders - sold

stock after the Company announced fourth quarter operating results for FY04 that did not meet the

analysts' expectations . See CAC at ¶ 42 ("Only once in the preceding six months had more than 1

million shares of Applied Signal stock traded in a day ; at no other time did volume exceed 600,000

shares in a day ."). The only allegation in the Consolidated Amended Complaint that even suggests an

inference that the stock sales were suspicious is Plaintiffs bare assertion that "Yancey had complete

knowledge of the'stop-work orders' and their expected impact on the Company's revenues and earnings

for the quarter ." See CAC at ¶ 49 . However, this assertion is completely undermined by the fact that

Plaintiffs Consolidated Amended Complaint does not actually allege any facts showing that the stop-

work orders had any impact on the Company's recognized revenue or earnings for the first quarter of

FY05 . See CAC at ¶¶ 44-47 .

c. Loss Causatio n

Finally, Defendants correctly argue that the Consolidated Amended Complaint does not provid e

an adequate basis for the required element of loss causation for SWO2, SWO3, or SW04 ." Indeed, the

"Defendants concede in their Motion that loss causation relating to SWO 1 is adequately plead .

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internal inconsistencies of the Consolidated Amended Complaint actually defeat a finding of loss

causation. For example, as noted above, although Plaintiffs securities fraud theory is premised on his

contention that the Company's misleading statements regarding backlog resulted in substantial financial

loss to the shareholders, Plaintiff actually states, in his Consolidated Amended Complaint, that the price

per share of the Company's stock declined in December 2004 because the Company announced that : (1)

the earnings would only be 21 cents per share for the fourth quarter of FY04, as opposed to the analysts'

consensus estimate of 29 cents per share ; and (2) the Company's revenue had only increased by 3% .

See CAC at ¶ 42 . Plaintiff also states that the price per share of the Company's stock declined in

February 2005 because the Company reported that "revenue declined almost 25 percent from the

preceding quarter, with net income and earnings per share declining as well ." See CAC at ¶ 44 .

Although Plaintiff vigorously contends, in his Opposition brief, that the stop-work orders were

the actual cause of the losses in revenue, the Consolidated Amended Complaint does not actually state

this . Indeed, the Consolidated Amended Complaint does not set forth any facts establishing a causal

connection between the contracts purportedly affected by the stop-work orders and the actual revenue

for the fourth quarter of FY04 or the first quarter of FY05 . Plaintiffs argument that it is "facially

absurd" to assume anything other than that SWO2, SWO3, and SWO4 directly impacted revenue in the

fourth quarter of FY04 and the first quarter of FY05 is undermined considerably by the relevant

government regulations concerning stop-work orders, which expressly provide that stop-work orders

are contingent for a ninety-day period and are otherwise subject to negotiations, revisions, and

extensions. Plaintiffs argument is further undermined by the fact that contracts are included in the

"backlog" precisely because the revenue is not recognizable until the relevant portion of the contract

is completed and the fact that it is undisputed that anticipated revenues included in the backlog are

typically realized over a multi-year period .

2. Statements Concerning Hiring

Next, with respect to Plaintiffs allegations concerning the Company's purportedly false an d

I misleading statements regarding the hiring of personnel, Defendants have effectively shown that

29

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Plaintiffs Consolidated Amended Complaint fails to state a claim under Section 10(b) or Rule lOb-5 .

Over the course of the entire Class Period, only three statements concerning hiring are challenged in the

Consolidated Amended Complaint : (1) two statement made during the August 2004 Conference Call ;

and (2) a statement made in the August 2004 Press Release .1 2

Plaintiff first challenges the fact that Yancey stated, during the August 2004 Conference Call ,

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that he was "pleased that we've been able to stay up with a fairly aggressive growth requirement and,

in particular, hiring of staff and staff that we can get cleared and hiring cleared staff and we believe that

we're keeping our program performance on par with adequate performance to where we will continue

to be looked upon as an asset to the defense community by the U.S. government ." See Harris-Sutton

Decl . at Ex . C .

The second August 2004 Conference Call statement challenged by Plaintiff is as follows:

Q: Okay. Thank you. Secondly, how many engineers did you addduring the quarter?

A (Doyle) : We've had total hiring of about 100 people year-to-date . Let'ssee, I don't know Gary, what, about 30 through the quarter?

A (Yancey) : I would have actually guessed maybe 20 . It slowed a bit intothe summer, although perhaps not . The simple answer wouldbe to go ahead and use 30, Steve, and kind of assume we'vebeen close to linear in our increase .

See Harris-Sutton Decl. at Ex . C .

As to the August 2004 Press Release, Plaintiff alleges that the following statement was false and

misleading :

Regarding the third quarter operating results, Mr. Gary Yancey, President andChief Executive Officer of the Company, commented, "The greatly increasedlevel of orders compared to fiscal 2003 has challenged us to meet aggressivehiring requirements and to control capital expenditures . I am pleased that wehave met these challenges and have been able to meet our contractualcommitments . This has resulted in our increase in revenue compared to fiscal2003 . "

"The Consolidated Amended Complaint makes mention of other statements of similar naturemade by Defendants, but these statements fall outside of the relevant Class Period . See CAC at ¶ 38 .

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II See id.

a. The False and/or Misleading Element

Plaintiff alleges that the aforementioned statements were materially false and misleading becaus e

"[i]f Applied Signal had, in fact, added 100 employees 'year-to-date' as of August, 2004, as reported by

Defendant Doyle during the August Conference Call, the Company would have had 525 employees"

at the time of the December 2004 Conference Call and "should have had approximately 545 employees

at the end of the year." See CAC at 40(b). As an initial matter, given that Plaintiffs entire argument

is based on the fact that the Company had 498 employees in December instead of Plaintiffs speculation

that it shouldhave had 525 or 545 employees, Plaintiffs claim borders on frivolous . See, e.g., Central

Laborers Pension Fund v. Merix Corp ., 2005 WL 2244072, * 4 (D . Or . 2005) ("Plaintiff cannot meet

the heightened pleading standards applicable to fraud claims by simply characterizing Defendants'

statements, embedding in those characterizations assumptions not found in the statements themselves,

and then explaining why Plaintiffs own assumptions are false .") .

Further, with respect to the element of falsity, Plaintiffs securities fraud "theory" is hopelessl y

flawed. First, as Defendants point out, the statement made by Doyle in the August 2004 Conference

Call makes clear that Doyle is not referring to a "net" gain of 100 employees . Thus, a theory that

attempts to prove falsity by comparing Doyle's statement with the total number of employees within the

Company in December 2004 is inherently defective . Indeed, there are no allegations in the Consolidated

Amended Complaint showing that the Company did not, in fact, hire the indicated number of

employees. As such, Plaintiff has not adequately plead that the statements made by Doyle or Yancey

were false. Second, and more importantly, Plaintiff utterly fails to show how Doyle and Yancey's

statements were misleading. Indeed, it does not appear that Plaintiff could show this, as Doyle's and

Yancey's answers regarding hiring are replete with qualifiers such as "I don't know," "maybe," and "I

would have guessed."

b. Scienter

The fact that Doyle and Yancey expressly stated in the August 2004 Conference Call that the y

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were not expressing a firm opinion with regard to the exact number of employee hires, and were only

guessing, also negates a finding that Doyle or Yancey acted out of deliberate recklessness or with an

intent to defraud shareholders . The inference of scienter is further negated by the fact that Doyle an d

Yancey did not experience any personal gain as a result of the allegedly false or misleading statements .

Indeed, even Plaintiff admits that Yancey did not sell any Company stock until after the December 200 4

disclosure which clarified the exact number of Company employees .

c. Loss Causation

Additionally, the Consolidated Amended Complaint does not establish a causal connection

between the August 2004 statements regarding hiring and the December 2004 decline in stock price .

To the contrary, as set forth previously, Plaintiff alleges, instead, that the stock price fell in December

because the Company announced that it was not meeting the analysts' consensus estimate and because

the Company's revenue only increased by 3% . See CAC at ¶ 42 . Plaintiffs contention that the February

2005 decline in stock price is also attributable to the Company's August 2004 statements is foreclosed

by the fact that Plaintiff admits that the investing public was apprised of the true number of employee s

in December 2004 .

In sum, Plaintiff has failed to state claim under Section 10(b) of the Exchange Act and Rule 1 Ob-

5 promulgated thereunder . Accordingly, these causes of action are hereby DISMISSED .

C. Liability Under § 20(a) of the Exchange Ac t

With respect to Plaintiffs second cause of action, to establish "control person" liability under

Section 20(a) of the Exchange Act, Plaintiff must show that a primary violation of Section 10(b) or Rule

I Ob-5 was committed and that each individual defendant "directly or indirectly" controlled the violator .

See Paracor Finance, Inc. v. General Electric Capital, 96 F .3d 1151, 1161 (9th Cir.1996) . Since

Plaintiff has not stated a viable Section 10(b) or Rule 1 Ob-5 claim, Plaintiffs claim under Section 20(a)

of the Exchange Act necessarily fails . Accordingly, the entire Consolidated Amended Complaint i s

DISMISSED .

III. Dismissal with Prejudice

32

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Further, given the deficiencies in Plaintiffs Consolidated Amended Complaint identified herein ,

the Court has concluded that it is appropriate to DISMISS the Consolidated Amended Complaint WITH

PREJUDICE. In making this determination, the Court finds it important to point out that this case

departs from the usual circumstances where dismissal with leave to amend is appropriate because the

plaintiff has merely failed to allege, with sufficient particularity, facts supporting a viable legal theory

of securities fraud . In this case, by way of contrast, the Consolidated Amended Complaint is defective

because Plaintiffs theory of fraud, itself, is legally flawed and is premised on either a fundamental

misunderstanding of Applied Signal's business model, at best, or a blatant misrepresentation of the

pertinent facts . Since Plaintiff could only amend his Consolidated Amended Complaint to allege

additional facts that are consistent with the facts that have already been plead, the Court finds that

granting Plaintiff leave to amend in order to augment the Consolidated Amended Complaint with

additional facts would be futile . Further, since Plaintiff has already changed his theory of fraud twice, 1 3

granting further leave to amend would be highly prejudicial to Defendants . The typically liberal

standard of allowing leave to amend should not be employed to require Defendants to defend agains t

an amorphous, "moving target" securities fraud case that is not well thought-out or well supported .

Further, the Court finds that dismissal without leave to amend is also appropriate given th e

length of time that has passed since the initial complaint was filed . Indeed, the initial complaint was

filed on March 11, 2005 and the Consolidated Amended Complaint was filed five months later, on

August 12, 2005 . Plaintiff has been on notice with regard to the defects of his Consolidated Amended

Complaint since September 14, 2005, when Defendants filed the instant Motion to Dismiss .

Accordingly, dismissal with prejudice is warranted on this basis as well . See Lipton v. Pathogenesis

Corp., 284 F.3d 1027, 1038-39 (9th Cir . 2002) (affirming district court's dismissal with prejudice afte r

finding that : (1) more than six months had elapsed between the filing of the original lawsuit and the

filing of the consolidated amended complaint, and (2) three additional months had passed between the

"As noted in the discussion of the procedural history of this case, the complaints initially filedset forth a different class period and were not expressly premised on the statements concerning theCompany's stop-work orders and backlog.

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II time the defendants filed their motion to dismiss and the district court's ruling) .1 4

CONCLUSION

For all of the reasons set forth above, IT IS HEREBY ORDERED THAT Defendants' Motio n

to Dismiss [Docket No . 35] is GRANTED. The Court hereby DISMISSES the Consolidated Amended

Complaint WITH PREJUDICE .

IT IS FURTHER ORDERED THAT Defendant ' s Request for Judicial Notice [Docket No . 36 ]

is GRANTED.

IT IS FURTHER ORDERED THAT Plaintiffs Motion for Class Certification [Docket No . 25]

is DENIED AS MOOT .

IT IS SO ORDERED .

4lir~ ssxSA DRA BROWN A TRONGUnited States District Judge

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Dated: 2/6/06

14Further, the Court cannot overlook the fact that Applied Signal is currently in its 2006 fiscalyear, and yet Plaintiffs Opposition does not even suggest that Plaintiff is aware of any additional factsor events that have occurred during this passage of time that would lend further support to his case .

34

EXHIBIT C

10kWIZARDSEC ~O .E~ SE-C .

FORM DEFR14ATIBCO SOFTWARE INC - TIBX

Filed : March 18, 2005 (period : )

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D .C . 20549

SCHEDULE 14AProxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

Filed by the Registrant ❑

Filed by a Party other than the Registrant ❑

Check the appropriate box :

❑ Preliminary Proxy Statement

❑ Definitive Proxy Statemen t

❑ Definitive Additional Materials

❑ Confidential, for Use of the Commission Only (as permitted by Rule14a-6(e)(2) )

❑ Soliciting Material Pursuant to Rule §240 .14a-I1(c) or §240 .14a-1 2

TIBCO Software Inc .

(Name of Registrant as Specified In Its Charter )

(Name of Person(s) Filing Proxy Statement , if other than the Registrant)

Payment of Filing Fee (Check the appropriate box) :

© No fee required .

❑ $125 per Exchange Act Rules 0-1 l(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item 22(a)(2) of Schedule 14A .

❑ $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3) .

❑ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11 .

(1) Title of each class of securities to which transaction applies :

(2) Aggregate number of securities to which transac tion applies :

(3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee iscalculated and state how it is determined) :

(4) Proposed maximum aggregate value of transaction :

(5) Total fee paid :

❑ Fee paid previously with preliminary materials .

❑ Check box if any part of the fee is offset as provided by Exchange Act Rule 0- 11 (a)(2) and identify the filing for which the offsetting fee was paidpreviously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing .

(1) Amount Previously Paid :

(2) Form, Schedule or Registration Statement No. :

(3) Filing Party :

(4) Date Filed :

Notes :

TIBCO®The Power of Now 'O

TIBCO Software Inc.3303 Hillview AvenuePalo Alto, CA 94304

March 11, 2005

Dear Stockholders :

You are cordially invited to attend the annual meeting of stockholders of TIBCO Software Inc . on Thursday, April 21, 2005 at 10:00 a .m. local time . Themeeting will be held at our headquarters located at 3303 Hillview Avenue, Palo Alto, California .

The matters to be acted upon are described in the accompanying Notice of Annual Meeting and Proxy Statement .

Your vote is very important . Whether or not you plan to attend the annual meeting, we urge you to vote and submit your proxy by telephone, the Internetor by mail in order to ensure the presence of a quorum . If you attend the meeting, you may, of course, revoke your proxy and vote your shares in person . If youhold your shares through an account with a brokerage firm, bank or other nominee, please follow the instructions you receive from them to vote your shares .

We look forward to seeing you at the meeting.

Sincerely,

Vivek Y . RanadivhPresident, Chief Executive Officer and Chairman of the Board

TIBCO Software Inc.3303 Hillview AvenuePalo Alto, CA 94304

NOTICE OF ANNUAL MEETING OF STOCKHOLDERSTO BE HELD ON APRIL 21, 2005

To the Stockholders of TIBCO Software Inc . :

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of TIBCO Software Inc ., a Delaware corporation , will be held on April 21, 2005

at 10 :00 a . m. local time at our headquarters located at 3303 Hillview Avenue, Palo Alto, California , for the following purposes :

1 . To elect six directors to serve until our next annual meeting of stockholders or until their successors are duly elected and quali fi ed ;

2 . To ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending

November 30, 2005 ; an d

3 . To transact such other business as may properly come before the meeting or any adjou rn ment or postponement thereof .

Only stockholders of record at the close of business on February 22, 2005 are entitled to notice of, and to vote at, the Annual Meeting or any adjou rn ment

or postponement thereof. For ten days prior to the meeting , a complete list of stockholders entitled to vote at the meeting will be available for examination by anystockholder , for any purpose relating to the meeting , during ordinary business hours at our headquarters at the above address .

By Order of the Board of Directors,

William R . Hughe sSecretary

Palo Alto, CaliforniaMarch 11, 2005

YOUR VOTE IS IMPORTANT

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, WE ENCOURAGE YOU TO VOTE AND SUBMIT YOUR PROXY BYTELEPHONE, THE INTERNET OR BY MAIL . FOR ADDITIONAL INSTRUCTIONS ON VOTING BY TELEPHONE OR THE INTERNET,PLEASE REFER TO YOUR PROXY CARD . TO VOTE AND SUBMIT YOUR PROXY BY MAIL, PLEASE COMPLETE, SIGN AND DATE THEENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED ENVELOPE . IF YOU ATTEND THE MEETING, YOU MAY, OF COURSE,REVOKE YOUR PROXY AND VOTE IN PERSON . IF YOU HOLD YOUR SHARES THROUGH AN ACCOUNT WITH A BROKERAGE FIRM,BANK OR OTHER NOMINEE, PLEASE FOLLOW THE INSTRUCTIONS YOU RECEIVE FROM THEM TO VOTE YOUR SHARES .

ELECTRONIC DELIVERY OF PROXY MATERIAL S

We are pleased to offer to our stockholders the benefits and convenience of electronic delivery of annual meeting materials, including email delivery of futureproxy statements, annual reports and related materials and on-line stockholder voting . If a broker or other nominee holds your shares and you would like tosign-up for electronic delivery, please visit "Proxy Information" on our website to enroll . Your electronic delivery enrollment will be effective until you cancelit. We encourage you to conserve natural resources, as well as help us reduce printing and mailing costs, by signing up to receive future proxy mailings by email .

TIBCO Software Inc.3303 Hillview AvenuePalo Alto, CA 9430 4

PROXY STATEMENT FO R2005 ANNUAL MEETING OF STOCKHOLDER S

This Proxy Statement is furnished in connection with the solicitation of proxies on behalf of the Board of Directors of TIBCO Software Inc ., a Delawarecorporation (the "Company"), for use at the Annual Meeting of Stockholders to be held on April 21, 2005, at 10 :00 a .m . local time, or at any adjournment orpostponement thereof, for the purposes set forth herein and in the accompanying Notice of Annual Meeting .

The Annual Meeting will be held at our headquarters located at 3303 Hillview Avenue, Palo Alto, California . This Proxy Statement and accompanyingproxy card will be mailed on or about March 18, 2005 to all stockholders entitled to vote at the Annual Meeting .

Voting Rights

Only stockholders of record at the close of business on February 22, 2005, the record date, are entitled to notice of and to vote at the Annual Meeting andany adjournment or postponement thereof. At the close of business on February 22, 2005, we had outstanding and entitled to vote 215,547,534 shares of commonstock .

Each stockholder of record will be entitled to one vote on each matter for each share of common stock held on the record date . There is no cumulativevoting in the election of directors .

How to Vote Your Share s

YOUR VOTE IS IMPORTANT . Your shares can be voted at the Annual Meeting only if you are present in person or represented by proxy . Whether ornot you expect to attend the meeting, please take the time to vote your proxy .

Stockholders of record, or "registered stockholders," can vote :

By Telephone: Call the toll-free number indicated on the enclosed proxy and follow the recorded instructions .

By Internet : Go to the website indicated on the enclosed proxy and follow the instructions provided .

By Mail : Mark your vote, date, sign and return the enclosed proxy in the postage-paid return envelope provided .

If your shares are held beneficially in "street" name through a nominee such as a brokerage firm, financial institution or other holder of record, your vote iscontrolled by that firm, institution or holder . Your vote may also be cast by telephone or Internet, as well as by mail, if your brokerage firm or financialinstitution offers such voting alternatives . Please follow the specific instructions provided by your nominee on your proxy card .

Even if you have given your proxy, you still may vote in person if you attend the meeting. Please note, however, that if your shares are held beneficiallythrough a broker, bank or other nominee and you wish to vote at the meeting, you must obtain a proxy issued in your name from the record holder.

Voting of Proxie s

All shares represented by a valid proxy received prior to the meeting will be voted, and, if you provide specific instructions, your shares will be voted asyou instruct . If you sign your proxy card with no further instructions, your shares will be voted FOR each of the nominees for the Board of Directors, FOR theratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending November 30, 2005 and in thediscretion of the proxy holders with respect to any other matters that properly come before the meeting .

Revocability of Proxie s

You may revoke or change a previously delivered proxy at any time before the meeting by delivering to our Corporate Secretary at our headquarters at3303 Hillview Avenue, Palo Alto, California 94304, a written notice of revocation or another proxy with a later date . You may also revoke your proxy byattending the meeting and voting in person, although attendance at the meeting will not, by itself, revoke a proxy .

Votes Required to Approve Proposal s

In the election of directors, the six nominees receiving the highest number of affirmative votes will be elected . Ratification of PriceWaterhouseCoopersLLP as our independent registered public accounting firm requires the affirmative vote of the holders of a majority of the outstanding shares of common stockpresent in person at the meeting or represented by proxy and entitled to vote on the subject matter of the proposal .

If your shares are registered in the name of a bank, brokerage firm or other nominee and you do not provide your broker or nominee with votinginstructions, your shares may constitute "broker non-votes ." Generally, broker non-votes occur on a matter when a broker is not permitted to vote on that matterwithout specific instructions from the beneficial owner and instructions are not given . In tabulating the voting result for any particular proposal, shares thatconstitute broker non-votes are not considered entitled to vote on that proposal . Thus, broker non-votes will not affect the outcome of any matter being voted onat the Annual Meeting . Abstentions have the same effect as a vote against the matter .

Quorum

The presence, in person or by proxy, of at least a majority of the shares outstanding on the record date will constitute a quorum . Both abstentions an dbroker non-votes are counted for the purpose of determining the presence of a quorum .

Solicitation of Proxie s

We will bear the cost of solicitation of proxies, including preparation, assembly, printing and mailing of this Proxy Statement, the proxy card and anyadditional information furnished to stockholders . Copies of solicitation materials will be furnished to banks, brokerage houses, fiduciaries and custodians holdingin their names shares of common stock beneficially owned by others to forward to such beneficial owners . We may reimburse persons representing beneficialowners of common stock for their costs of forwarding solicitation materials to such beneficial owners . Original solicitation of proxies by mail may besupplemented by telephone, telegram, Internet or personal solicitation by our directors, officers or other regular employees . No additional compensation will bepaid to these individuals for such services .

PROPOSAL NO . 1

ELECTION OF DIRECTOR S

Nominees

There are six nominees for election to our Board this year . Unless otherwise instructed, the proxy holders will vote the proxies received by them for our si x

nominees named below . If any of our nominees is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for anynominee who is designated by the present Board of Directors to fill the vacancy . We do not expect that any nominee will be unable or decline to serve as adirector . Each director is elected annually to serve until the next annual meeting of stockholders or until a successor has been duly elected and qualified . Duringfiscal year 2004, the following individuals served on our Board of Directors : Vivek Y . Ranadive, Eric Dunn, Naren Gupta, Peter Job, William A . Owens andPhilip K. Wood . Mr . Owens resigned from our Board of Directors in June 2004 .

The names of and certain information regarding the nominees are set forth below .

Name Age Position with TIBC O

Vivek Y . Ranadivd 47 Director, President, Chief Executive Officer and Chairman of the BoardBernard Bourigeaud 60 DirectorEric Dunn 46 DirectorNaren Gupta 56 DirectorPeter Job 63 DirectorPhilip K . Wood 49 Director

Vivek Y. Ranadive has served as our President, Chief Executive Officer and Chairman of the Board since our inception in January 1997 . From 1985 to1997, Mr . Ranadive served as a director and the Chairman and Chief Executive Officer of Teknekron Software Systems, Inc ., our predecessor company . Inaddition, Mr . Ranadive served as President, Chief Executive Officer and Chairman of the Board of TIBCO Finance Technology Inc ., a wholly owned subsidiaryof Reuters Group PLC (" Reuters" ), from its inception until December 1998 .

Bernard Bourigeaud currently serves as the Chairman of the Management Board and Chief Executive Officer of Atos Origin. He has been with thecompany since 1991, conducting the merger which led to the creation of Axime of which he became chairman . In 1996 Axime acquired Sligos, forming Atos . InNovember 2000, he merged Atos with the Dutch company Origin to create Atos Origin . In 2002, he completed the acquisition of KPMG Consulting in the UKand The Netherlands, now trading as Atos KPMG Consulting . Before joining Axime, Mr . Bourigeaud spent 11 years at Deloitte Haskins and Sells France, wherehe headed the management consulting group with responsibility for French operations and corporate finance in Europe . Mr. Bourigeaud is also a qualified Frenchchartered accountant.

Eric Dunn has been one of our directors since April 2004 . Since 2003, Mr . Dunn has been a General Partner at Cardinal Venture Capital . From 2000 to2003, Mr . Dunn owned and operated Kingston Creek Ventures . From 1986 to 2000, Mr . Dunn served in a number of senior executive capacities at Intuit, Inc .,including Chief Financial Officer and Senior Vice President and Chief Technology Officer . Mr . Dunn is currently on the Board of Directors of CorillianCorporation and several private companies .

Naren Gupta has been one of our directors since April 2002 . Since February 2000 he has served also as Vice Chairman of the Board of Directors ofWindRiver Systems, Inc . From June 2004 to January 2005, Dr . Gupta also served as the Interim President and Chief Executive Officer and as a director of QuickEagle Networks . He also served as Interim President, Chief Executive Officer of WindRiver Systems from June 2003 to January 2004 . Prior to joiningWindRiver Systems, Dr . Gupta was Chief Executive Officer and President of

Integrated Systems Inc . from 1980 until 1994 and Chairman of its Board of Directors from 1992 until 2000 . In addition, Dr . Gupta serves on the Boards ofDirectors of several privately held companies . Dr . Gupta is a fellow of the Institute of Electrical and Electronics Engineers .

Peter Job has been one of our directors since June 2000 . From 1963 through his retirement in July 2001, Mr . Job was employed by Reuters, most recentlyas its Chief Executive . In addition, Mr. Job serves on the Boards of Directors for Schroders PLC, Deutsche Bank AG, Shell Transport & Trading PLC andInstinct Group Inc ., as well as on the Board of Directors of a privately held company . Until December 2004, Mr . Job also served on the Board of Directors ofGlaxo Smith Kline PLC .

Philip K. Wood has been one of our directors since our inception . Since February 2004, Mr . Wood has been employed by DI Oils plc as its ChiefExecutive Officer . From September 1990 through February 2004, Mr. Wood was employed by Reuters and served as Managing Director of BusinessDevelopment . Prior to joining Reuters, Mr . Wood was a partner at Price Waterhouse, a predecessor to PricewaterhouseCoopers LLP . Mr . Wood was on theBoard of Directors of Independent Television News Limited until January 2004 . He is a fellow of the Institute of Chartered Accountants and a member of theAssociation of Corporate Treasurers.

Relationships Among Directors or Executive Officer sThere are no family relationships among our directors or executive officers .

Director Compensatio n

Only non-employee directors are compensated for serving as directors . Pursuant to the Board Compensation Plan adopted in December 2002, eachnon-employee director receives a $20,000 annual retainer for service on the Board and a $1,500 payment for each Board meeting attended in person or bytelephone. In addition, members of each of the Audit Committee and Compensation Committee receive a $5,000 annual retainer and a $1,000 payment for eachcommittee meeting attended . Members of the Nominating and Governance Committee receive a $2,500 annual retainer and a $1,000 payment for each committeemeeting attended . The Chairman of each of the above three committees receives an additional $2,500 annual retainer .

During fiscal year 2004, our non-employee directors also received stock option grants under our 1998 Director Option Plan as follows : an initial grantupon first being elected to the Board of an option to purchase 100,000 shares of common stock and an annual automatic grant of 40,000 shares for each year ofservice thereafter. All options vest annually over a three-year period, beginning on the date of the grant .

Board Meetings and Committee sThe Board of Directors held a total of nine meetings (including regularly scheduled and special meetings) during fiscal year 2004 . No incumbent director

during the last fiscal year attended fewer than 75% of the aggregate of. (i) the total number of meetings of the Board of Directors while he served on the Board ;and (ii) the total number of meetings held by all committees on which he served .

Although we do not have a formal policy regarding attendance by members of the Board of Directors at annual meetings, we encourage directors to attendand historically most have done so . All of our directors attended the 2004 Annual Meeting, except Mr . Owens .

Our Board of Directors has standing Audit, Compensation, and Nominating and Governance Committees, which assist the Board of Directors in thedischarge of its responsibilities .

Audit CommitteeThe Audit Committee directs our audit activities . It is charged with providing oversight and monitoring of the integrity of our financial statements,

nominating to the Board an independent registered public accounting firm to audit our financial statements, and overseeing the activities, independence,qualifications and performance of our independent registered public accounting firm . The Audit Committee also assists the Board in ensuring our compliance

with legal and regulatory requirements in connection with our financial reporting process . Members of the Audit Committee are appointed by the Board and

serve for one-year terms . During fiscal ye ar 2004, the Audit Committee consisted of Messrs . Wood, Gupta, Owens and Dunn . Since Mr. Owens' resignationfrom the Board of Directors, our Audit Committee has consisted of Messrs . Wood, Gupta and Dunn . The Audit Committee held thirteen meetings during fiscalyear 2004 . The Board of Directors has determined that Mr . Dunn is an "audit committee financial expert" as defined in Item 401(h) of Regulation S-K . All of themembers of the Audit Committee are "independent directors" as defined in Rule 4200 of the Marketplace Rules of the National Association of Securitie sDealers, Inc ., or the NASD .

The charter of the Audit Committee is available on our website, www .tibco.com, under "Corporate Governance . "

Compensation Committe e

The Compensation Committee reviews and approves the annual salary and bonus for each executive officer consistent with the terms of any applicableemployment arrangements ; reviews, approves and recommends terms and conditions for all employee benefit plans, administers our stock option plans,determines, or consults with management regarding (as appropriate), compensation and benefits for our non-executive officers and other employees, andoversees our compensation and benefits plans, policies and programs generally . Members of the Compensation Committee are appointed by the Board ofDirectors and serve one-year terms . During fiscal year 2004, the Compensation Committee consisted, and it currently consists, of Messrs . Gupta and Wood. Mr.Owens also served on the Compensation Committee during the period between the Company's annual meeting of stockholders in 2004 and his resignation fromthe Board of Directors . The Compensation Committee held six meetings during fiscal year 2004 . Each member of the Compensation Committee is an"independent director" as defined in Rule 4200 of the Marketplace Rules of the NASD .

The charter of the Compensation Committee is available on our website, www .tibco .com, under "Corporate Governance ."

Nominating and Governance Committe e

The Nominating and Governance Committee promotes the proper constitution of our Board of Directors in order to meet its fiduciary obligations tostockholders and to us, and to oversee our establishment of and compliance with appropriate governance standards . The Nominating and Governance Committeealso reviews, evaluates and proposes candidates for election to our Board of Directors, and considers any nominees properly recommended by stockholders .During fiscal year 2004, the Nominating and Governance Committee consisted of Messrs . Gupta and Job . Mr . Owens also served on the Nominating andGovernance Committee during the period between the Company's annual meeting of stockholders in 2004 and his resignation from the Board of Directors . TheNominating and Governance Committee held four meetings during fiscal year 2004 . Each member of the Nominating and Governance Committee is an"independent director" as defined in Rule 4200 of the Marketplace Rules of the NASD .

The charter of the Nominating and Governance Committee is available on our website, www .tibco .com, under "Corporate Governance ."

Director Nomination Process

Stockholder NominationsOur bylaws contain provisions that address the process by which a stockholder may nominate an individual to stand for election to the Board of Directors

The Nominating and Governance Committee also reviews, evaluates and proposes prospective candidates for our Board of Directors and considers nominees

properly recommended by stockholders . Stockholders wishing to submit nominations must notify us of their intent to do so on or before the date on which

stockholder proposals to be included in the proxy statement for the stockholder meeting must be received by us as set forth under "Stockholder Proposals to be

Presented at Next Annual Meeting" below . Such notice must include the information specified in our bylaws, a copy of which is available on our website under

"Corporate Governance ."

Director QualificationsMembers of our Board of Directors must have broad experience and business acumen, a record of professional accomplishment in his or her field, and

demonstrated honesty and integrity consistent with TIBCO's values . In evaluating director nominees, the Nominating and Governance Committee considers a

variety of factors, including the appropriate size of the Board of Directors, TIBCO's needs with respect to the particular talents and experience of the directors,the nominee's experience and understanding of the technology industry, familiarity with national and international business matters, experience with accountingrules and practices, and professional expertise and experience beneficial to the achievement of TIBCO's strategic goals . The Nominating and Governance

Committee may also consider such other factors as it may deem are in the best interests of TIBCO and its stockholders . The Nominating and Governance

Committee believes that it is appropriate for at least one, and, preferably several, members of the Board to meet the criteria for an "audit committee financialexpert" as defined by Securities Exchange Commission ("SEC") rules and for a majority of the members of the Board meet the definition of "independent

director" under SEC and NASD rules .

Identifying NomineesThe Nominating and Governance Committee identifies nominees by first identifying the desired skills and experience of a new nominee based on the

qualifications discussed above . The Nominating and Governance Committee will solicit ideas for possible candidates from members of the Board, senior level

executives, and individuals personally known to the members of the Board as well as third-party search firms . In fiscal year 2004, we retained the services of a

third party search firm to assist in identifying possible candidates for director . There is one nominee for election to our Board this year who has not previously

served as a TIBCO director, Bernard Bourigeaud . Mr . Bourigeaud was recommended by one of our executive officers .

Communications with the Boar dStockholders may send communications to the Board of Directors by writing to them at TIBCO Software Inc ., Board of Directors, Attention : General

Counsel, 3303 Hillview Avenue, Palo Alto, CA 94304 . All stockholder communications that are received by the General Counsel for the Board's attention will

be forwarded to the Board . Comments or complaints relating to accounting or auditing matters may be submitted on-line to the members of the Audit Committee

through our website under "Corporate Governance - Contact the Board ." All members of our Audit Committee will have access to these communications .

Compensation Committee Interlocks, Insider Participation in Compensation Decisions and Certain Transaction s

Philip K . Wood, a member of our Compensation Committee, was the Managing Director of Business Development of Reuters until February 2004 .

Reuters owned of record approximately 49% of our outstanding common stock as of November 30, 2003 . In February 2004, pursuant to the terms of a

Registration and Repurchase Agreement we entered into with Reuters in October 2003, Reuters completed a registered offering of

69 million shares of TIBCO common stock and we repurchased an additional 16 .8 million shares of our common stock from Reuters . As a result of thesetransactions, Reuters' ownership of our common stock fell below 10% and was approximately 8% at November 30, 2004 .

In October 2003, we entered into a new agreement with Reuters relating to the licensing, distribution and maintenance of our products that replaced ourprevious arrangements . Pursuant to the terms of this current agreement, Reuters has continued and will continue to act as a non-exclusive reseller of our productsto certain specified customers in the financial services market until March 2005 . Reuters may also continue to use our products internally and embed them into itssolutions . We have the right to market and sell our products, other than risk management and market data distribution products, directly and through third partyresellers (other than a few specified resellers) to customers in the financial services market. The limitations on our ability to sell risk management and marketdata distribution products and on reselling through the specified resellers will expire in May 2008 . Reuters has agreed to continue to pay us minimum guaranteedfees 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 thelicense and maintenance revenues from our sales to financial services companies (and until October 2004, were also reduced by 40% of our maintenance revenuefrom customers who were transitioned to us by Reuters) . Furthermore, Reuters has been transitioning maintenance and support of our products for its customers,as well as associated revenues, since entering into this current agreement . As a result, we have been providing maintenance and support services directly toReuters' former customers since the fourth quarter of fiscal 2003 . In addition to acting as a reseller of our products in the financial services market, Reuters iseligible 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 assistanceReuters provides in supporting the sale .

Required Vote

The six nominees receiving the highest number of affirmative votes of the shares of common stock present in person or represented by proxy and entitledto be voted at the Annual Meeting shall be elected as directors .

RECOMMENDATION OF THE BOARD : THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION OF MESSRS . RANADIVE,

BOURIGEAUD. DUNN . GUPTA . JOB AND WOOD AS OUR DIRECTORS .

PROPOSAL NO. 2RATIFICATION OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIR M

GeneralThe Audit Committee has nominated and the Board of Directors has selected PricewaterhouseCoopers LLP as our independent registered publi c

accounting firm to audit our consolidated financial statements for the fiscal year ending November 30, 2005 . PricewaterhouseCoopers LLP has been our

independent registered public accounting firm since we were established as a separate entity in January 1997 . A representative of PricewaterhouseCoopers LLP

will be present at the Annual Meeting, will be given the opportunity to make a statement, if he or she desires, and will be available to respond to appropriate

questions .

In the event that the stockholders do not approve the selection of PricewaterhouseCoopers LLP, the appointment of the independent registered public

accounting firm will be reconsidered by the Audit Committee and Board of Directors .

Fees Paid to PricewaterhouseCoopers LLPThe following table presents fees for professional audit services rendered by PricewaterhouseCoopers LLP for the audit of our annual financial statements

for the years ended November 30, 2004 and November 30, 2003 and fees billed for other services rendered by PricewaterhouseCoopers LLP during those

periods .

Fiscal Year Fiscal Yea r2004 2003

Audit Fees $3,540,000 $ 703,000Audit-Related Fees 800,000 87,000Tax Fees 353,000 795,000All Other Fees 9,000 108,000

Total 4,702,000 1,693,000

Audit Fees consist of fees billed for professional services rendered for the audit of our consolidated financial statements, the review of our interimconsolidated financial statements included in quarterly reports and services that are normally provided by PricewaterhouseCoopers LLP in connection withcomfort letters, consents and statutory and regulatory filings . Audit Fees for fiscal year 2004 also included the audit of management's report on the effectiveness

of the Company's internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002 .

Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of ourconsolidated financial statements and are not reported under "Audit Fees . "

Tax Fees consist of fees billed for professional services rendered for tax advice, planning and compliance (domestic and international) . These services

include the preparation and review of income tax returns, VAT tax returns and international returns, and assistance regarding transfer pricing, VAT matters,federal, state and international tax compliance, acquisitions and international tax planning.

All Other Fees consist of fees for products and services other than the services described above, including stock option and other advisory services .

Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Registered Public Accounting Fir mThe Audit Committee pre-approves all audit and non-audit services provided by the independent registered public accounting firm . These services may

include audit services, audit-related services, tax services and other services . Pre-approval is generally provided for up to one year, and any pre-approval isdetailed as to the particular service or category of services and is generally subject to a specific budget . The Audit Committee may delegate pre-approval

authority to one of its members when expedition of services is necessary .

Proposal , Required VoteThe Board of Directors has conditioned its appointment of our independent registered public accounting firm upon the receipt of an affirmative vote of a

majority of the shares of common stock present in person or represented by proxy and entitled to be voted at the Annual Meeting .

RECOMMENDATION OF THE BOARD : THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE RATIFICATION OF THE APPOINTMENT

OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOCNTING FIRM FOR FISCAL YEAR 2005.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the beneficial ownership of our common stock, as of February 22, 2005, of :

• each person or entity who we know to beneficially own five percent or more of the outstanding shares of our common stock ;

• each of our current directors ;

• our Chief Executive Officer and each of our four other most highly compensated executive officers ; and

• all of our current directors and executive officers as a group .

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission . In computing the number of sharesbeneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are currentlyexercisable or exercisable within 60 days of February 22, 2005 are deemed outstanding . Such shares, however, are not deemed outstanding for the purpose ofcomputing the percentage ownership of any other person .

The address of each individual listed in the table is TIBCO Software Inc ., 3303 Hillview Avenue, Palo Alto, CA 94304. The percentages in the table beloware based on 215,547,534 shares of our common stock outstanding as of February 22, 2005 . Except as indicated in the footnotes to this table and pursuant toapplicable community property laws, to our knowledge, each stockholder named in the table has sole voting and investment power with respect to the shares setforth opposite such stockholder's name . The information provided in this table is based on the Company's records, information filed with the SEC and

information provided to the Company, unless otherwise noted .

Name

FMR Corp .82 Devonshire Street,Boston, MA 02109

Reuters Group PLC and related entities85 Fleet St .London EC4P 4AJ

Vivek Y . Ranadivr (1)Eric Dunn(2 )Naren Gupta(3)Peter Job(4)Philip K. Wood(5)William R . Hughes(6)

Christopher Larsen(7)Christopher G . O'Meara(8)Murray Rode(9 )All current directors and executive officers as a group (eleven persons)(10)

SharesBeneficially Percentage

Owned Ownership

12,492,786 5.8%

17,415,157 8.1 %

14,367,142 6 .3 %36,33 4

148,064130,00 143,334

187,72 8167,397847,600371,777

17,986,840 7 .8 %

* Less than one percent (1%) of our outstanding shares of common stock .

(1) Includes 11,166,666 shares underlying options vested and exercisable within 60 days of February 22, 2005 . Includes 150,000 shares owned by the AnjaliDea Ranadiv6 Trust, 150,000 shares owned by the Aneel Ryan Ranadiv6 Trust, 150,000 shares owned by the Andre Vivek Ranadiv6 Trust and 2,250,000shares owned by the Ranadiv6 Family Generation-Skipping Trust (the "Trusts") for an aggregate of 2,700,000 shares tha t

10

have been irrevocably transferred to the Trusts . Mr. Ranadiv6 is a co-trustee of the Trusts and disclaims beneficial ownership of all shares held directly or

indirectly by the Trusts . Includes 5,478 shares acquired through an investment by Mr. Ranadiv6 in the Mayfield Fund.

(2) Includes 33,334 shares underlying options vested and exercisable within 60 days of February 22, 2005 .

(3) Includes 140,001 shares underlying options vested and exercisable within 60 days of February 22, 2005 . Includes 8,063 shares owned by the Naren and

Vinita Gupta Living Trust .

(4) Consists of 130,001 shares underlying options vested and exercisable within 60 days of February 22, 2005 .




( 8) Includes 782,600 shares underlying options vested and exercisable within 60 days of February 22, 2005 .

(9) Includes 271,529 shares underlying options vested and exercisable within 60 days of February 22, 2005 . Includes 2,999 shares owned by Mr . Rode's wife .

(10) Includes 14,109,256 shares underlying options vested and exercisable within 60 days of February 22, 2005 .

11

EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENT S

Summary Compensation Tabl eThe following table sets forth information concerning the compensation we paid to our Chief Executive Officer and our four other most highly

compensated executive officers (the "Named Executive Officers") for services rendered during the past three fiscal years .

Long-TermCompensation

Annual Compensation Award s

Number ofSecurities

Fiscal Underlying

Name and Principal Positions Year Salary ($) Bonus ($) Options

Vivek Y . Ranadive 2004 500,000 750,000 1,500,000President, Chief Executive Officer and Chairman of the 2003 285,000 - 1,000,000Board 2002 285,565 - 2,250,000

William R . Hughes 2004 228,959 291,000 200,000Executive Vice President, General Counsel & Secretary 2003 214,896 25,000 90,000

2002 196,850(4) 60,894 60,000

Christopher Larsen 2004 300,000 319,381 110,000Executive Vice President, Global Field Operations 2003 63,654(8) 31,250(6) 350,000

Christopher G . O'Meara 2004 244,855 300,000 130,000Executive Vice President and

2003 237,500 - 100,000Chief Financial Officer 2002 240,649 10,000(10) 425,000

Murray Rode 2004 218,550 300,000 215,000Executive Vice President, Strategic Operations 2003 194 .342 25,000 25,000

2002 195,481 49,029 58,500

(1) Consists of Group Life Insurance premiums .

(2) Consists of $550 in Group Life Insurance premiums and $9,895 in contributions made by us pursuant to our 401(k) Plan .

(3) Consists of $517 in Group Life Insurance premiums and $13,290 in contributions made by us pursuant to our 401(k) Plan .

All OtherCompensation

($)

684(1)

897(l)

931(1 )

10,445(2)

13,807(3)

12,678(5)

7,637(7)

1,430(9 )

579(1)

733(1)762(1 )

559(1)

10,063(11)10,482(12)

(4) Includes $6,253 of retroactive pay. In fiscal year 2002, Mr . Hughes worked in our UK office until July 31, 2002 . This amount includes approximately$91,824 in salary from our UK subsidiary, TIBCO Software Ltd., based on foreign currency exchange rates for July 31, 2002 .

(5) Consists of $164 in Group Life Insurance premiums, $5,751 in contributions made by us pursuant to our 401(k) Plan and approximately $6,763 in pensioncontributions made by TIBCO Software Ltd ., based on foreign currency exchange rates for July 31, 2002 .

(6) Consists of a $219, 381 commission and a $100 ,000 bonus .

(7) Consists of a $6,000 car allowance, $720 in Group Life Insurance premiums and $917 in contributions made by us pursuant to our 401(k) Plan .

(8) Includes $1,154 retroactive pay . Mr. Larsen was hired by the Company in September 2003 . On an annualized basis, Mr . Larsen's salary was $300,000 forfiscal year 2003 and he was eligible to receive an annual bonus of up to $450,000 in fiscal year 2003 .

12

(9) Consists of a $1,250 car allowance and $180 in Group Life Insurance premiums .

(10) Represents a discretionary bonus .

(11) Consists of $468 in Group Life Insurance premiums and $9,595 in contributions made by us pursuant to our 401 ( k) Plan .

(12) Consists of $471 in Group Life Insurance premiums and $10,011 contributions made by us pursuant to our 401 (k) Plan.

Option Grants in Last Fiscal Yea rThe following table sets forth information concerning stock options granted to our Chief Executive Officer and our Named Executive Officers during

fiscal year 2004. These options were granted under our 1996 Stock Option Plan, as amended, and provide for vesting of the underlying common stock ratablyover a period of 48 months beginning one month after the date of grant . Options were granted at an exercise price equal to the closing sale price of the common

stock on The Nasdaq National Market on that date .

Percent ofNumber of Total OptionsSecurities Granted to Exercise

Underlying Employees Pric eOptions in Fiscal Per Expiration

Name Granted Year (1) Share Date

Vivek Y .Ranadiv6 500,000 3 .81 $ 5 .99 12/03/1 31,000,000 7.61% 7 .30 05/07/1 4

William R . Hughes 30,000 0.23 $ 5 .99 12/03/1 3

100,000 0.76 6.98 07/22/1 470,000 0 .53% 7 .30 05/07/1 4

Christopher Larsen 35,000 0 .27 $ 5.99 12/03/1 375,000 0 .57% 7.30 5/07/1 4

Christopher G. O'Meara 70,000 0 .53 $ 5 .99 12/03/1 360,000 0 .46% 7 .30 05/07/1 4

Murray Rode 40,000 0 .30 $ 5.99 12/03/1 375,000 0 .57 7 .30 05/07/1 4

100,000 0 .76% 8 .61 06/16/1 4

(1) Based on a total of options to purchase 13,135,702 shares granted to all of our employees in fiscal year 2004

Potential Realizable Valueat Assumed Annual Rat e

of Stock Price Appreciationfor Option Term(2)

5% ($) 10%($)

$ 1,883,539 $ 4,773,2594,590,931 11,634,320

113,012 286,39 6438,968 1,112,43 2321,365 814,40 2

131,848 334,12 8344,320 872,574

263,696 668,25 6275,456 698,05 9

150,683 381,86 1344,320 872,57 4541,478 1,372,21 2

(2) Potential realizable values are net of exercise price, but before deduction of taxes associated with exercise . These amounts represent certain assumed rates

of appreciation only, based on SEC rules, and do not represent our estimate of future stock prices . No gain to an optionee is possible without an increase in

stock price, which will benefit all stockholders commensurately . Actual realizable values, if any, on stock option exercises are dependent on the futureperformance of our common stock, overall market conditions and the option holders' continued employment through the vesting period .

13

Aggregate Stock Option Exercises in Fiscal Year 2004 and Fiscal Year-End Value s

The following table sets forth information concerning option exercises during fiscal year 2004 and the exercisable and unexercisable options held as ofNovember 30, 2004 by our Chief Executive Officer and our Named Executive Officers . The amounts under "Value of Unexercised In-the-Money Options"were calculated as the difference between the exercise price of the applicable option and the closing price of our common stock on The Nasdaq National Marketon November 30, 2004, which was $11 .50 .

Name

Vivek Y . Ranadivd

William R . Hughes

Christopher Larsen

Christopher G . O'Meara

Murray Rod e

Employment and Transition Agreements

Number ofShares Value

Acquired Realizedon Exercise ($)

Number of Securities Value of UnexercisedUnderlying Unexercised In-the-Money Options

Options at November 30, 2004 at November 30, 2004 ($ )

Exercisable Unexercisable Exercisable Unexercisabl e

- - 10,687,499

- - 169,604

- - 119,480

- - 744,685

20,000 98,400 259,560

2,000,000 68 ,658,979 8,576,77 3

257,708 604,190 1,266,16 9

340,520 691, 991 1,901,85 9

265,312 4,542,285 1,208,45 6

222,062 1,281 , 068 885,68 2

Mr. Ranadive is a party to an employment agreement with us which provides that if Mr . Ranadive's employment is terminated by the Company withoutcause he will receive (i) twelve months of base salary and benefit plan continuation ; (ii) a lump sum payment equal to his actual bonus received for the fiscal yearimmediately preceding the fiscal year in which the termination occurs ; and (iii) twelve months of accelerated vesting of his stock options and the opportunity toexercise such vested options during that period . Generally, cause means a willful failure to perform or breach of fiduciary duty involving material injury to theCompany, an act of dishonesty or fraud intended to be self-serving or a felony conviction . If Mr . Ranadiv€'s employment is terminated within three months priorto or up to twelve months following a change of control and without cause, he will receive (i) twenty-four months of base salary and benefit plan continuation ;(ii) a lump-sum payment equal to two times the average of his actual bonus for the two fiscal years immediately preceding the fiscal year in which the change ofcontrol occurs ; (iii) twenty-four months of accelerated vesting of his stock options and the opportunity to exercise such vested options for eighteen months ; and(iv) a Section 280G gross-up . Further details of Mr. Ranadiv6's compensation set forth in his employment agreement are set forth in the Report of th eCompensation Committee of the Board of Directors . The terms of the agreement were reviewed and approved by the Compensation Committee .

Each of our executive officers is a party to our standard employee non-disclosure and invention assignment agreement . Under the non-disclosureagreements, for one year following their termination, our employees agree not to solicit any other employee to leave our employ . These employees also agree notto disclose any confidential information that they obtained during their employment to any third parties at any time during or subsequent to their employment . Inaddition, any inventions, discoveries or improvements created by the employees during their employment belong to us .

We entered into a transition agreement with David Rice on April 30, 2004 , pursuant to which Mr . Rice resigned as our Executive Vice President,Operations . Pursuant to the terms of the agreement , we paid Mr . Rice approximately $123,440 .

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that our executive officers and directors, and persons who own more than 10%of a registered class of our equity securities, file reports of ownership and changes in ownership with the Securities and Exchange Commission . Executiveofficers, directors and greater than 10% stockholders are required by Securities and Exchange Commission rules to furnish us wit h

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douglas j. clark, state bar no. 171499 wilson sonsini...

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