UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2003

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

For the transition period from to

Commission file number: 000-23997

BRIO SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

Delaware

77-0210797

(State or other jurisdiction of incorporation or

organization)

(I.R.S. Employer Identification No.)

4980 Great America Parkway

Santa Clara, CA 95054

(Address of principal executive offices, including zip code)

(408) 496 – 7400

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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

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

As of August 11, 2003 there were 38,112,498 shares of the registrant’s Common Stock outstanding.

BRIO SOFTWARE, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED JUNE 30, 2003

INDEX

		Page
PART I. Financial Information

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets – June 30, 2003 and March 31, 2003	3

	Condensed Consolidated Statements of Operations – Three Months Ended June 30, 2003 and 2002	4

	Condensed Consolidated Statements of Cash Flows – Three Months Ended June 30, 2003 and 2002	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	37

PART II. Other Information

Item 1.	Legal Proceedings	38

Item 2.	Changes in Securities and Use of Proceeds	38

Item 3.	Defaults Upon Senior Securities	38

Item 4.	Submission of Matters to a Vote of Security Holders	38

Item 5.	Other Information	38

Item 6.	Exhibits and Reports on Form 8-K	38

	Signatures	39

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

BRIO SOFTWARE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	June 30, 2003			March 31, 2003⁽¹⁾
	(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents	$	15,519		$	14,743
Short-term investments		14,097			13,876
Accounts receivable, net of allowance for doubtful accounts and sales returns of $1,687 and $1,817, respectively		14,780			18,466
Inventories		247			268
Prepaid expenses and other current assets		3,381			3,700

Total current assets		48,024			51,053
Property and Equipment, net		14,506			15,642
Other Noncurrent Assets		1,769			1,702

	$	64,299		$	68,397

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Note payable, current portion	$	1,667		$	1,667
Accounts payable		4,880			6,451
Accrued liabilities—
Payroll and related benefits		5,433			5,801
Other		7,054			7,109
Capital leases, current		52			127
Deferred revenue, current		32,786			33,670

Total current liabilities		51,872			54,825
Long-term Liabilities:
Deferred revenue		1,058			1,029
Note payable		833			1,250
Facility closure accrual		8,483			9,023
Deferred rent		821			778

Total liabilities		63,067			66,905

Stockholders’ Equity:
Common stock		38			38
Additional paid-in capital		104,240			102,438
Accumulated comprehensive loss		(687	)		(701	)
Accumulated deficit		(102,359	)		(100,283	)

Total stockholders’ equity		1,232			1,492

	$	64,299		$	68,397

⁽¹⁾

This financial information is derived from Brio Software, Inc.’s audited consolidated financial statements.

See accompanying notes to the condensed consolidated financial statements.

BRIO SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended June 30,
	2003			2002
Revenues:
License fees	$	8,567		$	12,021
Services		16,247			14,114

Total revenues		24,814			26,135

Cost of revenues:
License fees		295			411
Services (includes $159 and $(386), respectively, in stock compensation charges (benefit))		4,958			4,355

Total cost of revenues		5,253			4,766

Gross profit		19,561			21,369

Operating expenses:
Research and development (includes $275 and $(543), respectively, in stock compensation charges (benefit))		5,289			5,117
Sales and marketing (includes $259 and $(758), respectively, in stock compensation charges (benefit))		11,982			11,971
General and administrative (includes $899 and $(1,505), respectively, in stock compensation charges (benefit))		3,871			1,346
Loss on disposal of property and equipment		35			964
Facility closure expenses		167			—
Severance and related benefit expenses		—			1,000

Total operating expenses		21,344			20,398

Income (loss) from operations		(1,783	)		971
Interest and other income (expense), net		(166	)		914

Income (loss) before provision for income taxes		(1,949	)		1,885
Provision for income taxes		126			120

Net income (loss)	$	(2,075	)	$	1,765

Basic net income (loss) per share	$	(0.05	)	$	0.05

Shares used in computing basic net income (loss) per share		37,881			36,710

Diluted net income (loss) per share	$	(0.05	)	$	0.05

Shares used in computing diluted net income (loss) per share		37,881			36,769

See accompanying notes to the condensed consolidated financial statements.

BRIO SOFTWARE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended June 30,
	2003			2002
Cash Flows from Operating Activities:
Net income (loss)	$	(2,075	)	$	1,765

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities—
Depreciation and amortization		1,358			1,814
Amortization of intangible long-term assets		36			36
Provision for returns and doubtful accounts		100			—
Stock compensation charges (benefit)		1,592			(3,192	)
Loss on disposal of property and equipment		35			964
Changes in operating assets and liabilities—
Accounts receivable		3,569			(434	)
Inventories		21			(92	)
Prepaid expenses, other current assets and other noncurrent assets		312			235
Accounts payable and accrued liabilities		(1,994	)		(1,685	)
Deferred revenue		(855	)		(341	)
Other noncurrent liabilities		(497	)		103

Net cash provided by (used in) operating activities		1,602			(827	)

Cash Flows from Investing Activities:
Purchases of short-term investments		(3,926	)		(5,528	)
Sales of short-term investments		3,700			3,000
Purchases of property and equipment		(186	)		(694	)

Net cash used in investing activities		(412	)		(3,222	)

Cash Flows from Financing Activities:
Repayments under note payable		(417	)		(417	)
Proceeds from issuance of common stock, net		114			1,215
Reduction of capital lease obligations		(75	)		—

Net cash provided by (used in) financing activities		(378	)		798

Net increase (decrease) in cash and cash equivalents		812			(3,251	)
Effect of exchange rate changes		(36	)		(744	)
Cash and cash equivalents, beginning of period		14,743			16,226

Cash and cash equivalents, end of period	$	15,519		$	12,231

See accompanying notes to the condensed consolidated financial statements.

BRIO SOFTWARE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Brio Software, Inc. (“Brio”) in accordance with generally accepted accounting principles for interim financial information pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. However, Brio believes that the disclosures are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in Brio’s annual report on Form 10-K for the fiscal year ended March 31, 2003.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year.

The preparation of condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue Recognition

Brio derives revenues from two sources, perpetual license fees and services. Services include software maintenance and support, training and consulting and system implementation services. Maintenance and support consists of technical support and software upgrades and enhancements. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in the amount and timing of Brio’s revenue for any period if different conditions were to prevail.

Brio applies the provisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and related technical practice aids to all transactions involving the sale of software products.

Brio recognizes product revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is probable. In software arrangements that include rights to multiple elements, such as software products and services, Brio uses the residual method under which revenue is allocated to the undelivered elements based on vendor-specific objective evidence (VSOE) of the fair value of such undelivered elements. VSOE of the undelivered elements is determined based on the price charged when such elements are sold separately. The residual amount of revenue is allocated to the delivered elements and recognized as revenue. Such undelivered elements in these arrangements typically consist of services.

Brio uses a purchase order or a signed contract as persuasive evidence of an arrangement for sales of software, maintenance renewals and training. Sales through Brio’s value added resellers, private label partners, original equipment manufacturers, resellers, system integrators and distributors (collectively “resellers”) are evidenced by a master agreement governing the relationship together with binding purchase orders on a transaction-by-transaction basis. Brio uses a signed statement of work to evidence an arrangement for consulting and system implementation services.

Software is delivered to customers electronically or on a CD-ROM. Brio assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. Brio’s standard payment terms are generally less than 90 days. In instances where payments are subject to extended payment terms, revenue is deferred until payments become due, which is generally when the payment is received. Brio assesses collectibility based on a number of factors, including the customer’s past payment history and its current creditworthiness. If Brio determines that collection of a fee is not probable, Brio defers the revenue and recognizes it at the time collection becomes probable, which is generally upon receipt of cash payment. If an acceptance period is other than in accordance with standard user documentation, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.

When licenses are sold together with consulting and system implementation services, license fees are recognized upon shipment, provided that (1) the above criteria have been met, (2) payment of the license fees is not dependent upon the performance of the consulting and system implementation services, (3) the services are not essential to the functionality of the software, and (4) VSOE exists for the undelivered elements. For arrangements that do not meet the above criteria, both the product license revenues and services revenues are recognized in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts.” Brio accounts for the arrangements under the completed-contract method pursuant to SOP 81-1 as reliable estimates are typically not available for the costs and efforts necessary to complete the consulting and system implementation services.

The majority of Brio’s consulting and system implementation services qualify for separate accounting. Brio uses VSOE of fair value for the services and maintenance to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Brio’s consulting and system implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. For a fixed-fee contract, Brio recognizes revenue using the completed-contract method, as reliable input or output measures generally do not exist. For time-and-materials contracts, Brio recognizes revenue as services are performed.

Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. Training revenue is recognized when the training is provided.

Comprehensive Income (Loss)

A summary of comprehensive income (loss) follows (in thousands):

	Three Months Ended June 30,
	2003			2002
Net income (loss)	$	(2,075	)	$	1,765
Unrealized loss on short-term investments, net of tax		(118	)		(35	)
Foreign currency translation adjustment		(569	)		(424	)

Comprehensive income (loss)	$	(2,762	)	$	1,306

Short-term Investments

A summary of Brio’s available-for-sale investment portfolio is as follows (in thousands):

	June 30, 2003
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate debt & equity securities and commercial paper	$	10,437	$	—	$	(123	)	$	10,314
Government debt securities		11,041		19		—			11,060

Total	$	21,478	$	19	$	(123	)		21,374

Less: Cash equivalents									(7,277	)

Total short-term investments								$	14,097

	March 31, 2003
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate debt & equity securities and commercial paper	$	9,802	$	—	$	(122	)	$	9,680
Government debt securities		9,629		10		—			9,639

Total	$	19,431	$	10	$	(122	)		19,319

Less: Cash equivalents									(5,443	)

Total short-term investments								$	13,876

Computation of Basic and Diluted Net Income (Loss) Per Share

Basic net income (loss) per share is computed using the weighted-average number of shares of common stock outstanding. Diluted net income (loss) per share information is computed using the weighted average number of shares of common and potential common stock outstanding. For the three months ended June 30, 2003 and 2002, 8,073,317 and 10,592,747 potential common shares from conversion of stock options and contingently issuable shares, respectively, have been excluded from the calculation of net income (loss) per share, with a weighted-average exercise price of $2.15 and $1.88 per common share, respectively, as their effect would be antidilutive.

The following table presents the computation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended June 30,
	2003			2002
Net income (loss)	$	(2,075	)	$	1,765
Basic and diluted net income (loss) per share:
Shares used in computing basic net income (loss) per share		37,881			36,710
Dilutive effect of common share equivalents		—			59

Shares used in computing diluted net income (loss) per share		37,881			36,769
Basic net income (loss) per share	$	(0.05	)	$	0.05
Diluted net income (loss) per share	$	(0.05	)	$	0.05

Stock-Based Compensation

Brio adopted the disclosure requirements of Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” during the quarter ended March 31, 2003. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation and also amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the methods of accounting for stock-based employee compensation and the effect of the method used on reported results. As permitted by SFAS No. 148 and SFAS No. 123, Brio continues to apply the accounting provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”

At June 30, 2003, Brio has six stock-based employee compensation plans. The following table illustrates the effect on net income (loss) and net income (loss) per share if Brio had applied the fair value recognition provisions of SFAS No. 123. The following table presents pro forma information (in thousands, except per share amounts):

	Three Months Ended June 30,
	2003			2002
Net income (loss):
As reported	$	(2,075	)	$	1,765
Add: Stock compensation charges included in reported net loss, net of tax		1,592			—
Deduct: Stock compensation benefit included in reported net income, net of tax		—			(3,192	)
Deduct: Stock compensation charges determined under fair-value method for all awards		(3,346	)		(3,064	)

Pro forma	$	(3,829	)	$	(4,491	)

Basic net income (loss) per share:
As reported	$	(0.05	)	$	0.05
Pro forma	$	(0.10	)	$	(0.12	)
Diluted net income (loss) per share
As reported	$	(0.05	)	$	0.05
Pro forma	$	(0.10	)	$	(0.12	)

Reclassifications

Certain prior period financial statement balances have been reclassified to conform to the fiscal 2004 presentation.

Note 2. Line of Credit

In December 2001, Brio entered into an accounts receivable-based revolving bank line of credit with Wells Fargo Foothill (formerly Foothill Capital Corporation, “Foothill”). The line provides for up to $15.0 million in borrowings, with interest at the bank’s prime rate plus one percent, but in no event less than 7.0% (7.0% at June 30, 2003). Credit available under the line of credit will be reduced by the amount outstanding under a term loan in the amount of up to $5.0 million, with interest at the bank’s prime rate plus three percent, but in no event less than 7.0% (7.0% at June 30, 2003), and by any outstanding letters of credit. Borrowings under the bank line are limited to 80% of non-maintenance related, domestic eligible accounts receivable. The line of credit is collateralized by substantially all of Brio’s assets, including Brio’s intellectual property, accounts receivable and property and equipment to the extent required to secure the line.

The line of credit with Foothill initially required Brio to (a) maintain minimum EBITDA of $750,000 for the quarter ended March 31, 2002; $1,700,000 for the quarter ended June 30, 2002; $2,000,000 for the quarter ended September 30, 2002; and $1,800,000 for each quarter thereafter; (b) minimum recurring domestic maintenance revenues of $6,750,000 for each quarter; (c) minimum excess availability under the credit line plus cash equivalents of at least $4,000,000 at any time; and (d) maximum capital expenditures of $750,000 per quarter.

On February 27, 2002, Brio amended the initial line of credit with Foothill to change the definition of EBITDA to add back extraordinary non-cash losses of up to $500,000 occurring before June 30, 2002.

On May 15, 2002, Brio amended the covenants, on a prospective basis, requiring Brio to maintain a maximum EBITDA loss of $800,000 for the quarter ended June 30, 2002; a minimum EBITDA of $800,000 for the quarter ended September 30, 2002; $1,200,000 for the quarter ended December 31, 2002; and $1,800,000 for each quarter thereafter. For the quarter ended December 31, 2002, the definition of EBITDA was amended to include a one-time add back of non-cash expense resulting from the write-down of Brio’s computers and related technology in an aggregate amount not to exceed $3,000,000.

Additionally, on June 23, 2003, Brio amended the covenants, on a prospective basis, to require Brio to maintain a minimum EBITDA of breakeven for the quarter ended June 30, 2003; $500,000 for the quarter ended September 30, 2003; $1,000,000 for the quarter ended December 31, 2003; and $1.5 million for each quarter thereafter. In addition, Brio must maintain a minimum excess availability under the credit line plus cash equivalents of at least $6,000,000 at any time of which not less than $2,000,000 shall be comprised of cash equivalents. The amendment also allows Brio to permit its foreign subsidiaries to invest in foreign cash equivalents such as certificates of deposits. Brio was in compliance with these covenants as of June 30, 2003 and expects to be in compliance with its covenants during the remainder of fiscal 2004.

As of June 30, 2003, $2.5 million was outstanding under the term loan, of which $1.7 million is classified as short-term and $833,000 is classified as long-term. The term loan amortizes over 36 months and requires monthly payments of $139,000 plus interest. The line of credit has prepayment penalties of up to three percent. The line of credit expires in December 2004. As of June 30, 2003, based on domestic eligible accounts receivable there was $2.2 million of additional borrowings available under the line of credit. As of June 30, 2003, no amounts other than the term loan are outstanding under the line of credit.

Note 3. Industry Segment and Geographic Information

Brio’s reportable segments are based on geographic area. Brio’s chief operating decision-makers are the President and Chief Executive Officer and the Chief Financial Officer. These chief operating decision-makers use net operating income to measure each region’s profit or loss and to allocate resources. Each region has a Vice President or Managing Director who is directly accountable to and maintains regular contact with the chief operating decision-makers regarding the operating activities, financial results and budgeting for the region. Brio identified the regions as segments under SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” based upon: 1) each region engaging in operating activities from which it generates revenue and expenses; 2) each region’s operating results being regularly reviewed by the chief operating decision-makers to make decisions about resources to be allocated to the regions and assess the regions’ performance; and 3) each region having discrete financial information available.

Brio markets its products in the United States and Canada and in other foreign countries through its domestic sales personnel and its foreign subsidiaries. Reportable segments disclosures based on geographic area were as follows for the three months ended June 30, 2003 and 2002 (in thousands):

	North America			Europe, the Middle East, and Africa		Asia Pacific and rest of the world		Eliminations			Total
2003
Revenues:
External customers	$	18,356		$	3,522	$	2,937	$	—		$	24,815
Intersegment		2,200			—		336		(2,536	)		—

Total revenues		20,556			3,522		3,273		(2,536	)		24,815
Other Disclosures:
Depreciation and amortization		1,215			104		39		—			1,358
Interest income		67			2		6		—			75
Interest expense		78			—		9		—			87
Stock compensation charges		1,592			—		—		—			1,592
Facility closure expenses		167			—		—		—			167
Provision for income taxes		120			—		6		—			126

2002
Revenues:
External customers	$	20,504		$	3,352	$	2,279	$	—		$	26,135
Intersegment		1,564			—		360		(1,924	)		—

Total revenues		22,068			3,352		2,639		(1,924	)		26,135

Other Disclosures:
Depreciation and amortization		1,658			117		39		—			1,814
Interest income		60			6		4		—			70
Interest expense		118			—		—		—			118
Stock compensation benefit		(3,192	)		—		—		—			(3,192	)
Severance and related benefit expenses		473			527		—		—			1,000
Provision for income taxes		110			—		10		—			120

No one foreign country comprised more than 10% of total revenues for the three months ended June 30, 2003 or 2002. None of Brio’s international operations have material long-lived assets. As of June 30, 2003 and March 31, 2003, no customer accounted for more than 10% of total accounts receivable. For the three months ended June 30, 2003 and 2002, no customer accounted for more than 10% of total revenues.

Note 4. Restructuring Charges and Facilities Closure Expenses

In June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force Issue No. 94-3. SFAS No. 146 is effective for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of the commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Brio adopted SFAS No. 146 as of January 1, 2003.

Brio’s Board of Directors had originally approved a restructuring plan to reduce operating expenses in June 2001. Severance and related benefit expenses and facility closure expenses for the three months ended June 30, 2003 and 2002 consisted of restructuring charges related to severance costs associated with workforce reductions in various organizations across the Company and facilities consolidation expenses as follows (in thousands):

	Three Months Ended June 30,
	2003		2002
Severance and related benefit expenses	$	—	$	1,000
Facility closure expenses		167		—

Total restructuring charges	$	167	$	1,000

The severance and related benefit expenses and facility closure accrued liabilities as of June 30, 2003 are as follows (in thousands):

	Severance and Related Benefits			Facility Closure			Total
Accrual balance at March 31, 2003	$	607		$	11,111		$	11,718
Total charge		—			167			167
Amount utilized		(303	)		(2,795	)		(3,098	)

Accrual balance at June 30, 2003	$	304		$	8,483		$	8,787

During the three months ended June 30, 2003, Brio recorded facility closure expenses of $167,000 which represents accretion expense associated with the difference between the present value and fair value of the expected future cash flows related to the fiscal 2003 abandonment of two floors, or approximately 56,400 square feet, at our corporate headquarters in Santa Clara, California. These facility closure expenses were calculated in accordance with SFAS No. 146.

Brio will reassess this liability each quarter based on current market conditions. Revisions to the estimates of these liabilities could materially impact Brio’s operating results and financial position in future periods if anticipated events and key assumptions, such as the timing, amounts and probabilities of occurrence of sublease rental income, change from previous estimates.

During the three months ended June 30, 2002, Brio recorded approximately $1.0 million in costs associated with severance and related benefits associated with the workforce reductions in various organizations across the Company to consistently align Brio’s expenses with its revenues. Brio reduced its headcount by approximately 41 employees as of June 30, 2002. All termination notices and benefits were communicated to the affected employees prior the end of the quarter and all employees had been terminated as of June 30, 2002.

Note 5. Stock Compensation Charges (Benefit)

In November 2001, Brio commenced an option exchange program under which eligible employees were given the opportunity to exchange approximately 7.5 million of their existing options to purchase common stock of the Company for new options, with a new exercise price of $2.00 and the same vesting schedule as the original options. The right to exchange terminated on December 5, 2001, at which time 6.9 million shares had elected the option. This option exchange program is deemed an option repricing and therefore, variable plan accounting applies. For each interim period, Brio determines the change in fair value of the options that have not been exercised, cancelled or expired, and records a stock compensation expense based on the vesting schedule of the options. If there is a reduction in the market value of the options, Brio records a reduction in the stock compensation expense, but not in excess of what was recognized to date. For the three months ended June 30, 2003, Brio recognized a stock compensation charge of approximately $1.6 million relating to the option exchange program. For the three months ended June 30, 2002, Brio recognized a stock compensation benefit of approximately $3.2 million relating to the option exchange program.

Note 6. Stock Option Exchange Program

In November 2002, Brio announced a voluntary stock option exchange program under which eligible employees were given the opportunity to elect to cancel outstanding stock options held by them in exchange for an equal number of new options to be granted at a future date. These elections needed to be made on or before December 16, 2002 and were to include all options granted to the eligible employee before August 2, 2000 as well as all options granted to the eligible employee after May 13, 2002. A total of 163 employees elected to participate in the exchange program. Those 163 employees tendered a total of 960,906 options to purchase Brio’s common stock in return for Brio’s promise to grant new options on the grant date of June 18, 2003 or thereafter. The exercise price of the new options was equal to the fair market value of the Brio’s common stock on the date of grant. The exchange program was not made available to Brio’s executives, directors or consultants. On June 18, 2003, a total of 863,017 options were granted to 151 employees at an exercise price of $2.45.

Note 7. Subsequent Event

On July 23, 2003, Brio entered into a definitive agreement (the “Agreement”) for Hyperion Solutions Corporation (“Hyperion”) to acquire Brio (the “Merger”). Under the terms of the Agreement, Brio stockholders will receive a combination of 0.109 shares of Hyperion common stock and $0.363 cash for each share of Brio common stock. Brio stockholders will own approximately 10.5% of the outstanding capital stock of the combined company. The Merger is expected to close in the fourth calendar quarter of 2003. The Merger is subject to regulatory review, approval by Brio’s stockholders and certain other customary conditions.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto, and with Brio’s audited Consolidated Financial Statements and Notes thereto for the fiscal year ended March 31, 2003 included in Brio’s Form 10-K and the other information included elsewhere in this Report. Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements. The forward-looking statements contained herein are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. For a more detailed discussion of these and other business risks, see “Risk Factors That May Affect Future Operating Results” below.

Unless expressly stated or the context otherwise requires, the terms “we”, “our”, “us” and “Brio” refers to Brio Software, Inc. and its subsidiaries.

Overview

Founded in 1989, Brio Software, Inc. (Brio) helps Global 3000 companies improve business performance by creating new value from existing information systems and, ultimately, aligning everyone in the enterprise with key corporate goals. The category, business intelligence software, lets companies access, analyze and share information, offering users relevant, accurate and timely insight into the variables that impact their business. With this insight, companies can make superior business decisions.

Brio provides software solutions that help companies more easily extract, integrate, analyze and report information. The Brio Performance Suite includes advanced query and analysis technologies, along with information delivery through enterprise-wide reporting and personalized display screens known as “performance dashboards.” Our software products enable individuals, workgroups and executives in an organization to more easily view data and information allowing for more actionable insight resulting in superior business decisions. We had net losses of $16.6 million in fiscal 2003, $25.7 million in fiscal 2002 and $9.7 million in fiscal 2001. We had a net loss of approximately $2.1 million during the three months ended June 30, 2003. As of June 30, 2003, we had stockholders’ equity of approximately $1.2 million and an accumulated deficit of approximately $102.4 million. See “Risk Factors That May Affect Future Operating Results” for a description of the risks related to our operating results fluctuations in future periods.

On July 23, 2003, we entered into a definitive agreement (the “Agreement”) for Hyperion Solutions Corporation (“Hyperion”) to acquire us (the “Merger”). Under the terms of the Agreement, Brio stockholders will receive a combination of 0.109 shares of Hyperion common stock and $0.363 cash for each share of Brio common stock. Brio stockholders will own approximately 10.5% of the outstanding capital stock of the combined company. The Merger is expected to close in the fourth calendar quarter of 2003. The Merger is subject to regulatory review, approval by Brio’s stockholders and certain other customary conditions.

Impact of Economic Downturn

Due to the severe economic downturn experienced beginning April 1, 2001 and continuing through June 30, 2003, we experienced a reduction in total revenues for three of the quarters during fiscal 2003 when compared to fiscal 2002 and for the three months ended June 30, 2003 when compared to the three months ended June 30, 2002. Total revenues for each of the fiscal quarters noted below were as follows (in thousands):

	Fiscal 2004		Fiscal 2003		Fiscal 2002
June 30	$	24,814	$	26,135	$	29,389
September 30		N/A	$	24,823	$	28,225
December 31		N/A	$	25,451	$	28,347
March 31		N/A	$	26,657	$	25,407

The impact was initially felt through a marked reduction in the deal “pipeline” and a slowing of contract closings throughout fiscal 2002 and continuing through the first quarter in fiscal 2004. We experienced a decline in demand for our products as our customers reduced their capital spending. As a result, deal sizes have generally become smaller. We continue to expect a more moderate and conservative information technology (IT) capital spending environment throughout fiscal 2004.

During fiscal 2003, to further align our costs with revenues, we reduced our headcount by 26 employees in the first quarter and 26 employees in the fourth quarter and restructured our management in Europe and Asia Pacific. We also closed additional underutilized facilities and wrote-off the associated leasehold improvements and furniture and fixtures during the second and fourth quarters and continued to closely monitor overall operating expenses. We anticipate continuing our cost reduction efforts as required on a go-forward basis. In particular, we are continuing to evaluate the underutilization of various facilities throughout the world in an effort to consolidate and/or eliminate certain facilities to further reduce operating expenses. In addition, we are also evaluating computer software systems utilized throughout the world, which could lead to additional restructuring expenses in fiscal 2004.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, valuation allowances and accrued liabilities, long-lived assets, income taxes and facility closure expenses. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

We derive revenues from two sources, perpetual license fees and services. Services include software maintenance and support, training and consulting and system implementation services. Maintenance and support consists of technical support and software upgrades and enhancements. Significant management judgments and estimates are made and used to determine the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if different conditions were to prevail.

We apply the provisions of Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9 “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and related technical practice aids to all transactions involving the sale of software products.

We recognize product revenue when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable and collection of the resulting receivable is probable. In software arrangements that include rights to multiple elements, such as software products and services, we use the residual method under which revenue is allocated to the undelivered elements based on vendor-specific objective evidence (VSOE) of the fair value of such undelivered elements. VSOE of the undelivered elements is determined based on the price charged when such elements are sold separately. The residual amount of revenue is allocated to the delivered elements and recognized as revenue. Such undelivered elements in these arrangements typically consist of services.

We use a purchase order or a signed contract as persuasive evidence of an arrangement for sales of software, maintenance renewals and training. Sales through our value-added resellers, private label partners, original equipment manufacturers, resellers, system integrators and distributors (collectively “resellers”) are typically evidenced by a master agreement governing the relationship, together with binding purchase orders on a transaction-by-transaction basis or periodic royalty reports. We use a signed statement of work to evidence an arrangement for consulting and system implementation services.

Software is delivered to customers electronically or on a CD-ROM. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. Our standard payment terms are generally less than 90 days. In instances where payments are subject to extended payment terms, revenue is deferred until payments become due, which is generally when the payment is received. We assess collectibility based on a number of factors, including the customer’s past payment history and its current creditworthiness. If we determine that collection of a fee is not probable, we defer the revenue and recognize it at the time collection becomes probable, which is generally upon receipt of cash payment. If an acceptance period is other than in accordance with standard user documentation, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.

When licenses are sold together with consulting and system implementation services, license fees are recognized upon shipment, provided that (1) the above criteria have been met, (2) payment of the license fees is not dependent upon the performance of the consulting and system implementation services, (3) the services are not essential to the functionality of the software and (4) VSOE exists for the undelivered elements. For arrangements that do not meet the above criteria, both the product license revenues and services revenues are recognized in accordance with the provisions of SOP 81-1, “Accounting for Performance of Construction Type and Certain Production Type Contracts.” We account for the arrangements under the completed-contract method pursuant to SOP 81-1 as reliable estimates typically are not available for the costs and efforts necessary to complete the consulting and system implementation services.

The majority of our consulting and system implementation services qualify for separate accounting. We use VSOE of fair value for the services and maintenance to account for the arrangement using the residual method, regardless of any separate prices stated within the contract for each element. Our consulting and system implementation service contracts are bid either on a fixed-fee basis or on a time-and-materials basis. For a fixed-fee contract, we recognize revenue using the completed-contract method, as reliable input or output measures generally do not exist. For time-and-materials contracts, we recognize revenue as services are performed.

Maintenance and support revenue is recognized ratably over the term of the maintenance contract, which is typically one year. Training revenue is recognized when the training is provided.

Estimating Valuation Allowances

Management specifically analyzes accounts receivable and records a provision for doubtful accounts based on a detailed assessment of our accounts receivable and our allowance for doubtful accounts. Management considers the following: (1) historical bad debts, (2) the age of the accounts receivable, (3) customer concentrations, (4) customer creditworthiness, (5) the customer mix in each of the aging categories, (6) current economic trends, (7) changes in customer payment terms, (8) changes in customer demand and (9) trends in our accounts receivable, when evaluating the adequacy of the allowance for doubtful accounts in any accounting period. Should any of these factors change, the estimates made by management will also change, which could impact our future provision for doubtful accounts.

Management also specifically reviews our allowance for sales returns on an ongoing basis. In estimating our allowance for sales returns, management considers the following: (1) historical product returns, (2) general economic conditions in our markets and (3) trends in license revenues. Should any of these factors change, the estimates made by management will also change, which could impact our future allowance for sales returns.

Impairment or Disposal of Long-Lived Assets

We periodically review our long-lived assets, including property and equipment and certain identifiable intangibles, for impairment when events or changes in facts and circumstances indicate that their carrying amount may not be recoverable in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, which the Company adopted on April 1, 2002. Events or changes in facts and circumstances that we consider as impairment indicators include, but are not limited to (1) a significant decrease in the market value of the asset, (2) significant changes to the asset or the manner in which we use it, (3) adverse economic trends and (4) a significant decline in expected operating results.

When we determine that one or more impairment indicators are present for our long-lived assets, we compare the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. If the carrying amount of the asset is greater than the net future undiscounted cash flows that the asset is expected to generate, we would recognize an impairment loss. The impairment loss would be the excess of the carrying amount of the asset over its fair value.

We recorded an impairment loss of $3.1 million during fiscal 2003 due to the write-off of leasehold improvements and furniture and fixtures. Based on the additional facilities consolidation and review for underutilization, we may record additional impairment losses on our long-lived assets during fiscal 2004.

Income Taxes

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets.

We record a valuation allowance due to uncertainties related to our ability to utilize some of the deferred tax assets, primarily consisting of certain net operating loss carryforwards, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance, which could have a material impact on our operating results and financial condition.

Purchased Intangibles and Goodwill

We review our goodwill for impairment when events indicate that its carrying amount may not be recoverable or, at least once a year in accordance with SFAS No. 142, “Goodwill and Other Intangibles”, which we adopted on April 1, 2002. We are required to test our goodwill for impairment at the reporting unit level. We have determined that we have only one reporting unit. The test for goodwill impairment is a two-step process:

Step 1—We compare the carrying amount of the reporting unit, which is the book value of the entire company, to the fair value of the reporting unit, which corresponds to our market capitalization. If the carrying amount of the reporting unit exceeds its fair value, we have to perform the second step of the process. If not, no further analysis is needed.

Step 2—We compare the implied fair value of the reporting unit to its carrying amount. If the carrying amount of the reporting unit’s goodwill exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess.

We completed this test upon adoption of SFAS 142 and again during the fourth quarter of fiscal 2003 and were not required to record an impairment loss on goodwill.

Restructuring

We monitor and regularly evaluate our organizational structure and associated operating expenses. Depending on events and circumstances, we may decide to restructure our operations to reduce operating costs. We applied the provisions of Emerging Issues Task Force (“EITF”) No. 94-3, “Liability Recognized for Certain Employee Termination Benefits and other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring”) to all of our restructuring activities initiated before January 1, 2003.

For all of our restructuring activities initiated before January 1, 2003, we accrue for the costs related to a restructuring plan when the following criteria are met:

•

Our board of directors or management having the appropriate level of authority approves the restructuring plan;

•

The plan specifically identifies all significant actions to be taken;

•

Actions required by the plan begin soon after the approval date of the plan and would be completed within one year of the approval date; and

•

Significant changes to the plan are not likely.

If a restructuring plan includes the involuntary termination of employees, the plan must be communicated to the employees who are at risk of being terminated and specifically identify:

•

The number of employees to be terminated;

•

The employees’ functions and locations; and

•

The formula to calculate the termination payment for all employees to be terminated.

Under a restructuring plan, we accrue only for costs that:

•

Are not associated with activities to be continued;

•

Are not generating revenue after the approval date of the plan; and

•

Are incremental to our other costs incurred and are direct results of the restructuring plan, or, are incurred under an existing contractual obligation.

For restructuring activities initiated on January 1, 2003 or after, we apply the provisions of SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

For all of our restructuring activities initiated on January 1, 2003 or after, we accrue for the costs related to a restructuring plan when the following criteria are met:

•

Our board of directors or management having the appropriate level of authority approves the restructuring plan;

•

The plan specifically identifies all significant actions to be taken;

•

Actions required by the plan begin soon after the approval date of the plan and would be completed within one year of the approval date; and

•

Significant changes to the plan are not likely.

If a restructuring plan includes the involuntary termination of employees, the plan must be communicated to the affected employees by the end of applicable quarterly period and the affected employees must be:

•

Informed of their severance and related benefits; and

•

Terminated within forty-five days following the end of the applicable quarterly period unless mandated by law. If any severance arrangement requires future services beyond forty-five 45 days, the liability is accrued as the employee renders his or her services.

Under a restructuring plan, costs are measured at their fair value when the liability is incurred. We accrue only for costs that:

•

Are not associated with activities to be continued; and

•

Are not generating revenue after the approval date of the plan.

Costs to consolidate or close facilities are only accrued when the costs are incurred, even if the costs are incremental to other operating costs or will be incurred as a direct result of an exit or disposal plan.

Our restructuring costs and any resulting accruals involve significant estimates made by management using the best information available at the time the estimates are made, some of which may be provided by third parties. These estimates include facility exit costs, such as lease terminations costs, and timing and market conditions of sublease income and related sublease expense costs, such as brokerage fees.

We regularly evaluate a number of factors to determine the appropriateness and reasonableness of our restructuring accruals. These factors include, but are not limited to, our ability to enter into sublease or lease termination agreements and market data about lease rates, timing and term of potential subleases and costs associated with terminating certain leases on vacated facilities.

Our estimates involve a number of risks and uncertainties, some of which are beyond our control, including future real estate market conditions and our ability to successfully enter into subleases or lease termination agreements upon terms as favorable as those assumed under our restructuring plan. Actual results may differ significantly from our estimates and may require adjustments to our restructuring accruals and operating results in future periods.

Results of Operations

The following table includes consolidated statements of operations data as a percentage of total revenues for the periods indicated:

	Three Months Ended June 30,
	2003		2002
Consolidated Statements of Operations Data:
Revenues:
License fees	35	%	46	%
Services	65		54

Total revenues	100		100

Cost of revenues:
License fees	1		2
Services	20		16

Total cost of revenues	21		18

Gross profit	79		82

Operating expenses:
Research and development	21		20
Sales and marketing	48		46
General and administrative	16		5
Loss on disposal of property and equipment	—		3
Severance and related benefit expenses	—		4
Facility closure expenses	1		—

Total operating expenses	86		78

Income (loss) from operations	(7	)	4
Interest and other income (expense), net	(1	)	3

Income (loss) before provision for income taxes	(8	)	7
Provision for income taxes	—		—

Net income (loss)	(8	)%	7	%

Revenues

We derive revenues from license fees and services, which include software maintenance and support, training and system implementation consulting. Total revenues decreased $1.3 million or 5% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The decrease was primarily due to the continued weakness in the economic environment, which has resulted in continuing lengthening of the enterprise sales cycle and deferred information technology spending. As a result, there was a reduction in the number and size of deals closed when compared to historical results. Due to the continued economic uncertainties, we expect revenues to remain relatively flat in the foreseeable future.

Revenues by geographic location were as follows for the three months ended June 30, 2003 and 2002:

	Three Months Ended June 30,
	2003		2002
Revenues by Geography:
Domestic	$	18,356	$	20,504
International		6,459		5,631

Total revenues	$	24,815	$	26,135

Revenue from international sources increased $828,000 or 15% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The increase was primarily due to increased demand in the Asia Pacific Region as we continued to strengthen and expand our indirect sales efforts in these areas. See Note 3 of Notes to condensed consolidated financial statements for additional information about revenues in geographic areas.

License Fees. Revenues from license fees decreased $3.5 million or 29% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The decrease was primarily due to the continued weakness in the economy and lengthening of the sales cycle for large-scale deployments, which resulted in a reduction in the number and size of deals closed and the price at which we are able to sell, when compared to historical results. We expect license revenues to remain relatively flat in the foreseeable future.

Services. Services revenues increased $2.1 million or 15% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The increase was primarily due to consulting revenues. We expect service revenues to remain relatively flat in the foreseeable future.

Cost of Revenues

License Fees. Cost of revenues from license fees consists primarily of product packaging, shipping, media, documentation and related personnel and overhead allocations. Cost of revenues from license fees decreased $116,000 or 28% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The decrease in absolute dollars was due to the decrease in license revenues. Cost of revenues from license fees may vary between periods due to the mix of customers purchasing master disks, which are less expensive for us to produce relative to customers purchasing “shrinkwrapped” product. We expect that cost of license fees and the associated profit margins will remain flat, as a percentage of total revenues, with the results from the current quarter.

Services. Cost of revenues from services consists primarily of personnel costs and third-party consulting fees associated with providing software maintenance and support, training and system implementation consulting services. Cost of revenues from services increased $603,000 or 14% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The increase was primarily due to the recognition of stock compensation charges of $159,000 during the three months ended June 30, 2003 versus the recognition of a stock compensation benefit of $386,000 during the three months ended June 30, 2002. Cost of revenues from services may vary between periods due to the mix of maintenance and support revenues compared to training and system implementation consulting services revenue as it tends to be more labor intensive to provide training and system implementation consulting services. In addition, the cost of revenues from services may vary due to the volume and mix of services provided by our personnel relative to services provided by outside consultants and to varying levels of expenditures required to support the services organization. We expect that cost of services and the associated profit margins will remain flat, as a percentage of total revenues, with the results from the current quarter.

Operating Expenses

Research and Development. Research and development expenses consist primarily of personnel and related costs associated with the development of new products, the enhancement and localization of existing products, quality assurance and testing. Research and development expenses increased $172,000 or 3% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The increase was primarily due to the recognition of stock compensation charges of $275,000 during the three months ended June 30, 2003 compared to a stock compensation benefit of $543,000 recognized during the three months ended June 30, 2002. The increase was offset by the fiscal 2003 workforce reductions in the research and development organization and overall cost reductions. We expect that our research and development expenses will continue to vary as a percentage of total revenue as we may commit substantial resources to research and development in the future, as we believe that investment for research and development is essential to product and technical leadership. Specifically, we expect research and development expenses to decrease slightly as a percentage of total revenues due to an increased utilization of outsourced offshore service providers to perform quality assurance and localization of new products.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries and other personnel related costs, commissions, bonuses and sales incentives, travel, marketing programs such as trade shows and seminars and promotion costs. Sales and marketing expenses increased $11,000 or less than 1% for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The marginal increase was primarily due to the recognition of stock compensation charges of $259,000 during the three months ended June 30, 2003 compared to a stock compensation benefit of $758,000 during the three months ended June 30, 2002. The increase was offset by lower expenses due to the fiscal 2003 workforce reductions in the sales and marketing organizations, a decrease in travel and entertainment expenses, a decrease in the use of outside sales and marketing services and an overall decrease in discretionary spending. We anticipate that sales and marketing expenses will remain consistent as a percentage of total revenues with the results from the first quarter of fiscal 2004.

General and Administrative. General and administrative expenses consist primarily of personnel costs for finance, human resources, information systems and general management, as well as professional service fees such as legal, accounting and unallocated overhead expenses. General and administrative expenses increased $2.5 million for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The increase was primarily due to the recognition of stock compensation charges of $899,000 during the three months ended June 30, 2003 compared to a stock compensation benefit of $1.5 million during the three months ended June 30, 2002. We expect that our general and administrative expenses will remain consistent, as a percentage of total revenues, with the results from the first quarter of fiscal 2004.

Restructuring Charges and Facility Closure Expenses. Our Board of Directors had originally approved a restructuring plan to reduce operating expenses in June 2001. Severance and related benefit expenses and facility closure expenses for the three months ended June 30, 2003 and 2002 consisted of restructuring charges related to severance costs associated with workforce reductions in various organizations across the Company and facilities consolidation expenses as follows (in thousands):

	Three Months Ended June 30,
	2003		2002
Severance and related benefit expenses	$	—	$	1,000

Facility closure expenses		167		—

Total restructuring charges	$	167	$	1,000

The severance and related benefit expenses and facility closure accrued liabilities as of June 30, 2003 are as follows (in thousands):

	Severance and Related Benefits			Facility Closure			Total
Accrual balance at March 31, 2003	$	607		$	11,111		$	11,718
Total charge		—			167			167
Amount utilized		(303	)		(2,795	)		(3,098	)

Accrual balance at June 30, 2003	$	304		$	8,483		$	8,787

During the three months ended June 30, 2003, we recorded facility closure expenses of $167,000, which represents accretion expense associated with the difference between the present value and fair value of the expected future cash flows related to the fiscal 2003 abandonment of two floors, or approximately 56,400 square feet, at our corporate headquarters in Santa Clara, California. These facility closure expenses were calculated in accordance with SFAS No. 146.

We will reassess this liability each quarter based on current market conditions. Revisions to the estimates of these liabilities could materially impact Brio’s operating results and financial position in future periods if anticipated events and key assumptions, such as the timing, amounts and probabilities of occurrence of sublease rental income, change from previous estimates.

During the three months ended June 30, 2002, we recorded approximately $1.0 million in costs associated with severance and related benefits associated with the workforce reductions in various organizations across the Company to consistently align our expenses with our revenues. We reduced our headcount by approximately 41 employees as of June 30, 2002. All termination notices and benefits were communicated to the affected employees prior the end of the quarter and all employees had been terminated as of June 30, 2002.

Stock Compensation Charges (Benefit)

In November 2001, we commenced an option exchange program under which eligible employees were given the opportunity to exchange approximately 7.5 million of their existing options to purchase our common stock for new options, with a new exercise price of $2.00 and the same vesting schedule as the original options. The right to exchange terminated on December 5, 2001, of which holders of approximately 6.9 million shares elected the option. In accordance with FASB Interpretation (FIN) No. 44, “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25)”, this option exchange program is deemed an option repricing and, therefore, variable plan accounting is being applied. For each interim period, we will determine the change in fair value of the options that have not been exercised, cancelled or expired, and will record a charge based on the vesting schedule of the options. If there is a reduction in the market value of the options, we will record a reduction in the stock compensation charge, but not in excess of what had been recognized to date. For the three months ended June 30, 2003, we recognized a stock compensation charge of approximately $1.6 million relating to the option exchange program. For the three months ended June 30, 2002, we recognized a stock compensation benefit of approximately $3.2 million relating to the option exchange program.

Stock Option Exchange Program

In November 2002, we announced a voluntary stock option exchange program under which eligible employees were given the opportunity to elect to cancel outstanding stock options held by them in exchange for an equal number of new options to be granted at a future date. These elections needed to be made on or before December 16, 2002 and were to include all options granted to the eligible employee before August 2, 2000 as well as all options granted to the eligible employee after May 13, 2002. A total of 163 employees elected to participate in the option exchange program. Those 163 employees tendered a total of 960,906 options to purchase our common stock in return for our promise to grant new options on the grant date of June 18, 2003 or thereafter. The exercise price of the new options was equal to the fair market value of our common stock on the date of grant. The exchange program was not made available to executives, directors or consultants. On June 18, 2003, a total of 863,017 options were granted to 151 employees at an exercise price of $2.45.

Loss on Disposal and Abandonment of Property and Equipment

In May 2002, we performed a physical count of our technology equipment and related components. As a result of the physical count, we recorded a write-off of $6.2 million in property and equipment, which had accumulated depreciation of $5.2 million and resulted in a loss on disposal of $964,000 during the three months ended June 30, 2002.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, is comprised primarily of interest income and foreign currency transaction gains or losses, and realized gains or losses from the sale of investments, net of interest expense. Interest and other income (expense), net, decreased by $1.1 million for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. The decrease was primarily due to smaller gains on foreign exchanges due to the weakening of the dollar against other foreign currencies. We anticipate continued fluctuations in foreign exchange, which we do not currently hedge against. Therefore, results will continue to vary based on such fluctuations in future periods.

Income Taxes

We recorded a provision for income taxes of $126,000 and $120,000 for the three months ended June 30, 2003 and 2002, respectively. The provision for the three months ended June 30, 2003 consists primarily of estimated state and federal tax payments as well as foreign taxes withheld from sales to customers in foreign countries from the United States. The provision for the three months ended June 30, 2002 consists primarily of estimated state and federal tax payments as well as taxes for certain profitable foreign subsidiaries. While we have net operating loss carryforwards available to offset income taxes generated from operations, given the uncertainty of achieving profitability during the remainder of fiscal 2004 and beyond, we maintain a valuation allowance against these net operating carryforwards to reduce the deferred tax asset to zero as of June 30, 2003.

Liquidity and Capital Resources

As of June 30, 2003, we had cash, cash equivalents and short-term investments of $29.6 million.

Line of Credit

In December 2001, we entered into an accounts receivable-based revolving bank line of credit with Wells Fargo Foothill (formerly Foothill Capital Corporation, “Foothill”). The line provides for up to $15.0 million in borrowings, with interest at the bank’s prime rate plus one percent, but in no event less than 7.0% (7.0% at June 30, 2003). Credit available under the line of credit will be reduced by the amount outstanding under a term loan in the amount of up to $5.0 million, with interest at the bank’s prime rate plus three percent, but in no event less than 7.0% (7.0% at June 30, 2003), and by any outstanding letters of credit. Borrowings under the bank line are limited to 80% of non-maintenance related, domestic eligible accounts receivable. The line of credit is collateralized by substantially all of our assets, including our intellectual property, accounts receivable and property and equipment to the extent required to secure the line.

The line of credit with Foothill initially required us to maintain (a) minimum EBITDA of $750,000 for the quarter ended March 31, 2002; $1,700,000 for the quarter ended June 30, 2002; $2,000,000 for the quarter ended September 30, 2002; and $1,800,000 for each quarter thereafter; (b) minimum recurring domestic maintenance revenues of $6,750,000 for each quarter; (c) minimum excess availability under the credit line plus cash equivalents of at least $4,000,000 at any time; and (d) maximum capital expenditures of $750,000 per quarter.

On February 27, 2002, we amended the initial line of credit with Foothill to change the definition of EBITDA to add back extraordinary non-cash losses of up to $500,000 occurring before June 30, 2002 and stock compensation charges resulting from our stock option repricing.

On May 15, 2002, we amended the covenants, on a prospective basis, requiring us to maintain a maximum EBITDA loss of $800,000 for the quarter ended June 30, 2002. Future covenant requirements are a minimum EBITDA of $800,000 for the quarter ended September 30, 2002; $1,200,000 for the quarter ended December 31, 2002; and $1,800,000 for each quarter thereafter. For the quarter ended December 31, 2002, the definition of EBITDA has also been amended to include a one-time add back of non-cash expense resulting from the write-down of our computers and related technology in an aggregate amount not to exceed $3,000,000.

Additionally, on June 23, 2003, we amended the covenants, on a prospective basis, requiring us to maintain a minimum EBITDA of breakeven for the quarter ended June 30, 2003; $500,000 for the quarter ended September 30, 2003; $1,000,000 for the quarter ended December 31, 2003; and $1.5 million for each quarter thereafter. In addition, we must maintain a minimum excess availability under the credit line plus cash equivalents of at least $6,000,000 at any time of which not less than $2,000,000 shall be comprised of cash equivalents. The amendment also allows us to permit our foreign subsidiaries to invest in foreign cash equivalents such as certificates of deposits. We were in compliance with these covenants as of June 30, 2003 and expect to be in compliance with our covenants during the remainder of fiscal 2004.

Although our ability to comply with these covenants is uncertain because of the risk factors highlighted in this document, we believe that we will be in compliance with these covenants through the remainder of fiscal 2004. Moreover, our current cash position would permit us to pay all amounts outstanding under the Foothill loan. As of June 30, 2003, $2.5 million was outstanding under the term loan, of which $1.7 million is classified as short-term and $833,000 is classified as long-term. The term loan amortizes over 36 months and requires monthly payments of $139,000 plus interest. The line of credit has prepayment penalties of up to three percent. The line of credit expires in December 2004. As of June 30, 2003, based on domestic eligible accounts receivable, there were $2.2 million of additional borrowings available under the line of credit. As of June 30, 2003, no amounts other than the term loan are outstanding under the line of credit.

Change in cash position

Net cash provided by operating activities was $1.6 million for the three months ended June 30, 2003. Net cash used in operating activities was $827,000 for the three months ended June 30, 2002. The increase of approximately $2.4 million was due to changes in operating assets and liabilities of approximately $2.8 million and non-cash operating activities of approximately $3.4 million, offset by an increase in net loss of approximately $3.8 million.

Net cash used in investing activities was $412,000 for the three months ended June 30, 2003, consisting primarily of approximately $3.9 million for purchases of short-term investments, $186,000 for purchases of property and equipment, net, offset by $3.7 million of sales of short-term investments. Net cash used in investing activities was $3.2 million for the three months ended June 30, 2002, consisting primarily of approximately $5.5 million for purchases of short-term investments, $694,000 for purchases of property and equipment, net, offset by $3.0 million of sales of short-term investments.

Net cash used in financing activities was $378,000 for the three months ended June 30, 2003, consisting primarily of repayments of our note payable liability and a reduction in capital lease obligations offset by proceeds from the issuance of common stock to employees under various incentive stock plans. Net cash provided by financing activities was $798,000 for the three months ended June 30, 2002, consisting primarily of proceeds from the issuance of common stock to employees under various incentive stock plans offset by repayments of our note payable liability.

We implemented several cash conservation measures to help improve our overall cash position during fiscal 2003 and 2002. Specifically, during fiscal 2003 and 2002, we cut expenses through reductions in headcount across the organization, implemented a temporary salary reduction in November and December 2001 for all North American and certain international employees, reduced and/or eliminated cash bonus and cash incentive programs, reduced or eliminated employee fringe benefit programs and delayed or eliminated capital expenditure plans. We will continue to evaluate and implement additional cash conservation measures as circumstances dictate.

Future obligations under non-cancelable contracts

The following table summarizes our obligations to make future cash payments under non-cancelable contracts (in thousands):

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		2-3 years		4-5 years		After 5 years
Note payable	$	2,361	$	1,667	$	694	$	—	$	—
Operating leases		41,756		7,517		12,168		11,128		10,943
Capital leases		65		65		—		—		—

Total contractual cash obligations	$	44,182	$	9,249	$	12,862	$	11,128	$	10,943

We will continue to evaluate possible acquisitions of, or investments in businesses, products and technologies that are complementary to ours, which may require the use of cash. Management believes existing cash, cash equivalents, short-term investments and existing credit facility will be sufficient to meet our operating requirements through June 2004 based upon our projections, which have certain assumptions with regard to future levels of revenues and expenditures. If these assumptions are not achieved, additional cash may be required prior to June 2004. We may sell additional equity or debt securities or modify or obtain credit facilities to further enhance our cash position. The sale of additional securities could result in additional dilution to our stockholders.

RISK FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

We desire to take advantage of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 and of Section 21E and Rule 3b-6 under the Securities and Exchange Act of 1934 (“Exchange Act”). Specifically, we wish to alert readers that the following important factors, as well as other factors including, without limitation, those described elsewhere in reports we have filed with the SEC and incorporated into our annual report on Form 10-K, by reference, could in the future affect, and in the past have affected, our actual results and could cause our results for future periods to differ materially from those expressed in any forward-looking statements made by or on behalf of us. We assume no obligation to update these forward-looking statements. In addition, our recent announcement of the proposed merger (the “Merger”) between Brio and Hyperion Solutions Corporation (“Hyperion”) for Hyperion to acquire our common shares may intensify these risks.

Risks Factors Relating to Our Business

Our business and results of operations are likely to be affected by our announced Merger with Hyperion.

On July 23, 2003, we entered into a merger agreement with Hyperion. The announcement of the Merger could have an adverse effect on our revenue in the near term if customers delay, defer or cancel purchases pending consummation of the planned Merger. While we are attempting to mitigate this risk through communications with our customers, current and prospective customers could be reluctant to purchase our software or services due to potential uncertainty about the direction of the combined company’s product offerings and its support and service of existing products. To the extent that our announcement of the Merger creates uncertainty among customers such that one large customer, or a significant group of small customers, delays purchase decisions pending consummation of the planned Merger, our results of operations and ability to operate profitably could be negatively affected. Decreased revenue and a failure to be profitable could have a variety of adverse effects, including negative consequences to our relationships with customers, suppliers, resellers and others. In addition, our quarterly operating results could be substantially below the expectations of market analysts, which could cause a decline in our stock price. Finally, activities relating to the Merger and related uncertainties could divert our management’s and our employees’ attention from our day-to-day business, cause disruptions among our relationships with customers and business partners, and cause employees to seek alternative employment, all of which could detract from our ability to grow revenue and minimize costs.

If the conditions to the proposed Merger with Hyperion set forth in the merger agreement are not met, the Merger with Hyperion may not occur.

Several conditions must be satisfied to complete the proposed Merger with Hyperion. These conditions are set forth in detail in the merger agreement. We can not assure you that each of the conditions will be satisfied. If the conditions are not satisfied or waived, the proposed Merger will not occur or will be delayed, and Brio may lose some or all of the benefits of the proposed Merger. For example, if either Hyperion’s or Brio’s representations and warranties are not true and correct and, with some exceptions, the failure to be true and correct has a material adverse effect at the closing, the other party may not be required to close.

Failure to complete the proposed Merger with Hyperion would negatively impact Brio’s future business and operations.

If the planned Merger with Hyperion were not completed, we could suffer a number of consequences that may adversely affect our business, results of operations and stock price, including the following:

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We would not realize the benefits we expect from becoming a part of a combined company with Hyperion, including the potentially enhanced financial and competitive position;

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Activities relating to the Merger and related uncertainties may lead to a loss of revenue and market position that we may not be able to regain if the Merger does not occur;

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The market price of our common stock could decline following an announcement that the Merger has been abandoned, to the extent that the current market price reflects a market assumption that the Merger will be completed;

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We could be required to pay Hyperion a termination fee and provide reimbursement to Hyperion for certain costs incurred;

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We would remain liable for our costs related to the Merger, such as legal and accounting fees and a portion of the investment banking fees;

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We may not be able to continue our present level of operations and therefore would have to scale back our present level of business and consider additional reductions in force; and

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We may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures.

In connection with the proposed Merger, we and Hyperion expect to file a joint proxy statement/prospectus with the SEC. The joint proxy statement/prospectus will be mailed to all holders of our stock and will contain important information about us, Hyperion and the proposed Merger, risks relating to the Merger and the combined company, and related matters. We urge all of our stockholders to read the joint proxy statement/prospectus when it becomes available.

If the proposed Merger with Hyperion occurs, the Merger consideration will consist of a combination of cash and shares of Hyperion Stock.

Upon completion of the proposed merger, each share of Brio Common Stock will be exchanged for 0.109 shares of Hyperion common stock, plus $0.363. The exchange ratio for the stock portion of the merger consideration will not be adjusted for changes in the market price of either Brio Common Stock or Hyperion common stock, and neither party is permitted to terminate the merger agreement solely because of changes in the market price of Brio Common Stock or Hyperion common stock. Consequently, the specific dollar value of Hyperion common stock to be received by you will depend on the market value of Hyperion common stock at the time of completion of the merger and may decrease from the date that you submit your proxy. You are urged to obtain recent market quotations for Hyperion common stock and Brio Common Stock. We cannot predict or give any assurances as to the market price of Hyperion common stock at any time before or after the merger. Additionally, the price of Brio Common Stock may, during the pendency of the Merger, trade in a manner correlating to Hyperion common stock price and, therefore, events that materially adversely effect Hyperion common stock price could also materially adversely effect Brio Common Stock price.

Our quarterly operating results have fluctuated in the past. We do not always meet financial analysts’ expectations or management guidance, which has caused and may cause our share price to decrease significantly.

We have experienced, and expect to continue to experience, significant fluctuations in quarterly operating results. Our operating results are difficult to predict and we do not always meet management guidance or the expectations of some securities analysts. If our operating results do not meet analysts’ expectations in the future, our common stock price could decrease significantly. For example, in the quarters ended June 30, 2001, September 30, 2001 and March 31, 2002, we did not meet analysts’ expectations for our revenues, expenses or earnings per share, and for the quarter ended September 30, 2002 and June 30, 2003, we did not meet analysts’ expectations for our revenues. Following the announcement of the results for each of these quarters the price of our shares declined. There are a number of factors that contribute to the fluctuations in our quarterly operating results, including but not limited to:

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Long Sales Cycle. Our sales cycle is typically nine to twelve months long. Large-scale deployments take longer to evaluate, implement and close and they frequently require more customer education about the use and benefit of our products as well as requiring complex software license agreements. Additionally, continuing budgeting constraints of our prospective customers, particularly during the recent period of worldwide economic slowdown, may arise during the course of a long sales cycle and may delay or disrupt sales. We anticipate that an increasing portion of our revenue could be derived from larger orders. Also, the product sales cycle in international markets has been, and is expected to continue to be, longer than the sales cycle in the United States and Canada. These issues make it difficult to predict the quarter in which the revenue for expected orders will be recorded. Delays in order execution could cause some or all of the revenues from those orders to be shifted from the expected quarter to a subsequent quarter or quarters.

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Seasonality. Seasonal changes in our customers’ spending patterns can cause fluctuations in our operating results. For example, in the past, our customers’ slower seasonal spending patterns have hurt our results of operations particularly in the quarters ending June 30 or September 30.

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Weak Global Economic Conditions. General economic conditions affect the demand for our products. Beginning in the June quarter of fiscal 2002, the slowing global economy caused many of our prospective customers to reduce budget allocations for technology spending. The terrorist attacks of September 11, 2001, continuing international violence and war, have increased uncertainty as to the worldwide economic environment, which we believe has caused deferral of information technology purchases including our products. In particular, the size of deals has declined during the past eight quarters and we expect them to remain smaller in size than in historical periods.

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Introduction of Product Enhancements and New Products. The announcement or introduction of product enhancements or new products by us or by our competitors, or any change in industry standards may cause customers to defer or cancel purchases of existing products. We anticipate continuing releases of new product enhancements throughout fiscal 2004.

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Mix of License and Service Revenues. Our revenues are derived from two sources, license fees and services. Both of these sources are essential to our business, but our profit margin is higher on license fees than it is on services. As the mix of license and service revenues varies between quarters, our profits fluctuate, which can cause fluctuations in our quarterly results. The mix of licensing fees and services is difficult to predict because it is influenced by many factors, some of which are beyond our ability to control, including the timing of new product introductions, success in promotion of new products, customers’ renewing maintenance and support contracts, customers’ needs for professional services and training and customers’ budgets for information technology spending.

We experience back-ended quarters.

Quarterly revenues and operating results are highly dependent on the volume and timing of the signing of licensing agreements and product deliveries during the quarter, which are difficult to forecast. Significant portions of our quarterly software licensing agreements are concluded in the last month of each fiscal quarter, generally with a concentration of such revenues earned in the final week of that month. Due to the relatively fixed nature of certain costs, including personnel and facilities expenses, a decline or shortfall in quarterly and/or annual revenues may result in increased losses. Prior to the very end of any quarter, we must rely on our forecasts of revenue for planning, modeling and other purposes. Forecasts are only estimates and may not correlate to revenues in a particular quarter or over a longer period of time. A significant discrepancy between actual results and sales forecasts could cause us to improperly plan or budget and thereby adversely affect our business, operating results or financial condition. Any publicly stated revenue or operating results projections by us are especially subject to this risk.

There are many additional steps we must take in order to overcome our history of net losses, and there is no guarantee that we can accomplish these steps or that we will be profitable in the future.

We have a history of net losses. In particular, we incurred net losses of $16.6 million in fiscal 2003, $25.7 million in fiscal 2002 and $9.7 million in fiscal 2001. We had a net loss of approximately $2.1 million during the three months ended June 30, 2003. As of June 30, 2003, we had stockholders’ equity of approximately $1.2 million and an accumulated deficit of approximately $102.4 million. If we do not successfully take steps to overcome our net losses, we may never achieve profitability. Examples of areas that we must address to achieve profitability include:

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Successfully Implementing Cost Reduction Measures. We must continue to implement cost reduction measures to improve our overall cash position and align our expenses with revenues. However, this is challenging for us because if we implement too many cost reduction measures, we may lose the ability to attract, retain and motivate personnel, which could be detrimental to our business.

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Successfully Managing the Capacity of Our Direct Sales Force and Services Organization. Maintaining more sales and service organization employees than is necessary to fulfill market opportunities leads to higher overhead costs without proportional revenue from greater product and service sales. If we fail to size the organization properly for market opportunities, it could have a negative impact on operating results.

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Achieving Higher Rates of Revenue Growth. Maintaining and increasing our rate of revenue growth is a significant factor for achieving profitability. We may not achieve or sustain the rates of revenue growth we have experienced in the past. Our prospects for increased future revenues depend on our ability to successfully increase the scope of our operations, expand and maintain indirect sales channels worldwide, improve our competitive position in the marketplace, educate the market on the need for deployment of enterprise-wide analytical solutions, and attract, retain and motivate qualified personnel.

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Increasing Indirect Sales Channels while Maintaining Management Focus on Execution of Overall Strategy. Selling our products through indirect sales channels, including value-added resellers, private label partners, original equipment manufacturers, resellers, system integrators and distributors (collectively “resellers”) expands our reach into the marketplace. We need to attract and retain additional indirect channel partners that will be able to market our products effectively and provide timely and cost-effective customer support and services. We may not succeed in increasing indirect channel partner relationships, and this could limit our ability to grow revenues and achieve profitability. Managing indirect sales channels, however, may require more management attention than managing our direct sales force. If the indirect sales channels grow, management attention may be diverted, impairing our ability to execute other parts of our strategy. To date we have generated a majority of sales through our direct sales force. Our indirect sales channels accounted for approximately 24% of total revenues during the three months ended June 30, 2003 and approximately 29% of total revenues during the three months ended June 30, 2002.

Stock-based compensation charges will reduce our reported net income.

Our stock option repricing program requires us to record a compensation charge on a quarterly basis as a result of variable plan accounting treatment, which will lower our earnings. This charge will be evaluated on a quarterly basis and additional charges will be recorded if the market price of our stock exceeds the price of the repriced options. Since the variable component of this charge is computed based on the current market price of our stock, such charges may vary significantly from period to period. For example, for every dollar in value that our stock price exceeds $2.00, the adjusted exercise price of these options, we will recognize an additional $6.3 million in stock compensation charges. During the three months ended June 30, 2003, we recorded approximately $1.6 million in stock compensation charges.

There are many strong competitors in our industry who may be more successful in attracting and retaining customers, which could result in fewer customer orders, price reductions, loss of market share and reduced gross margins.

We compete in the business intelligence software market. This market is highly competitive and we expect competition in the market to increase. Our competitors offer a variety of software solutions that our prospective customers could choose instead of our products. For example, Cognos and Business Objects/Crystal Decisions offer business intelligence software that provides reporting and analysis capability that compete with ours. There are also numerous other vendors such as MicroStrategy and Actuate that are selling competitive products. Additionally, companies such as Microsoft, SAP, Siebel and Oracle offer client products that operate specifically with their proprietary data sources and databases. These and other competitors pose business risks to us because:

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They compete for the same customers that we try to attract;

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If we lose customers to our competitors, it may be difficult or impossible to win them back;

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Lower prices and a smaller market share could limit our revenue generating ability, reduce our gross margins and restrict our ability to become profitable or to sustain profitability; and

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They may be able to devote greater resources to quickly respond to emerging technologies and changes in customer requirements or to the development, promotion and sales of their products.

Market consolidation may create more formidable competitors that are able to capture a larger market share.

Current and new competitors may form alliances, make strategic acquisitions or establish other cooperative relationships among themselves, thereby enhancing their ability to compete in our market with their combined resources. For example, in July 2002, Business Objects announced the acquisition of privately held Acta Technology, Inc. and in July of 2003, the execution of a definitive agreement pursuant to which Business Objects intends to acquire Crystal Decisions. In December 2002, Cognos announced the acquisition of Adaytum. These types of agreements between our competitors could be harmful to our business because consolidated or allied competitors could:

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Rapidly gain significant market share, possibly taking customers away from us;

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Form relationships with our current or future indirect channel partners, possibly displacing our existing relationships and impeding our ability to expand our indirect sales channels; and

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Force us to reduce prices to compete, possibly impacting our profitability or ability to become profitable.

We may not successfully develop new and enhanced versions of our products that meet changing customer requirements in a timely manner, which could impair our ability to maintain market acceptance and remain competitive.

In our industry there is a continual emergence of new technologies and continual change in customer requirements. In order to remain competitive, we must introduce new products or product enhancements that meet customers’ requirements in a timely manner. If we are unable to do this, we may lose current and prospective customers to our competitors.

Our products incorporate a number of advanced and complex technologies, including data analysis systems, a distributed architecture and Web access and delivery technology. Rapidly developing and delivering new and improved products is very challenging from an engineering perspective, and in the past, particularly with our efforts in the Unix server environment, we experienced delays in software development. In particular, we experienced a delay in completing our Brio Performance Suite version 8 in the Unix (Sun Solaris, IBM AIX and HP-UX) server environment. Delays in completion and release of new and enhanced versions of our products could impair our ability to maintain market acceptance and remain competitive, which could have a material adverse effect on our business, operating results and financial condition.

The new and enhanced versions of our products may not offer competitive features, or be successfully marketed to our customers and prospective customers, or enable our current install base to easily migrate their existing applications to the newest version of our product, which could hurt our competitive position.

We must successfully market new and enhanced versions of our products to remain competitive with our competitors’ products and to maintain our current market position. In order to be competitive and well received in the marketplace, our new products and product enhancements must:

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Provide a complete offering of product features including analytical capabilities, open architecture, extranet capability and scalability;

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Provide top level performance, quality and ease-of-use;

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Provide the necessary migration tools and aids to migrate our existing install base to the newest version of our product;

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Be capable of addressing the requirements or needs of the indirect channel marketplace;

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Include customer support packages;

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Be completed and brought to market in a timely manner;

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Minimize the inclusion of major defects and errors; and

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Be competitively priced.

Our failure to compete favorably in these areas could limit our ability to attract and retain customers, which could have a material adverse effect on our business, operating results and financial condition.

The new and enhanced versions of our products may present migration issues, which could increase our costs, adversely affect our reputation, diminish demand for our products and adversely affect our business, operating results and financial condition.

With the release of Brio Performance Suite 8 (Brio 8) in December 2002 for the Windows server environment, Brio switched from client-server-based pricing to user/role-based pricing. This change has presented some administrative issues and may lead to customer disagreements regarding migration of some customers’ deployments. In addition, a substantial number of our customers pay ongoing maintenance at a percentage of list price and may be subject to increased maintenance renewal prices to the extent that the current list price of their deployment (based on version 8 user/role-based pricing) substantially exceeds the former list price for their deployment (based on prior version client-server-based pricing). Instances where customers disagree about migration, elect not to migrate to Brio 8, or face dramatically larger maintenance renewal prices could lead to a loss of future maintenance revenue as customers decline to renew maintenance, a loss of customer loyalty and diminishing future license and service revenue, as well as increased administrative and logistical burdens as our employees are required to spend time addressing Brio 8 migration issues.

We may not successfully market larger, enterprise-wide implementations of our products, which could impair our future revenue growth.

We expect that larger, enterprise-wide implementations of our products will constitute an increasing portion of any future revenue growth, so we must successfully market and focus our selling efforts on these enterprise-wide implementations. Failure to succeed in this effort may limit our growth potential and adversely impact our business goals. In the past our selling efforts have resulted in limited enterprise-wide implementations of our products. We believe that most companies are not yet aware of the benefits of enterprise-wide business intelligence solutions. Additional risks of focusing our selling efforts on this area include:

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That our efforts may not be sufficient to build market awareness of the need for enterprise-wide solutions;

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That the market may not accept our products for enterprise-wide solutions; and

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That the market for enterprise-wide solutions may not be as large as we anticipate and it may not continue to grow.

Defects in our products could increase our costs, adversely affect our reputation, diminish demand for our products, and hurt our operating results.

As a result of their complexity, our software products may contain undetected errors or viruses. Errors in new products or product enhancements might not be detected until after initiating commercial shipments, which could result in additional costs, delays, possible damage to our reputation and could cause diminished demand for our products. This could lead to customer dissatisfaction and reduce the opportunity to renew maintenance or sell new licenses.

Also, any defects or viruses found in our products by our customers could cause our customers to seek damages for loss of data, lost revenue, systems costs or other harm they suffer. Our license agreements with customers typically contain provisions designed to limit our exposure for potential claims based on product error or malfunctions. These limitations of liability provisions may not be effective under the laws of all jurisdictions. Our insurance against product liability risks may not be adequate to cover a potential claim. A product liability claim brought against us could adversely affect our reputation, operating results and financial condition.

Because we depend on a direct sales force, any failure to attract and retain qualified sales personnel could slow our sales, impeding our revenue generating ability and causing significant financial and operational risks.

We depend on a direct sales force for the majority of our product sales. We may not be able to attract and retain qualified sales personnel. Due to the state of the economy and the increasingly competitive nature of the marketplace, fewer members of our sales force met quotas during the first quarter of fiscal 2004 and in fiscal 2003 and 2002 than in historical periods. This issue, in addition to our recent reduction or elimination of cash bonuses, cash incentive plans and some employee fringe benefits, may make it difficult for us to retain a qualified sales force. We have experienced significant turnover of our sales force, including two Executive Vice Presidents of Worldwide Sales in the last twenty-four months. As turnover tends to slow our sales efforts while replacement personnel are recruited and trained, our revenue generating ability may be impaired.

We may not continue to attract and retain high quality employees in our management, engineering, consulting and marketing departments. Our success depends to a significant degree upon the continued contributions from these employees.

Our success depends to a significant degree upon the continued contribution from employees in our management, engineering and marketing departments. If we fail to attract and retain high quality employees, our business operations and operating revenues may be impaired. Our recent or historic workforce reductions may hurt the morale and loyalty of our employees. Additionally, the reduction or elimination of cash bonuses, cash incentive plans and some employee fringe benefits may reduce incentives for our employees to remain with us.

Our patented intellectual property rights may not be sufficient to provide us competitive advantages in our industry.

We have two issued patents and thirteen pending patent applications in various jurisdictions including the United States and European Union. We may withdraw or abandon patent applications from time to time and we may not file for patent protection in certain jurisdictions. Moreover, the patent applications may not result in the issuance of a patent, and we may not obtain any more patents. Our issued patents and any additional patents issued to us may be invalidated, circumvented or challenged and the rights granted under these patents might not provide us competitive advantages.

Our intellectual property protection may not be adequate to prevent competitors from entering our markets or developing competing products, which could reduce our revenues or cause us to incur costly litigation.

We rely primarily on a combination of copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our intellectual property rights. The legal protection is limited. Unauthorized parties may copy aspects of our products and obtain and use information that we believe is proprietary. Other parties may breach confidentiality agreements or other protective contracts they have made with us. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software products exists, we expect software piracy to be a persistent problem.

The laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. Litigation may be necessary to enforce our intellectual property rights. Intellectual property litigation is time-consuming, has an uncertain outcome and could result in substantial costs and diversion of management’s attention and resources. For example, in 1997 Business Objects instituted patent litigation against us and in 1999 we instituted patent litigation against Business Objects. These lawsuits took a total of two years and eight months to conclude. Additionally, as a smaller company with limited resources, we may choose not to pursue some patent litigation claims against competitors who may be violating our patents.

Our plans to expand internationally expose us to risks related to managing international operations, currency exchange rates, regulatory and other risks associated with foreign operations. We may not successfully address these risks, which could harm our operating results.

A key component of our strategy is continued expansion into international markets. If the international revenues generated by these expanded operations are not adequate to offset the expense of establishing and maintaining these foreign operations, our business, operating results and financial condition could be materially harmed. In our efforts to expand our international presence we will face certain risks, which we may not be successful in addressing. These risks include:

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Difficulties localizing our products for foreign countries;

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Difficulties finding staff to manage foreign operations and collect cash;

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Difficulties with respect to recognizing revenues from customers located outside the United States;

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Liability or financial exposure under foreign laws and regulatory requirements;

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Political and economic instability; and

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Potentially adverse tax consequences.

Additionally, our international sales are generally denominated and collected in foreign currencies, and we have not historically undertaken foreign exchange hedging transactions to cover potential foreign currency exposure. We incurred losses on foreign currency translations during the three months ended June 30, 2003 and in fiscal 2003 and 2002 resulting from intercompany receivables from foreign subsidiaries.

Fluctuations in the exchange rates of foreign currency may harm our business.

We are exposed to adverse movements in foreign currency exchange rates because we translate foreign currencies into U.S. Dollars for reporting purposes. Historically, these risks were minimal for us, but as our international revenues and operations have grown and continue to grow, the adverse currency fluctuations could have a material adverse impact on our financial results. Historically, our primary exposures have related to operating expenses and sales in Australia, Asia and Europe that were not U.S. Dollar denominated. The increasing use of the Euro as a common currency for members of the European Union could affect our foreign exchange exposure. Additionally, the U.S. Dollar has depreciated significantly against the Euro and other currencies in the last two years. Continuing changes in macroeconomic conditions could affect our foreign exchange rate exposure.

Risks Related to our Securities Market and Ownership of Our Common Stock

We have anti-takeover provisions that may adversely affect our stock price and make it more difficult for a third party to acquire us.

Our charter documents contain provisions that may delay or prevent us from a change in control. These include provisions:

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Creating a classified board of directors;

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Eliminating cumulative voting;

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Eliminating the ability of stockholders to take actions by written consent; and

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Limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice.

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

Additionally, our board of directors has authority to issue up to 2,000,000 shares of preferred stock and to fix the rights and preferences of these shares, including voting rights, without stockholder approval. The rights of our common stock holders may be adversely affected by the rights of the holders of any preferred stock that we may issue in the future. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control. These provisions apply even if the offer may be considered beneficial by some stockholders.

Our stock price may be volatile because of the stock price volatility of other companies in our industry, and as a result you may lose all or part of your investment.

The market price of our common stock has experienced periods of high volatility and it is likely that the market price of our common stock will continue to be volatile. Broad market fluctuations, as well as economic conditions generally and in the software industry specifically, may result in material adverse effects on the market price of our common stock.

The cost of possible securities class action litigation could increase our expenses and damage our reputation with prospective and existing customers.

Securities class action litigation has often been instituted against companies following periods of volatility in the market price of their securities. Our common stock price has been volatile, fluctuating from a low sales price of $0.72 to a high sales price of $3.00 during the fifty-two weeks ended June 30, 2003. If litigation were instituted against us, it could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, operating results and financial condition.

We need to maintain qualified, independent directors to comply with new corporate governance reform initiatives and failure to do so could result in the delisting of our common stock from Nasdaq.

On October 9, 2002, Nasdaq filed proposed rule changes to its listing standards with the SEC in connection with the recent, widely publicized corporate governance reform initiatives. In addition, on January 8, 2003, the SEC published Proposed Rules to set stricter independence and other standards for public company Audit Committees. The SEC directed the exchanges and Nasdaq to propose changes to its listing standards consistent with the SEC’s Proposed Rules. These rules have not been approved in final form and will be effective with the Annual Stockholders meeting occurring in 2004.

Our Board of Directors approved the appointment of John Mutch and Edward Saliba as directors on September 18, 2002, and December 17, 2002, respectively. Messrs. Mutch and Saliba each were also appointed to serve on our Audit Committee. With the addition of Mr. Mutch and Mr. Saliba, our Board and our Audit Committee are in compliance with the SEC Rules and with the changes proposed by Nasdaq. However, as any or all of the proposed Nasdaq rules could change following the public comment process, we cannot guarantee that we will be in compliance with the new Board standards under the final Nasdaq listing standards adopted. Failure to comply with these new rules and standards could result in being delisted from Nasdaq, which could materially impair stockholders’ ability to engage in transactions involving our stock and impair the liquidity of our stock.

We incur or may incur significant accounting charges that, individually or in the aggregate, could reduce earnings and create net losses under generally accepted accounting principles.

We incur or may incur significant accounting charges that, individually or in aggregate, could create losses under generally accepted accounting principles in future periods. Examples of these charges are:

•

Stock-based Compensation. In accounting for our stock option and stock purchase plans, because the exercise price of options granted under our stock plans are generally equal to the market value of our common stock on the date of grant, we recognize no compensation cost for grants under these plans. The FASB has voted to require companies to record a charge to earnings for employee stock option grants, but the methodology for valuing stock options and the timing for issuance of final rules have not been finalized. Changes in practices regarding accounting for stock options could result in significant accounting charges; and

•

Restructuring Charges. We regularly perform evaluations of our operations and activities. Any decision to restructure our operations, to exit any activity or to eliminate any excess capacity could result in significant accounting charges. Our Board of Directors had originally approved a restructuring plan to reduce operating expenses in June 2001. Facility closure expenses during the three months ended June 30, 2003 consisted of accretion associated with the difference between the present value and fair value of the expected future cash flows related to the abandonment of two floors, or approximately 56,400 square feet at our corporate headquarters in Santa Clara, California. Severance and related benefit expenses and facility closure expenses for fiscal 2003 and 2002 consisted of restructuring charges related to severance costs associated with workforce reductions in various organizations across the company and facilities consolidation expenses. In connection with this restructuring plan, we recorded a total restructuring charge of approximately $167,000 during the three months ended June 30, 2003 and $16.5 million and $2.1 million during fiscal 2003 and 2002, respectively. As of June 30, 2003, the total carrying amount of our restructure reserve was $8.8 million.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We maintain an investment policy that ensures the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. As of June 30, 2003, we had $15.5 million of cash and cash equivalents and $14.1 million of short-term investments with a weighted average variable rate of 1.2%.

We mitigate default risk by investing in high credit quality securities and by constantly positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and maintains a prudent amount of diversification.

We currently have limited cash flow exposure due to rate changes for long-term debt obligations. We have entered into borrowing agreements to support general corporate purposes including capital expenditures and working capital needs, should the need arise. As of June 30, 2003, $2.5 million was outstanding under the term loan (See Note 2 in Notes to condensed consolidated financial statements), of which $1.7 million is classified as short-term and $833,000 is classified as long-term. The term loan is due over 36 months in monthly payments of $139,000 plus interest.

We conduct business on a global basis in international currencies. As such, we are exposed to adverse or beneficial movements in foreign currency exchange rates. We may enter into foreign currency forward contracts to minimize the impact of exchange rate fluctuations on certain foreign currency commitments and balance sheet positions. At June 30, 2003 there were no outstanding foreign currency exchange contracts.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. We evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that the disclosure of required information is timely made in accordance with the Exchange Act and the rules and forms of the SEC. This evaluation was made under the supervision and with the participation of management, including our chief executive officer and chief financial officer, as of a date (the “Evaluation Date”) within 90 days before the filing of this Quarterly Report on Form 10-Q. The chief executive officer and chief financial officer have concluded, based on their review, that our disclosure controls and procedures, as defined at Exchange Act Rules 13a-15(e) and 15d-15(e), are effective to ensure that information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

(b) Changes in internal controls. There were no significant changes in our internal controls or to our knowledge, in other factors that could significantly affect our disclosure controls and procedures subsequent to the Evaluation Date.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Not applicable.

Item 2. Changes in Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to Vote of Security Holders.

Not applicable.

Item 5. Other Information.

In accordance with Section 10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002 (the “Act”), we are required to disclose the non-audit services approved by our Audit Committee to be performed by KPMG LLP, our external auditor. Non-audit services are defined in the Act as services other than those provided in connection with an audit or a review of the financial statements of a company. The Audit Committee has approved the engagement of KPMG LLP for the following non-audit services: (1) tax matter consultations concerning state taxes, (2) the preparation of federal and state income tax returns, (3) tax matter consultations on transfer pricing, (4) merger-related due diligence services and (5) review of merger-related SEC filings.

Item 6. Exhibits and Reports on Form 8-K.

(a)

Exhibits:


10.36		Confidential Separation Agreement and General Release of Claims dated March 31, 2003 between Brio and Todd Davis. +

31.1		Craig Brennan’s Certification pursuant to Exchange Act Rules 13a-14(a) [Section 302].

31.2		Craig Collins’ Certification pursuant to Exchange Act Rules 13a-14(a) [Section 302].

32.1		Craig Brennan’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Craig Collins’ Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Designates management contract or compensatory plan.

(b)

Reports on Form 8-K:

We filed two reports on Form 8-K during the three months ended June 30, 2003. Information regarding the item reported on is as follows:

Date		Item Reported On
April 23, 2003		Regulation FD Disclosure
June 30, 2003		Section 906 Certifications

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


BRIO SOFTWARE, INC.

By:		/s/ Craig Collins
		Craig Collins Chief Financial Officer and Executive Vice President, Corporate Development (Principal Financial and Accounting Officer)

Date: August 14, 2003

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BRIO SOFTWARE INC 10-Q